When there's a significant price swing and price then pulls back and starts moving in the direction of the initial swing off of a lower high (down trending move) or higher low (up trending move), price has a strong tendency to move a distance equal to the initial move. Why? Because that appears to be what crowd psychology (or lots of algos programmed to do the same thing) causes to manifest more often than not. So the initial down move to level A occurs and price pulls back and then resumes its move down off a lower high. If level A fails to hold as support, there's a good chance the bids will get pulled and support will be established at a level equal to the distance of the initial move, from the level of the lower high. This equal distance B is close to where price found support (C). There's then another pullback and price starts back down from yet another lower high. So now if the support established at C breaks, there's a good chance the bids will be pulled and support will be established at a level equal to the distance of the previous move yet again (D). It's these levels breaking and the lack of liquidity until the next S/R level in line to be tested that causes spikes. That's what measured moves are and they're quite common in a trending move.
KP: I had to think about how to answer you question(s), for any direct answer I give will definitely be lost in translation, for we lack a common framework to communicate our ideas without the risk of misinterpretation. So, the best I can do is to communicate my answer by way of an thought experiment. Imagine a world where everyone has very poor vision -- people can barely see things next to them. The only way they can navigate is by touch -- touch an object and try to determine what it is. As you can imagine, a person living in that world can never be sure what an object really looks like but might have a rough idea based on its shape as determined by touch. Now imagine a sub-group having access to corrective eye-glasses. This group can not only see the objects clearly but can also see the object's surrounding environment. Now, people from this world really like apples (an object). They would do anything to eat an apple. The only problem is that many of the apples also have poisonous snakes next to them. As you can only imagine, people without corrective lenses will more likely than not be bit by a snake more than they succeed in getting an apple. This on top of trying to find an apple given their poor eye-sight! On the other hand, the sub-group with corrective lenses can be more selective in picking the apple 'cos they can also see the snake next to it. So, this group might end up getting more apples than snake bites. In this thought experiment, the world is analogous to the market; the corrective eye-glasses is the framework a trader needs to 'see' the market; the surrounding environment is the context; and, the objects are trade setups. You asked me a question on 'objects', asking me how the price action is around it, and what I look for. I cannot explain that to you without you understanding my framework (corrective eye-glasses), and the way I interpret my context (surrounding environment). Even if I tell you the price action, it will not make sense to you. Having said this let me attempt the answer: I don't look for demand, for I don't know how demand looks like. I don't trade at the [key] price level 'cos that is not consistent with my understanding of price action I have gleaned using my framework. So where and how do I take the trade? I let price play out and then step up. The words play out can only be explained with reference to my framework. Now, you can see the difficulty of explaining today's trade to you. The only thing I can assure you is that none of this is subjective. Every single step in my process is objective. I want to continue with the thought experiment to explain one more opinion of mine before ending. Imagine that the people in our 'thought experiment' world have access to a ruler. Using that they can exactly measure the distance between the snake and the apple. What use is the ruler to the group that does not have access to corrective lenses? I am sure you will concur with me in saying that the ruler is of no use -- for, this group can barely see; they can't even be sure if an apple is indeed an apple, and most likely they can't see the snake. What use is the ruler to the group having access to corrective lenses? I would contend that the ruler is not of much use 'cos human judgement (of distance) alone is enough to protect the people in this group from getting bit by the snake. They do not need a ruler to measure the exact distance between the snake and the apple. The ruler is risk-to-reward ratio. Be wary of using it if you don't have corrective lenses to clearly see the market! And, if you have the corrective lenses, you will not need a ruler! All the best. Regards, Monoid.
Monoid... that is an excellent thought experiment and your point has been communicated quite effectively. Thank-you for taking the time. But you have of course now very much piqued my curiosity. I will understand if you don't wish to pursue this further, but I'd like to get a sense of what these corrective lenses are that you use. So perhaps a couple of direct questions if I may to at least shine a light? First I'd like to find out what your building blocks are. Time charts are simply lines that denote the range of price covered by all the transactions that happen within a specified period of time. Volume charts show the range of price for a specific number of contracts exchanged in that one bar. Both of these though have at their core the transaction which is recorded when a buyer and seller agree on a price for a specific number of contracts at a specific time. So all of these charts are made up from the transactions. Is there anything else that one look at? Could there be anything else to the market other than these transactions? I can understand how you would create a special type of chart for yourself, but it seems like the only 3 variables are time, price and number of contracts. Therefore, any chart can only be made up of these, although I guess you can choose which you display and which you don't, but it seems like this is all the data that is available. Is this correct? Second, continuing with your example, those people who have to feel their way around their world could be given those glasses and now they too can benefit from the ability to see both the apple and the snake. You say you don't know what demand looks like, and key levels don't factor into what you do. So what does it mean for you to let price "play out". What is that thing in the market that gives you the power of the glasses? The posts by DbPhoenix and fortydraws centre on watching the behavior at various levels, to watch the right tick move, to get a sense of either buyers driving the price higher, or there being a lack of buyers at the current price and hence price has to drop in order to attract more buyers and hence sellers being in charge. I've found it very hard to see this, and hence I wonder what it means for you to let price "play out". Third, if I may, do you have a set of stats that you could provide which highlight the statistical nature of your trading plan? What I mean by this would be roughly how many trades might present a day, what your typical stop loss is, what your typical average win is, and of course your win rate. I know its very difficult as different environments present different opportunities. As an example, I did some backtesting on a setup that NoDoji was sharing. I collected over 100 instances of a price breaking out of 5 min trendlines and then taking the trade on the first retracement based on the 1 minute chart. The entry was I believe 1 point above the bar, the stop was one tick below the setup bar, and the target was simply 1:1. So if the bar height was 6 ticks, I would count it as a win if the profit of 7 ticks could be realized before price dropped to stop me out. I further collected stats on a 1:2 and 1:3 risk:reward ratios. The trouble here was that some of these trades were only 4-6 ticks given that the setup bar was small, others were 4 or 5 points. But I managed to get roughly 66% for a 1:1 trade, perhaps about 40% for 1:2 and less than 30% for 1:3. (I don't recall the exact numbers anymore). Anyway, my point is that it seems that anything over an 80% win rate on a trade is quite rare, stops are usually between 2-5 points (NQ points), and targets I guess anywhere from 5-20 points or so. I actually have no firm data on any of this since most people don't share stats like this, but its what I gather from all the charts I've seen posted over the past year where people have actually shown their trades. Perhaps some traders take one trade, walk away, come back hours later to a 50 point profit and call it day, but most day traders I don't imagine have stats this good. So I'm just curious about your stats if you don't mind me asking. A fellow trader commented in my journal when I was still posting to it months ago mentioned that he had a win rate of 83% which I thought was incredible, even though he did say he was quite selective. Knowing that 4 out of 5 trades will produce a profit makes it very easy to just follow the plan and not care about the outcome of any one trade, which is of course the proper trader's mindset to have.
Most volatility spikes has more to do with key market events and less to do with technical analysis. The particular volatility spike in the opening chart in this thread was a key market event involving news with one of the Nasdaq heavy weighted stocks. That answer the question "what creates spikes" involving that particular spike in the opening chart that started this thread. There are other common reasons for volatility spikes and they too have less to do with technical analysis and more to do with a key market event. Yeah, there's often involved algos, institutions and others that can quickly and more efficiently take advantage of these key market events as they are occurring in comparison to us retail traders. With that said, technical analysis comes into play if you want to use TA to look for trade opportunities in the price action reacting to those key market events.
You are focusing on the wrong item -- chart. No matter how much data you gather or how beautiful the chart looks, you are not going to become a profitable trader by following this path in by itself. A chart is just a tool to help you validate and then learn from your framework. So, a chart should be built for a framework, not the other way around. A chart without a framework is like a guitar without strings, it is of no use. The word "given" concerns me. Seems to me that you do not want to do the work. I could be wrong. Even if one gives you the framework, you will have to do the work to make it your own. Yes, once you make a framework your own, then you have those corrective lenses. Answer: The framework. This is the path one need to pursue. What is a framework? The answer will surprise you. TA is the framework! TA, in all its flavors, was intended to be used as corrective lenses to see the market, not as an adhoc methodology to formulate trade setups. Once you learn to use TA for its intended purpose, then you will understand the surrounding environment which in turn will help you identify trade setups (which might or might not use TA!). Unfortunately, most new traders use TA as an adhoc trade setup formulation tool and suffer! To compensate for the losses accrued due to poor understanding of TA's purpose, and with only a cursory knowledge of the theory of probability, they seek refuge under risk-reward ratio and expectancy. I know of no trader trading individual issues (not talking about traders trading a portfolio of issues here) that have been successful in using RR/expectancy alone as the cornerstone of their trading plan. It is a myth that retail traders, for whatever reason, are more than eager to follow. Select a TA -- Wyckoff's Intra-day TA, or multi-day TA (both offered by SMI, I don't know if they are still around), Tom William's VSA, Jessi Livermore's Trend System, Edwards/Magee/Schabacker/Dow/Gann type TA, Joseph Hart's formulation of TA, Douglass Taylor's method, Fisher's ACD, etc -- pick whatever you want. And use it as a corrective lenses to see and understand the market. You will eventually understand context and start seeing trade setups appropriate for each context. There is no other magic formula. Forget about what I am doing - I am a stubborn bastard, and I have a "If not invented here it is no good" syndrome; yet, my framework is nothing but a combination of ideas from other great minds. I am not sure what you mean by different environments, but I will assume 'surrounding environments' (a.k.a context) in my answer. I take may be 3 or 4 trades a day tops. Some days I just sit and watch the market 'cos the market is not generating the contexts that I am prepared to trade - there is no point fighting the markets. Handle123, else where, beautifully said, "If you don't have a plan before you enter a trade, you are trading lost." Heed that sage advice. Depending on context, my stops can be anywhere between 4-ticks to 8-ticks. I like to play it tight, and am comfortable doing so. Use the 100 instances to understand the price action around instances. Ask: why do some work and why some doesn't. The answer is the context you are looking for. Using statistical analysis blindly on all the 100 instance is just waste of your time. It makes no sense. I think I have given you enough to reflect upon. After you have done reflecting, and have tinkered with the ideas provided here, go back are re-read the Wizards book (first and second). You will have a completely new insight into what they are saying. Ha! When you get there, you will realize it is not as easy as you think it is. Our minds are just fascinating! All the best. Regards, Monoid.
I have read the two Market Wizards books (presents from my broker). I never read books but these two I already read a few times. But to be honest I never found anything that made me smarter then I was. And because I am not really smart it means that these books are no really interesting to get any knowledge out of them. At least not about trading. If I judge you from what I read from you I am surprised that a person that talks so much sense, advices to re-read these books. For me these books are full of anecdotes, not real wisdom. Or should I maybe re-read them because I missed the essences?
Hi @monoid, Thanks very much for sharing your views and insights in this thread and others. I'm very intrigued by your posts and would like to ask you a question: Based on your experience, can you share one concept/criterion/idea that one should explore, in order to improve the level of objectivity in understanding context and building a framework? Hope kp doesn't mind and hope you can consider it. Thanks in advance! Edit: Thanks @lucysparabola, for your reply in post #52 and I will check them out. Looking forward to Monoid's reply too.. Thanks very much for your reply in post #54, @monoid! I'm currently learning Db's SLA/AMT methodology to try to understand the context, and will use yours (and lucysparabola's) replies to help me in this regards. Much appreciated and best wishes to all your trades!