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jcl
Registered: Jan 2012
Posts: 407 |
03-10-12 12:29 PM
Price curves have a very low signal to noise ratio. Therefore one would normally assume that signals or patterns based on the high or low of a bar have no predictive value, except maybe for HFT, or for 24-hour bars of the Japanese rice market.
Is price action just trading the noise or is there more to it?
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wiesman02
Registered: Oct 2006
Posts: 1475 |
03-10-12 01:02 PM
stare at a 15 min ES chart every day for a few years. Soon you'll start to see patterns that repeat themselves.
For example, Thursday 3/8/12 's chart pattern I hadn't seen in about 3 months or so. But I recognized it fairly quickly and knew the probability was in my favor to initiate a long position.
Thats why its so important to have years of historical data. The way price action repeats itself is not obvious by any means. But after time, you'll be staring at a, say, 15 min ES chart, and you'll think, "holy sh#t" ive seen this before and its most likely going to go to point X.
Now you understand PA. Now you can get a trading plan together !
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ssrrkk
Registered: Jun 2005
Posts: 433 |
03-10-12 01:52 PM
Quote from jcl:
Price curves have a very low signal to noise ratio. Therefore one would normally assume that signals or patterns based on the high or low of a bar have no predictive value, except maybe for HFT, or for 24-hour bars of the Japanese rice market.
Is price action just trading the noise or is there more to it?
I used to have the same doubts about PA until I studied thousands and thousands of charts, and observed live price action as it happens. There are definitely undeniable pivot points or SR lines where price hesitates then makes a decisive move and I am certain this is not voodoo or an illusion or hindsight bias. In a nutshell this happens because people cannot truly define absolute value, but rather can only decide on the relative value of things. The probabilities are not absolute but are conditional, and they are well-defined at those points. The difficulty is in properly defining the bins to count the statistics on -- this is not easy. The stock market is not all physics -- it is based also on the psychology of the masses. Some examples of this in everyday microeconomics are illustrated in the book "Predictably Irrational" by Dan Ariely.
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wiesman02
Registered: Oct 2006
Posts: 1475 |
03-10-12 04:10 PM
Quote from ssrrkk:
I used to have the same doubts about PA until I studied thousands and thousands of charts, and observed live price action as it happens. There are definitely undeniable pivot points or SR lines where price hesitates then makes a decisive move and I am certain this is not voodoo or an illusion or hindsight bias. In a nutshell this happens because people cannot truly define absolute value, but rather can only decide on the relative value of things. The probabilities are not absolute but are conditional, and they are well-defined at those points. The difficulty is in properly defining the bins to count the statistics on -- this is not easy. The stock market is not all physics -- it is based also on the psychology of the masses. Some examples of this in everyday microeconomics are illustrated in the book "Predictably Irrational" by Dan Ariely.
+1
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goodgoing
Registered: Jun 2009
Posts: 340 |
03-10-12 05:04 PM
The key here is probability . PA trading makes sense if you can get a prior estimate of probability. Then it turns into a very powerful method but not easy to execute because it involves quant analysis.
One of the PA gurus is undoubtedly Michael Harris. You will find many examples in his blog of PA analysis and very interesting and counter-intuitive results. For example before the open last Tuesday he posted a blog about a pattern in SPY, an inside day breakout and analysis that showed that historically the underline PA had a bullish bias based on two samples of 60 and 98 trades. Here is the link.
It is interesting that the market gapped down on Tuesday at the open and since then SPY had a 3-day winning streak for a gain of $2.20 per share.
This is a style of PA analysis that I like. There are other styles based on s&r, pivots, etc. but in those cases it is hard to estimate prior probability. Of course in the case of Harris his program helps a lot but it's too expensive for most.
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