Bride of If You Can Draw A Straight Line

Discussion in 'Journals' started by dbphoenix, Oct 28, 2013.

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  1. dbphoenix


    Given that the preceding two Straight Line threads are now over a thousand posts each, it's time for a third. I'm taking a minimalist approach on this third thread due partly to the number of sidetracks the first two threads took and due partly to the circumstance that a lot of people do in fact have trouble drawing a straight line.

    • When you get through the skin, and through the muscle and slosh aside the organs, down to the bone, you know what you do?

      When you get down to the bone you aren't all the way.

      Something's inside the bone.

      The marrow.

      That's what you got to get at.

      --Who's Afraid of Virginia Woolf?

    In this case, the marrow is supply and demand, i.e., the Law of. Everything else -- trend, support and resistance, and so on -- stems from the balances and imbalances between supply and demand. However, understanding how these imbalances work AND being able to see them in real time is evidently a real challenge for struggling traders. Therefore, supply and demand -- and the retracements that enable one to enter a trade -- will be the focus of this thread. No breakouts, no reversals, no hinges, no S&R, no trendlines and trend channels: all of that can be discussed in either of the preceding two threads.


    The first step is to determine the current trend of the market (Wyckoff). Some of this just can't be made simpler, and the first two steps exemplify that.



    The second step is to determine one's place in the current trend:


    The third step is to determine the proper timing of one's entry into whatever it is he's trading.

    There are three strategies: reversals, retracements, and breakouts. Reversals are generally employed at the upper and lower limits of trading ranges. Breakouts are traded when price breaks out of one of these trading ranges. Retracements are the first pullbacks which take place after a breakout. For the sake of simplicity, only retracements will be addressed in this thread. Those who want to discuss something else are welcome to do so in either of the first two threads ("If You Can Draw A Straight Line" and "Son of If You Can Draw A Straight Line").

    The fourth step is to manage the trade by monitoring the balance between buying pressure and selling pressure through the use of "demand and supply lines", exiting when the balance is no longer in your favor.

    And here we go.


    And the afternoon:


    A precondition:

    Bars are nothing more than a choice the trader makes to illustrate the movement of price in segments. Price is continuous and uninterrupted (unless the market is closed). A more accurate representation of price movement would be a line chart, but this is nearly always too big a step for the wannabe to handle, which is why I usually recommend a very small bar interval instead, even a 1t if he can deal with it. If he can't, he's welcome to use a larger bar interval as long as he can view the bars as continuous -- which is far easier to do if done in real time or via replay -- rather than get tangled up in "opens" and "closes" which exist only because he has chosen a particular means of illustrating what is, again, a continuous movement. Put simply, there are no "opens" and "closes" except -- in the case of the NQ, which will be used in this thread -- from the Sunday evening open to the Friday afternoon close. This can sometimes become more clear if one zooms out of his chart window so that the bars melt together into a continuous line. Some have actually had Ah-Ha moments after having done so.

    Price is a movie, not a slideshow.

    And in case you don't know, or have forgotten:

    • 1. Anything can happen, i.e., the outcome of any given trade is unknowable.

      2. You don’t need to know what is going to happen next in order to make money.

      3. There is a random distribution between wins and losses for any given set of variables that define an edge.

      4. An edge is nothing more than an indication of a higher probability of one thing happening over another.

      5. Every moment in the market is unique. (Douglas)

    And the principles of Auction Market Theory:

    • 1. An auction market's structure is continuously evolving, being revalued; future price levels are not predictable.

      2. An auction market is in one of two conditions: balancing or trending.

      3. Traders seek value; value is price over time; price is arrived at by negotiation between buyers and sellers.

      4. Change in demand drives change in price.

      5. One can expect to find support where the most substantial buying has occurred in the past and resistance where the most substantial selling has occurred.

    A final note: those who are fearful will scatter like cockroaches at the flip of the lightswitch when price makes the slightest move against them. Even a tick. But the money is made by staying in the trade for as long as it generates a profit. Therefore, the trader should look for every excuse to stay in a trade, not to get out of it. This doesn't mean sitting there like a post when the trade is clearly going against you. But neither does it mean setting "targets" and exiting as soon as they're reached, nor freaking out for no other reason than a line has been "broken".

    This approach is by no means mechanical. It requires instead that the trader be sensitive to the changing imbalances between supply and demand -- or selling pressure and buying pressure -- and act accordingly. Therefore, any break or countermove should not be cause for panic but for reassessment. Those who follow this approach will find it difficult to lose if they just pay attention and refuse to allow their egos and biases to prevent them from doing what's required.
  2. niko


    Thank you. Lets see if I can get it this time.
  3. slugar


    Thanks db I'm looking forward to this again
  4. r3algood


    How can we best contribute to the discussion DB?

    Is it by posting our interpretations and markups of the charts, or by asking questions on concepts we do not understand or don't quite get yet?
  5. Hooti


    I think of it as a homework assignment...
  6. dbphoenix


    Whatever will be of most benefit.
  7. dbphoenix


    For those who are new to this, a series of "real-time" trading decisions was posted to the "Son of If You Can Draw A Straight Line" thread on the 11th (of October) and a consolidation is provided below ("real time" is in quotes since "real-time" trades can't be made on a message board, particularly if a chart is involved). There was at the time a discussion over the following weekend, available to those who are interested. Subsequent to that discussion, a series of charts were provided on the 16th to illustrate what was being posted with regard to the trading decisions themselves.

    So. Since midnight, price has made a lower high and a lower low followed twenty minutes ago by another lower high. The NY RTH session opens in five minutes. So what does one do?

    0928: Price has made a higher low. What does that mean?

    0936: Price has exceeded the last swing high. What does one do now?

    0939: By now, a demand line can be drawn.

    0942: Price has gone parabolic, but a tighter demand line can be drawn.

    0945: Price tests the adjusted demand line and resumes its upmove.

    0947: If one entered correctly, the trade is now worth 8pts.

    0949: Price "breaks" the adjusted demand line. What does one do now?

    0950: Price makes a higher high. What does one do now?

    0952: Trade now worth 10pts.

    0953: Price "breaks" the fanned demand line. What does one do now?

    0956: Price makes a higher high. What does one do now?

    1000: Price makes a higher high then drops back to test the fanned demand line. What does one do now?

    1003: Price makes a higher high. Demand line intact. Trade now worth 14pts.

    1006: Price consolidating.

    1007: Price makes higher high. Trade now worth 15pts.

    1010: Demand line broken. What does one do now?

    1011: Price drops below last swing low. What does one do now?

    1013: Price retraces 25%. Does not breach next lower swing low. What does one do now?

    1017: Price cannot make a higher high. What does one do now?

    And so on.

    Those who could not answer the questions don't have a well-thought-out trading plan, much less one that is thoroughly tested. The market therefore will have them by the short hairs from the opening bell.

    Note also that no mention was made of support, resistance, trend, trendlines, trend channels, volume or anything else beyond demand and supply lines and retracements. Further, only one trade was made.

    A better example of a "real-time" trade -- actually foresight with regard to the daily -- was posted on the 24th, after the daily demand line was broken. This short was never triggered and price instead made a new high, voiding the trade and enabling the trader to "fan" the daily demand line to incorporate the higher high. But even though the trade was voided and thus not taken, these sorts of posts carry a bit more weight than those referring to "trades" which a "trader" allegedly "took".

    Now, of course, the new daily demand line has also been broken, and the same decision about what to do has arisen again. Those who have studied this should know.

    As a side note, there is also the business of the NQ reaching 3400, which was "forecast" last July.
  8. niko


    So it is 10 minutes for the open. The market has been making HHs and HLs, and we are approaching the top of the current trading range at 90-92.
  9. Hooti


    unavoidable appt's for me today... have to go.
    Friday too

    interesting day tho so far.
  10. llIHeroic


    I am excited for the renewal of this discussion. It is almost like the process of forming a diamond, where high heat and pressure force carbon bonds to re-arrange themselves into a highly efficient and valuable structure.

    In the spirit of the thread, I will re-double my efforts to continue to compress my understanding of price action, and refine it into a pure understanding of the forces of Supply and Demand.


    10-29-13 NQ Open

    The Trend: Strong up-trend which has just touched the top of the yearly trend channel.

    Where we are: Price is beginning to move sideways, fanning the short-term Demand. A loose trading range from ~60-90 has formed, containing more concentrated action and recognized value in a tighter range from 70-80.

    The Action: Demand has been ramping up overnight, away from value towards the upper end of the trading range. A push is made for a new high, but when met with sustained resistance from sellers, price is forcibly pushed back into the middle of the range.
    #10     Oct 29, 2013
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