On another subject, it appears that -- puzzling though it may be -- a number of the elite do not know what a chart is or what it represents or what it's for. Therefore, a primer. I hope it is of some use to somebody. A chart is a visual representation of transactions. The results of these transactions are depicted by either a line which will look like a map of the Pacific Coast Highway, or by a bar which represents the opening price (the little notch on the left side of the bar), the low for the day (the bottom of the bar), the high for the day (the top of the bar) and the closing price (the little notch on the right of the bar). At the bottom of the graph you'll usually also find volume bars which will tell you how many transactions were completed that day. But beyond all this, a chart is a visual representation of buying and selling behavior on the part of investors/traders, not just a tally, and this behavior creates patterns (not bunnies in clouds patterns but easily identifiable, repeating patterns of behavior). Thus if you approach this from the viewpoint of psychology and sociology rather than cut-and-dried mathematical models, you'll have a leg up. These patterns do not exist in nature. They are created by the buying and selling dynamic. Begin by thinking of the market as a giant bazaar. Lots of buyers and sellers, all excitedly negotiating prices. If a lot of people are crowded around a particular merchant's stall, he can demand premiums for his goods. If another merchant is getting little or no traffic, he must lower his prices in order to unload his goods. If he's able to manufacture a demand, he can then raise them again. Either that or use whatever demand he creates to unload whatever crap he's selling and move on to something else. Consider also that all stocks/contracts/etc go through up/down cycles. These cycles can last for anywhere from a few minutes to several years. Which cycles you focus on will depend on the kind of investor/trader you are and what your time horizon is. Here's how it works. Somebody's attention is caught by a particular company or its stock or a futures contract or whatever. They like it, think the price is reasonable, and begin buying it. But they do it gradually and in small lots so they don't attract attention to what they're doing. If they attracted attention, others would start buying the stuff as well and the price would be driven up because of the increased demand. At some point, they'll "test" the market by offering some of their stuff to see what the demand is. If the demand is there, they'll offer more as the price rises. If the demand increases and the price rises further (because of buyers willing to pay ever-increasing premiums), they may hold back their stuff and let other holders provide the supply for the time being, then sell more of their shares, or all of them, when the price represents their target profit level. Selling into this increased demand is quiet. The holder of the stuff doesn't want to dump a huge amount of supply onto the market for fear that there may not be enough demand to absorb it, and the last thing he wants to do at this point is drive down the price. When the stuff has topped out and the real selling takes place, he's already out. Thereafter, unless demand increases, the stuff falls until it represents "value", to somebody, for some reason. Then the whole process starts all over again. Does all of this require a chart? No. A chart is a tool, like a T&S display. But if used properly, it can convey information in its own way which the trader/investor may prefer over any other. To claim that the chart displays no useful information is simple ignorance.
Questions regarding AMT. Since price moved out of the March TC at that moment does that imply a change in trend or an oversold condition? Since now we are at the mean does that get treated like the midpoint of a trading range as in entries could be a bit more dicey? Should one wait for the top of the TC to be tested for an optimal entry and optimal application of SLA? I have been trying to add AMT into the SLA plan I just still struggle with it. The past two days I've practiced patience and waiting for the right opportunity. I guess what I am asking is when the charts are opened in the morning do we just straight SLA away and AMT adds confidence to the trades we may or may not take or do we sit and wait for the prices depicted by AMT and then begin the SLA? This is where I find the struggle.
Since we have broken the current -- or what was the current -- trend channel, there has been a change in trend. This is a duh. However, unless and until we drop below the last swing low in early February, that's all it is: a change. It could just go sideways for however long. As to the mean, I'll get to that in the next post as that's something that came up this afternoon. As to AMT itself, remember that it's not a method or a system; it's simply emblematic of how traders behave. Professionals will trade where they can find the greatest volume of trades if for no other reason than they have so much to buy or sell. Therefore, if there's a lot you want to buy or sell, you're going to look to the mean as that is where the greatest volume of trades can be found. Is the mean the same as the median? No. That's why the mean can sometimes be slightly above or below the midpoint. But if you don't want to go through all that or don't know how, price will tell you where the mean is, which is also addressed in the next post. If you DON'T have a lot to buy or sell, then you're going to have to find those levels beyond which traders can't find trades. These are by definition the limits of the trend channels that these excursions away from the mean create, i.e., the limits create the trendlines, not vice-versa (the latter would be stupid), and the trend channels, if those lines turn out to be parallel (why are they parallel? because traders tend to venture the same distances from the mean one way and the other in order to find trades; don't ask me why).Therefore, you can trade any seeming reversal in a trending move and hope for the best, or you can wait until price has reached one or the other extreme and play your reversal there. Up to you.
I revisited chat this afternoon because my morning wasn't all that great and I thought I might find a decent trade around the FOMC release. There were a couple of people there, and I said that I expected price to work its way toward 80 since that's where the mean appeared to be, but I was going to depend on price's behavior to tell me whether or not I was right and where I should exit the trade. As it turned out, I exited at 78 because price began to stall. However, there was some confusion over what I meant by price telling me where the mean was. Didn't I know where the mean was? The mean is not a pinpoint just as the line which eventually wends its way through the middle of the trend channel is not razor-thin. Not every trade that takes place in the middle is, after all, completed at exactly the same price. You have to let price tell you what to do. You have to "judge the market by its own action". Perhaps some of this confusion has to do with how the charts are drawn, so I'll go back over this once more. One can't do this backwards, and if one does it in hindsight, doing it backwards seems natural. But regardless of when one draws this stuff, it has to be done AS IF it were being done in real time. The chart below illustrates what I mean. First you draw the upper trendline. Then you copy and paste this in parallel below the lowest swing low between the two swing highs (this may have to be changed somewhat later, but that was already addressed in a couple of posts in mid-February). You then find the midpoint by, if you're lazy, drawing a line from one to the other and finding the middle of it. This is where you start your mean. And when you begin, what I've drawn is all you have. You can extend those lines to give you some idea of what to anticipate, but this is an elective, not a required. The fact that the demand line has departed downward from the lower limit of the trend channel -- posted a day or so ago -- naturally suggests that the mean will change, probably on a downward slant. That's why I said I wanted price to tell me whether the mean was where I expected it to be or whether it was much lower. If the mean were to be traced between the highs and lows of each swing without regard to the parallel, then the mean today would be at 70, not 80. However, this turned out not to be the case. Price sailed through 70 like a hot knife through butter. It then stopped at 85 and dropped back to 75, midpoint 80, before resuming the upmove. Therefore, 80 is what I'll work with until the market tells me different.
Ahhhhh I see. So those who had a lot to buy or sell when they can not find trades that creates the extreme and then we head back to the mean where they can find more trades. So since I don't have a lot to buy or sell I look for the extreme with "the expectation" of traveling at the least back to the mean?
Incidentally, since I did not intend a practicum on drawing trendlines, I skipped ahead a bit. If I were to go back to the very very very beginning, it would look like this:
Say we get to 3620 then price reverts back to the mean and maybe a little lower would we then see a change in the TC since we did break the lower extreme and could not get back to the upper extreme or would price have to go lower than 3480 for that to happen? Would we still keep the March TC in our minds if the example I provided happens?
Trading around a mean is always more problematic than trading off a limit. When one reverses off a limit, the odds are on his side. When trading off a mean, the odds are pretty much even. Which is where AMT and SLA can work together. The SLA gets the handoff. Where is the line beyond which traders can't find buyers? Where is the line beyond which traders can't find sellers? And by "line" I don't mean the farthest point but the price which is repeatedly tested, sometimes with a poke or a prod or a probe which goes beyond that line but then falls back into the range. Price moving one side or the other beyond one of these two lines provides an opportunity, particularly if that movement is accompanied by fear.