IN THIS THREAD: IronFist learns (the elusive) PRICE ACTION

Discussion in 'Strategy Development' started by IronFist, Dec 2, 2008.

  1. Ok I'm taking a break from my quest to design a holy grail indicator and I'm going to use ONLY PRICE ACTION.

    As of now, the following are my thoughts on price action (feel free to correct me if I'm wrong)

    Price Action has no definition. For the longest time I got pissed off every time I read a thread where someone said "indicators are useless, it's all price action." There was never a definition of it. It's like "go do task xyz" but not being given a definition of what xyz is or how to actually do it. Does it mean looking for patterns? Does it mean using S/R? If so, does it mean Pivot Point formula calculated S/R or does it mean dynamic S/Rs as defined by areas of S/R and previous high/lows? Does it mean using candle patterns? All I know is I'm pretty sure it doesn't mean using any indicators, including MAs. I think I read in a thread somewhere that Trendlines are allowed. They're not really indicators, per se, so they're probably good.

    So today I wiped all the indicators from my YM chart (except for volume, which I find to be as useless as a random distribution histogram, but maybe this is the time when I will understand how it can be useful. I've heard all the theories on why it's supposed to be helpful, it's just none of them are consistent. But that's all discussed in that other thread, so I digress.).

    So after watching the YM on a 400 tick chart (arbitrary number, no fib number voodoo, no magic multiple of 7 magic, I just thought 400 tick draw bars at a decent speed) with no indicators for the entire morning, never knowing where to enter, I finally grew some balls and placed a trade. But I will post my chart in a bit.

    As I understand it, price action is discretionary (to an extent)... right? This annoys me. When using indicator-based systems, even if they're not profitable, there is never any doubt ever about when to enter or exit. Signal. Enter. No emotion. Signal. Exit. Repeat.

    But discretionary systems don't have that luxury.

    So back to Price Action. One thing that I learned from jjrvat's "Day Trading 2.0 for small traders" thread is that price moves in waves. HH/HL, LH/LL. I believe that statement is in alignment with "Price Action."

    So basically, if you're going long, you probably have a better statistical chance of being profitable if your long entry is in an uptrend following a series of higher highs and higher lows. This is also known as "buying pullbacks."

    In the jjrvat thread, I used a relatively fast Hull MA to define the pullbacks for me, but since this thread doesn't allow MAs, I have to guess.

    I find guessing to be impossible. Price is going up... it's pulling back, there's a red candle... another... how do I know if this is a pullback or a reversal? Here's an example:

    Look at this chart. It's obviously heading down:

    [​IMG]

    Now, we don't want to sell just when it's going down (cuz that's always when it reverses :D) so we're going to follow Price Action and buy on a pullback. That's safer.

    So what's the next candle?

    [​IMG]

    Ok cool, it's a hammer (sort of) type candle. This might be a good start of a pullback.

    So we'll just wait for the pullback (if it happens) and then sell short into this nice downtrend. Next few candles:

    [​IMG]

    Looks like a bit of a pullback is happening (good thing we didn't sell before, lol)

    One trouble spot I'm having is: how do I know when the pullback is done and it's time to short? and How do I know it is a pullback and not a reversal?

    Next candle:

    [​IMG]

    Hey, that's a pretty big green candle. Maybe this downtrend is over. Maybe Buying pressure/momentum is increasing. I have no idea. Is now a good time to short? Or should we buy? I dunno. So I'm gonna sit on the sidelines for a while longer.

    (Note: It takes me forever to edit the charts so only show one candle advance at a time, so I'm just gonna post the rest now. Hopefully you all understand my point. The reason I am trying to post them one candle at a time is because I feel like most of the "price action" charts posted here are done after the fact when everything is obvious. It's insanely difficult to know in real time what is going on, this especially applies to the people who draw perfect trendlines after the fact. How many trendlines did you draw in real time that didn't work? but more on that later.)

    Here's the rest of the chart (for a while):

    [​IMG]

    Hmm, turns out that was a pullback.

    So there was some money to be made in there. What does Price Action use to determine when to exit? Say you got in after the pullback (which we didn't even know was a pullback and not a reversal until after the fact anyway). Since there is no indicator saying "exit", how do you know?

    Trendlines have two aspects that I don't like: 1) I never know where to draw them, and 2) I don't like how other people post charts with perfect trendlines after the fact when there's no way they could have known which one to use when the chart was live.

    For example, look at this chart from today. Check out these channels I drew. They are awesome and perfect, and obvious. I'm such a master trader and all you noobs suck. See how easy price action is?

    [​IMG]

    Seriously.

    It's so easy after the fact.

    Let's look at the same time period but with trendlines that could have been drawn in real time (rather than breaking down the chart into bar by bar, I'm going to assume that the readers of ET are able to extrapolate and pretend that they were only seeing one bar at a time)

    [​IMG]

    What an ugly mess!


    And just a quick note about volume. I know that many people think volume bars the the holy grail, but here is why I don't know how to use them: I can't get a straight answer on how to use them. For example, some people say "volume spikes signal the beginning of a trend," other people say "volume spikes signal the end of a trend." The crafty ones say something ambiguous like "watch volume to determine trend" and they're all correct. That last guy has put himself in a great guru position, too, because then if volume occurs high at the beginning, he can say "see, volume spike = beginning of trend. Volume leads price." But if it occurs at the end, he can say "see? volume spiked as all the noob buyers came in trying to get on the trend. Price goes where volume is." It's circular logic exploited by "gurus" (term in quotes) to bewilder noobs.

    Based on my experience, volume is as useful as random distribution. Sometimes it does one thing when price is doing something, and other times it does the opposite. Because there are no hard and fast patterns, I say it's not useful. But for the purpose of this thread I am leaving it up on my charts just in case I have a lightbulb moment or something.


    Alright I think this is long enough for a first post in a thread.

    To summarize:

    - I'm trying to define price action. Right now I think it means:
    -- look for patterns (double tops/bottoms, candle patterns like hammers, etc.)
    -- look for HH/HL, LL, LH, price moves in waves, trade in the direction of the trend after pullbacks, in other words, don't go short if price is making HHs and HLs

    - I do not know how to tell if price is just "pulling back" or "reversing" (without the help of MAs, which as I said in the beginning, I'm trying to do away with).

    - I do not know when to enter (ie. when the pullback is done)

    - I do not know what to do about determining exits. Ideally you would exit when price is done moving in a certain direction, but how do you know? And if it goes against you a little, how do you know if it's "just" a pullback vs. an actual reversal and you should get out?

    - I do not understand how to draw correct trendlines in real time (as opposed to after the fact when it's easy to make them perfect)

    My charts are much bigger when there's no indicators below them :D

    Much, much more later.
     
  2. Tums

    Tums

    in
     
  3. this should be an interesting thread. I struggle with the SAME things you are saying about price action.
     
  4. Circular Reasoning – supporting a premise with the premise rather than a conclusion.


    Circular reasoning is an attempt to support a statement by simply repeating the statement in different or stronger terms. In this fallacy, the reason given is nothing more than a restatement of the conclusion that poses as the reason for the conclusion. To say, “You should exercise because it’s good for you” is really saying, “You should exercise because you should exercise.”

    It shares much with the false authority fallacy because we accept these statements based solely on the fact that someone else claims it to be so. Often, we feel we can trust another person so much that we often accept his claims without testing the logic. This is called blind trust, and it is very dangerous. We might as well just talk in circles.


    You are definitely much smarter then me in spotting fallacies. Looking forward to what may become an excellent thread. Great post, btw.
     
  5. I would highly recommend you go over to surinotes.com

    He also post on ET ( or used to, not sure) under the same name ( minus the .com)

    I think he will be able to shine some light on your situation.
     
  6. Corey

    Corey

    In my studies, I have found that price action can be summed up as such:

    You cannot predict forward with the past. I cannot say that I expect a trend to last N more minutes and move X more points ... but I can describe how price SHOULD behave if it is to continue in the same manner it is going now. It is the FAILURE to act in this manner that is the most telling for a trader.

    Much like hypothesis testing, we are only REJECTING or FAILING TO REJECT. We are either rejecting that a change occurred, or failing to reject that a change occurred. We are never proving that a continuation occurred.

    In your first example, you would draw a trend line like this:

    [​IMG]

    In this case, there is nothing -- merely an upward resistance. We could probably fill in a bottom support -- but I forgot to draw it. You will see it in the next picture...

    Notice how if we expect this trend to continue, it should behave by respecting the upper trend line. If it does NOT, we can REJECT this trend and expect a trend change.

    Next:

    [​IMG]

    We now have a move near a resistance top trend-line, and some close horizontal resistance. FAILING to take out the top resistance would indicate a continuation. If we break through, we probably have regime change, and should look to draw the new lines of support and resistance.

    And finally,

    [​IMG]

    It hit the trend line, FAILED to take it out (indicating, most likely, a continuation), proceeded to break the bottom resistance, and accelerated.

    The hardest part is probably defining what a breach or break of a trend-line is, without missing it entirely. I like the 'two bars below of the same direction of the trend, filled 50%'. But if we waited for that, we would miss the move entirely. I would recommend switching to a constant volume bar, or a constant range bar, to use this sort of confirmation. You said you were using a 400 tick bar, but I don't know whether you did for these charts.

    Anyway...I'm just babbling. Hindsight is 50/50.

    But whenever people present me with a chart and say "predict where this is going using TA," I say, "I can't." "But you drew support and resistance on the chart!" they exclaim. To which I reply, "Right -- and it is only the FAILURE or the NON-FAILURE of those lines that tells me something."


    EDIT: I would like to add that sometimes looking at a higher time-frame (or 'fractal' as some people around it), can make things clearer. The whole 'trees versus forest' thing. I also wanted to add that I think we can see two things from your charts. The first is that a breakdown in the DIRECTION of the trend leads to acceleration of the trend. Breakdown in the opposite direction of the trend does not necessitate a NEW trend -- we should wait for confirmation via S&R...
     
  7. <i>To summarize... the words, "I don't know" dominate my post</i>

    Based on where you are at right now, I'd honestly opine you are about two years' away from a solid understanding of trading price action.

    Be patient, give yourself until roughly Dec 2010 and your self-education should get you about that far by then. Not being rude, simply frank.
     
  8. Pyewacket

    Pyewacket

    I love you. Great thread!!
     
  9. jashanno

    jashanno

    The trendline is a guide. Use it to connect HL's or LH's depending on the direction of the trend. Once price starts to get close to the trendline then I am looking for an entry. At this point I am expecting to see (assuming overall trend is down) bars making highs greater than the previous bar and lows that are greater than the previous bar. Once price breaks and make a new low then I will enter.

    Refer to my sloppy drawing.
     
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  10. Suri Diddella's (apology if sic) book is a must-read for new price pattern traders. That's big-picture pattern recognition coverage. If you don't have it, buy it now. fwiw, he doesn't even know I'm alive let alone we have no affiliation whatsoever. Before anyone even almost asks.

    For inner workings or price action, trendlines and 1-2-3 patterns are the building blocks of reading a chart. Everything builds out from there... and neither can ever become "burnt out" or cease to work any more than oceans will cease to ebb & flow tides.

    Enjoy your quest :)
     
    #10     Dec 2, 2008