Price and Volume

There's a quote from the old website you might like:

Until the lens of experience focuses information, it does almost no good. No matter how much the marketing machines of the Information Age would have us think otherwise, information by itself isn't power: knowledge is. And turning information into knowledge requires more time, experience, and effort than an afternoon spent starting at a screen full of facts.

Information is passive. To make it knowledge, you need to assimilate it. Put it in context. Understand it. Knowledge streamlines and focuses our relationship with information. Knowledge helps us avoid information we don't want or need and leaves us with the stuff we can use.

In an age in which endless amounts of bits and bytes are always available, it's a daunting task to spot the worthwhile stuff. It's easy for the Net to overwhelm us or lull us into the misconception that simply having access to something is as good as knowing it.

-- Michael Penwarden

 

Because of my comments over the past few days regarding "setups" and fading one's own "setup" and the hinge/springboard "setup", I'm quoting here a piece written by Vad for the realitytrader.com site regarding setups and the conditions of entry. My comments will follow.

IDENTIFICATION OF TRADING OPPORTUNITIES

The first stage is identifying the basket of stocks to watch. Two major criteria should be applied: (1) Activity and (2) Setup. You want to go where activity is, and this leads you to watching pre-market gaps and volume. Next step is to identify the type of action. This is very important because the action might be such that you never see any familiar setup that would give you a reasonable trade. There are plenty of movements that we can't utilize to any "trading" extent as opposed to "gambling" extent. In other words, if you put on the trade because you see the setup, you are trading. But if you just go for the action without seeing a setup, you are gambling. You might lose on "trading" trade and you might win on "gambling" trade, but in the long run you will lose if you go for pure action without any attempts to identify the setup. When the trade shows a familiar situation, that's where you get probabilities on your side. You will often sit and wait in spite of the fact that there are plenty of hot movers around. But you have to ignore everything that moves in a way that doesn’t allow you to read the movement within your system. (A bit more complicated is trying to find a situation which might create an opportunity but the activity isn't there yet. Doing this you have to determine your stop point in advance, in case the action never occurs or the stock does the opposite to what the setup prescribes.)

After (1) spotting the activity and (2) identifying the type of activity comes (3) defining scenarios in terms of IF - THEN. You see, for instance, a stock approaching the higher limit of the range and your setup is buying the breakout because you identified the trend of the stock as an uptrend and are going to buy the high, going with the trend.

Your set of scenarios: (these are just examples, not a description of the strategy)

Buying at 20 - I buy

IF pullback to 19 5/8 THEN I get stopped out because 11/16 was the support on last pullback.

IF movement over 20 THEN I move my stop to 19 3/4 because stock shouldn't drop that far if it's really strong.

IF stock moves to 20 3/8 THEN I move my stop to breakeven.

IF stock moves over 20 5/8 THEN I sell half and move stop to 20 1/4 on remaining half.

IF stock moves up too fast on big volume THEN I sell entire position.

Note that the scenarios are built in such a way that any kind of market action triggers one of your reactions. It goes in accordance with our general approach: let the market tell you what to do.

After your set of scenarios is done, you have pretty much "programmed" your behavior and they become your psychological support. You have already predetermined your stop level and assumed the risk, so if the stock acts nasty, you’re not caught off guard; it's merely one of your scenarios. Knowing that you were not trying to predict anything, you take it calmly. If the stock goes in your favor, you know what to do next and there is no room for overexcitement and all those "Go ABCD!!!" which show unprofessionalism. Rather, another set of scenarios kicks in, moving your stop up and selling of half of your shares as you secure your profit, or selling it in full if you are a scalper or if the trade was intended as a scalp from the very beginning. After the trade is closed, you get back to monitoring and looking for activity. A full cycle is completed and now it's time for a new cycle.

As a daytrader, you spend much more time on the sidelines, waiting for the right opportunity to present itself. You are filtering out everything that:

1. Doesn't fit your risk criteria.

2. Moves in a way that doesn't allow you to identify a familiar setup.

3. Sets up but still doesn't trigger the trade. This means that, for example, AMZN goes to 32 1/2 where it should be a short but selling never hits this level. Therefore, the trade is not triggered. You can often see Chris or me saying “to enter ABCD long, we want to see fast selling under 18”. The stock never sells down and we don't make any call on it. Why? Sometimes it goes up from 18 1/8 and it might look like a missed opportunity. But we ignore it because a bounce from this level without fast selling prior is not what we can read within our system. Either we see the setup or we let it go. Trading outside of a setup is gambling.

This programming of your action is very important as it brings structure to what would otherwise be chaos. You structure your own behavior putting some kind of algorithm in it. Eventually, that is what disciplines you and creates a favorable environment for getting rid of emotional imbalances. When you act within predetermined scenarios, you don't let actions trigger your ego. Ego raises its head when you expect the stock to do something, and it does the opposite. If you don't expect anything but are ready for any turn of events, nothing wakes the ego.

Attempts to jump on everything that moves leads to inevitable frustration as stocks act randomly for a trader doing this. They can't act any different because he looks at them randomly, so he takes the trades randomly. As soon as the trader has formed a system of setups and scenarios, where the setup is the trigger for the action and the scenario is the algorithm of the action, his behavior ceases to be chaotic and moves from gambling to trading.

The "setup", in other words, is not manufactured by some guru, nor does it have a cute name, unless you choose to give it one. The setup is rather a set of circumstances which you define which triggers an entry. It's up to you to impose order on the data stream; to -- in the context of this thread -- find those markers of buying and selling interest, buying and selling pressure, buying and selling exhaustion; test them to determine whether they show a higher probability of trading success than a random entry; decide exactly what it is you want to see before entering a trade. That's your "setup".

 

The first step for a trader is to determine the current trend of the market.

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.

I usually post this stuff on the weekends, but this weekend I didn't. Caca pasa. And next weekend, I won't be here.

The forest and the trees: a couple of hinges.

 

From Mark Douglas, on Support and Resistance:

Support is a level where buyers entered the market or old sellers liquidated their shorts with enough force to keep prices from going any lower. Resistance is a price level where sellers entered the market or old buyers liquidated their longs with enough force to keep prices from going any higher.

If a market has been making consistently higher highs and higher lows (reverse for the sell side) . . .

1. What kind of price action will sustain the buyers' beliefs that they can make more money?

2. When are sellers likely to come into the market in force?

3. Where are old buyers likely to take profits? Where are old sellers likely to lose faith in their positions and bail out?

4. What would have to happen for buyers to lose faith? What would have to happen to draw new buyers into the market?

You can answer all these questions by identifying certain significant reference points where buyers' and or sellers' expectations are likely to be raised and where they are likely to be disappointed if they don't get their way.

 

The typical trader will do most anything to avoid creating definition and rules because he does not want to take responsibility for the results of his trading. If he knows exactly what he is going to do and under what conditions, then he would have something by which to measure his performance, thus making himself accountable to himself. This is exactly what most traders don't want to do, preferring instead to keep their relationship with the market somewhat mysterious.

This creates a real psychological paradox for traders, because the only way to learn how to trade effectively is to make oneself accountable by creating structure: but, with accountability comes responsibility.

-- Mark Douglas

 

It's not unusual for a trader to experience some anxiety during the day, but many traders start out that way. Some are in a state of perpetual anxiety. But while being "alert" is an advantage, remaining in a free-floating anxiety state is likely to lead to poor decisions.

The advantage of trading when the blue line crosses the red line is that one is relieved of all responsibility, which probably is why this sort of trading is so popular.

However, if one is trading buying and selling waves according to the tape, trading when the blue line crosses the red line is not an option.

This does not mean, however, that one must begin the day in a state of anxiety. Nor does it mean that no planning or preparation can take place.

Trading according to buying and selling pressure entails looking for those areas which are most likely to attract attention and activity, which is why understanding the nature of support and resistance is important. Those areas where the most people traded the most shares/whatever in the past are most likely to ignite activity because all those people have something to gain or lose at those levels.

There are several levels or areas or zones to look at, the most obvious of which are the previous day's high and low, and if one does nothing but sit idly by until those areas are tested, he will likely save himself a lot of money.

The opening high and low can also be a rich source of opportunity. I say "can" because one must also consider volume. Note, for example, the ES from yesterday, and the volume shortly after 1100 when the gap from Monday was tested. Lots of activity, lots of opportunity. When the LOD was tested at 1330, again lots of activity, lots of opportunity. When the HOD was tested yet again at 1600, again lots of activity, lots of opportunity.

Targeting these opportunities in advance is simple. Sitting on your hands until the opportunities actually present themselves is considerably more difficult. But if one knows well in advance what he's going to do and where he's going to do it, and has some understanding of the nature of probability, he has nothing to be anxious about.

 

It's not difficult.

It's simple.

Support, resistance.

Price, volume.

Demand, supply.

Trend.

But it can be made difficult. Anything can.

If, for example, one insists on focusing on how he can make it "work" with mathematically-derived indicators (stochastics, MACD, CCI, OBV, blah blah blah), then he blocks the process through which he would otherwise understand it and profit from it.

If he focuses on where and how to make mechanical entries and exits rather than understand the dynamics of demand and supply, then he blocks the process through which he would otherwise understand it and profit from it.

If he focuses on setups and patterns as gimmicks rather than as manifestations of changes in the balance of buying and selling pressure, then he blocks the process through which he would otherwise understand it and profit from it.

Difficulties arise when one realizes that in order to profit from trading by price and volume alone, he must forget nearly all of which he thought was true, and that presents an insurmountable obstacle to a great many people. But that constitutes a personal problem, and is not the chart's problem.

Hire yourself to do a job. The job is just to sit there and watch the bars form, to watch the buying and selling waves, the pokes and prods and feelers cast by buyers and sellers looking for a trade, not to create or test a strategy, not to make money, not to learn the "secrets" or the "tricks", just to develop a sensitivity to buying and selling pressure. No indicators, no MAs, no nothing but price bars/points and volume bars.

Make notes of what you see and what you think you see. Don't rush to draw conclusions. Throw away your crutches and focus on what the auction market is really all about. The market is not out to get you. The market is not out to trick you. Buying pressure is buying pressure. It lasts as long as it lasts according to who wants what. Ditto for selling. Rather than focusing on avoiding getting screwed, focus on the pressures and the imbalances between them. Don't trade. Don't conclude. Just watch.

When you get tired, stop. Come back. Begin again. When you're done, review your notes. Look for those areas in which change took place. Formulate some hypotheses as to why those changes took place in those areas and not others. Don't force the Ah-Ha. Be a sponge.

If you're unsuited for this job, then you're wasting your time at it.

 

In some ways, today is more interesting than yesterday for all the stopouts and invalidated entries.

If you're stopped out, or if your entry is invalidated, the market is telling you something.

If you don't know what the market is telling you, you're not in tune with it.

If you're not in tune with the market, stop. Do not begin again until you find clarity.

 

In a certain sense, reading charts is like reading music, in which you endeavor to interpret correctly the composer's ideas and the expression of his art. Just so a chart of the averages, or of a single stock, reflects the ideas, hopes, ambitions and purposes of the mass mind operating in the market, or of a manipulator handling a single stock.

The study of charts is not as some people claim, the mere identification of certain labeled patterns made by the actions of stocks. That sort of thing borders on the mechanical and does little to aid in the development of one's judgment. But when a student undertakes to read from his charts the purposes and objective of those who are responsible for a stock's action in the market, he is beginning to see, in a true light, the meaning of scientific stock speculation.

-- Richard D. Wyckoff

 

As traders, we cannot afford the luxury of wishing and hoping because it puts us in a passive relationship with the markets. When we wish and hope, we are shifting responsibility on to the markets for making something happen instead of confronting the conditions and doing something about it ourselves. If we find ourselves wishing and hoping, it is an excellent indication that we don't know what is going on and as a result need to get out of the markets until we do.

-- Mark Douglas