Price and Volume

Some things to think about and even work on:

How important are bozos? Does it matter where they occur? Does it matter when they occur? Why do big things happen after some, and nothing after others?

What about WRBs? What is their effect on subsequent price action?

And what about base length? How long does an intraday base have to be in order to motivate big moves (e.g., yesterday)?

And hammers. When is a hammer not a hammer? When is a shooting star not a shooting star? And what difference does it make?

 

Call it fantasy, prejudice, opinion, judgment, or what you will, when the high abstraction collides with bare facts, it is the facts that have to give way if your value system places such a high premium on rightness that your tender ego cannot suffer the slightest setback. Many men cannot afford to take monetary losses in the market, not because of the money itself so much as because of their oversensitive, poorly-trained selves. The humiliation would be unbearable.

The only way that occurs to such men to prevent such painful situations is to strive to be always or nearly always right. If by study and extreme care they could avoid making mistakes, they would not be exposed to the hard necessity of having to take humiliating losses over and over again. And so?

And so, too often, rather than settle for a relatively minor loss, our friend will stand firmly on the deck of his first judgment, and will go down with the ship. The history of Wall Street, and of LaSalle Street, too, is studded with the stories of men who refused to be wrong and who ended up ruined, with only the tattered shreds of their false pride left to them for consolation.

How to avoid such unnecessary tragedies? Be always right? You know that isn’t possible. Keep away from the speculative market entirely? That is one answer, but it’s rather like burning down the barn to get rid of the rats.

There are other answers, and they are simple. They are standing there, right at hand, like elephants in the front hall, if we can only see them. In the first place, there is no rule that we can’t change our minds. It’s not necessarily wrong or a mistake to believe that Fruehauf stock will go up from $24 to $60. What is wrong is sticking to the opinion after the evidence clearly shows that the conditions have changed. The rational approach is to be ready at all times to consider new evidence, and to revise the map accordingly.

In the second place, it need not hurt so much to have to change one’s mind. Unless we are so wedded to absolute standards that we cannot entertain anything that will conflict with what we decided in the first place, we can alter the map to any degree we want, or completely reverse our position. If we have a good method of evaluation, in which we have confidence on the basis of observed and verified results, we will not have to think of these changes of opinion as defeats. They are simply part of the process of keeping our maps up to date. If we plan to travel to Boston over Route 20 and there is construction underway on a five-mile section of the route, we don’t try to blast our way through. We take the detour. We go by the territory as it now is, not by the old map. And if the road is blocked entirely and no detour possible, we don’t shoot ourselves, or run our car over a cliff; we simply turn around and go back home and try again tomorrow.

It is perfectly amazing how many losses you can take in the market and not get hurt very much, provided you are able to cut these losses short as soon as a change of trend appears. In order to do that, you will have to keep an open mind — not open just to favorable things that confirm what you wanted to believe in the first place, but open to any reports that will have a bearing on the situation, whether good or bad.

The really serious losses come when someone closes his mind and stubbornly refuses to recognize new factors in the situation. Of course, it’s not enough merely to keep losses small. In order to keep solvent, one must also have some profits; but profits, too, bring their psychological woes.

-- John Magee

 

How do changes of buying pressure and selling pressure manifest themselves?

1. lack of follow through, inability to make new highs / lows
2. increasing bar overlap (reducing pressure)
3. inside bars at the end of a price swing
4. hammers, shooting stars, engulfing bars, dojis, particularly near s/r
5. change of trend line angle
6. a change of trend – from a series of lower swing highs, lower swing lows to higher swing highs, higher swing lows and vice versa

The beginnings of a strategy…?

 

Beginnings, yes. Nice start.

 

I should point out that it's not necessary to develop a global strategy that is applicable to all situations. You are correct that becoming sensitive to changes in buying and selling pressure is only the beginning. After all, you can become sensitive as hell, but then what? What do you do with it?

There are three basic contexts for strategy development: breakouts, retracements (and, by implication, continuations), reversals. You can't be expected to develop specific strategies for all three simultaneously. However, you should be very clear on the point that whatever you develop for one is very unlikely to be applicable to either of the others. If nothing else, keeping these three contexts at the front of your awareness should help clarify your thinking.

Begin with what appears to apply to whatever market you're trading. If it's in a trend, focus on rets/conts. If it's in a trading range, focus on revs. And so on. Develop the strategy throughly, with all the accompanying tactics. Test it. Learn it. Get comfortable with it. Trade it. But understand always that whatever you're doing may not apply to every trading day. If you decide to focus on breakouts, for example, and the entire day is range-bound, then you're very likely going to have nothing to do. This is not your problem. Use the time for something else. But don't force trades. Don't see what isn't there (many novices fall into this trap when they've been working on reversals and insist on seeing reversal setups where none exist, e.g., on trend days). In time, you'll have a variety of strategies to cover most situations. But the key words here are "in time".

 

Somebody was asking how to determine whether the day was likely to chop or not. This morning, we're exactly between the PDH and the top of the gap from Wednesday. Knowing where S/R lie helps to guide one's contingencies.

 

For yuks, I'm posting an example of how the apex of a hinge can provide S (note the word "can"). We're not talking about a lock here, but when you're doing your PM S/R prep, this is the sort of thing you may want to add to your checklist:

 

The Ws file has been finished and uploaded to the Yahoo site (click Files, below). I also uploaded an old Pristine piece on S/R which is interesting. This should complete the revisions on all the files that the Demand/Supply file alludes to.

You may also want to look at a current chart of CFC. It provides an excellent example of the subject of the file and will be a good companion to the illustration included. Save it for reference (for some reason, people are always saying "future reference"; what other kind of reference is there?).

Now working on Bottom Fishing.

 

The best traders can put on a trade without the slightest bit of hesitation or conflict, and just as freely and without hesitation or conflict, admit it isn't working. They can get out of the trade -- even with a loss -- and doing so doesn't resonate the slightest bit of emotional discomfort. In other words, the risks inherent in trading do not cause the best traders to lose their discipline, focus, or sense of confidence.

If you are unable to trade without the slightest bit of emotional discomfort (specifically, fear), then you have not learned how to accept the risks inherent in trading. This is a big problem, because to whatever degree you haven't accepted the risk is the same degree to which you will avoid the risk. Trying to avoid something that is unavoidable will have disastrous effects on your ability to trade successfully.

-- Mark Douglas

 

The market forces you, if you're going to succeed, to be completely honest with yourself. If you're losing money, you are forced to confront that reality. It's an objective reality, it's right in front of you, and you have to acknowledge it. The market weeds out people who are unable to be honest with themselves.

Trading is one of the most self-revelatory things that a person can do. If you allow yourself to be really open, it's like going through psychotherapy everyday.

-- Robert Koppel