Son of If You Can Draw a Straight Line . . .

Discussion in 'Journals' started by dbphoenix, Sep 19, 2013.

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  1. dbphoenix


    Given that the original Straight Line thread is now well over a thousand posts long and given the number of sidetracks it has taken, I'm spinning off what I hope will be a more focused thread, one which is centered on the principles of basic price movement trading. There's nothing new here, but it's one hell of a lot shorter, so perhaps it will be easier to understand. This is, after all, not that complicated. The complications arise when ego and fear intrude.

    The first step is to determine the current trend of the market (Wyckoff):


    Links will be provided in the event that the chart evaporates: This has been an issue.

    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.

    The fourth step is to manage the trade by monitoring the balance between buying pressure and selling pressure, exiting when the balance is no longer in your favor.

    And here we go.


    Q: [Do] you just fade the levels?

    A: Nothing's faded. When the line is broken, price is given a chance to retrace. As long as it doesn't retrace more than 50%, the trader stays in the trade.

    Q: I understand the exit, when the trend-line is broken you mark the 50% area and if that goes, you exit. However, whats your signal for entry ?

    A: The first retracement, except in the case of reversals in a trading range (this example doesn't contain any). One just has to accept the risk on those and take them, or else not trade ranges at all, which is generally the better course unless the range is especially wide.

    Q: Any rules on channels or same as in lines?

    A: If you mean trend channels, this was addressed in another thread a few days ago. The post I made referenced the following chart:


    The instructions for drawing the trendlines are in the second paragraph:

    The dotted line. Appears to be mid point of the trend. What is the purpose of that?

    As RN says, it's the midpoint, or midline. If you're familiar with auction market theory, you know about trading ranges and value areas and midpoints/means and mean reversion. The trend channel is simply a diagonal trading range with the same "midpoint". The channel is created by traders trading away from the mean. At some point, the activity reverts to the mean. It can then reverse and go back where it came from, or it can breach the mean and move to the opposite extreme. Or trades can cluster around the mean, as they did in 2012. This reversion to the mean from the extremes is what leads many people to believe that trendlines and channels provide support and resistance, but what appear to be support and resistance are more a matter of standard deviation.

    As to the trendlines themselves, the first is drawn below the first two swing lows. As RN explained earlier, this line is then copied and plotted across the swing highs beginning with the first swing high between those two swing lows. All of this is then projected forward in a straight line. The lines are not changed if price breaches the line since much of the purpose of drawing the lines in the first place is to be alerted either to "oversold" and "overbought" conditions (i.e., price ventures outside the lines) or to a potential change in trend and even a trend reversal.

    It is also worth noting that this channel could not be drawn until late 2011. The first channel would be drawn at a severe angle under the first two swing lows in 2009. Such an angle could not be sustained and the channel would be broken by the end of the year. As higher highs are made, the channel begins to rotate downward until it reaches a sustainable angle, in this case by 2011. This particular trend has been sustained for more than four years.

    As to what is a "sustainable angle", that depends on what traders are comfortable with and how crazy they become. If the angle is reasonably gradual, a great deal of trading will go on at any given point or level. This trading will provide substantial support in an uptrend (and resistance in a downtrend). Parabolic moves, on the other hand, often collapse as rapidly as they rise because there are so few trades at any given level during the ascent; there's nobody there to support the price. Exceptions to the "sustainable angle" can be quite lengthy, as with the Naz in 1999, or, really, 1994 all the way to 1999. But that had largely to do with traders losing their minds, which a great many paid for soon thereafter when the market collapsed.

    And the afternoon:


    Q: On the long, you go long before the 50% retrace area is taken.

    Per your rules:

    "When the line is broken, price is given a chance to retrace. As long as it doesn't retrace more than 50%, the trader stays in the trade."

    so why did you long prematurely before the 50% line was broken?

    A: I don't know that I'd call it a "rule" (if I did, my apologies). It's more an indication of market sentiment, i.e., the balance between buying pressure and selling pressure.

    Be that as it may, if you're referring to the last long and the 50% retr of the immediately-preceding downmove, the short is old news after the "supply line" is broken and a double bottom is made. There's no suggestion of a continuation but rather a change in the balance between selling pressure and buying pressure: sellers appear to be done. If that's the case, price will rise (the "line of least resistance"). If it doesn't, the long will never be triggered, in which case price will most likely move sideways (it may eventually continue downward at some point, but nothing can be done about that unless and until it happens).

    As a side note, the lateral dotted lines that don't have "50%" on them refer to the swing points, which are expected to provide minimum support. If they don't, that violation can be used to exit at least one contract, if trading more than one.

    If one keeps an open mind, the market will tell him what to do.

    Q: [How are] the pink and blue lines with 50% wedges [drawn]...are they just simply drawing line from top to bottom and marking the 50% point?

    A: As noted above, the blue lines are "demand/support" lines and the pink are "supply/resistance". The first tracks demand/support by connecting the swing lows in an upmove. The second tracks supply/resistance by connecting the swing highs in a downmove. Their purpose is to alert the trader to changes in the balance between buying pressure and selling pressure. These changes may alert him to scale out, pyramid, exit, whatever, depending on his strategy and tactics.

    "50%" refers to the midpoint of the upward or downward move, e.g., a move from 20 to 10 has a midpoint of 15, a move from 6 to 18 has a midpoint of 12. This can be a "last line in the sand" regarding the continued viability of a trade.

    Q: I always used the term "timeframe" for the bar, knowing it really wasn't accurate. Bar interval makes sense!

    A: I should say here at the beginning that "bar" is simply a convenience, stemming perhaps from Homma's "candles" in the 18th century (though I doubt this since Dow probably never heard of Homma). When charts were published in the paper, it made sense to note the range of activity from low to high along with the closing price and, sometimes but not always, the opening price.

    Bars, however, 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.
  2. dbphoenix


    Another example:

    First, this is what you should have been looking at during today's session (7/1), whether you were trading or just observing:


    This is what you may or may not have had in your head:


    One begins with premkt support at 20. This was discussed earlier, as was my opinion that the line of least resistance was up. Several long options are provided, the choice depending in part on how comfortable one is about entering a position before the open. Note that an entry at the open might not have been filled.

    After price shot up, it held at 29. When it moved on, a demand line could be drawn -- on the chart or in the head -- below the swing lows. Tracking this move with a tighter line -- the dashed one -- would have seemed reasonable given the extent of price's departure from the previous line.

    Now we get to the interesting part, and it's fortunate that this situation arose so early in this thread given that it illustrates two important fundamentals of a good trading plan: (1) what do you want and (2) how do you plan to go about getting it? Here price reaches the top of the trend channel (+/-) in an almost parabolic move. It then forms a dbl top.

    So now what? What do you want? Do you want to take the money and run? Do you want to exit and keep monitoring the situation in order to jump onto a possible continuation? Do you want to risk a short? If the last, what exactly is the risk? What are the probabilities here? Remember that this is the top of the trend channel, i.e., resistance. Not that the trendline itself provides resistance. It doesn't. But it does represent a certain distance from the midline of the trend channel, just as it would if the channel were lateral, i.e., a trading range. And since trading ranges and trend channels (diagonal trading ranges) are all about mean reversion, price is most likely to revert to the mean once it reaches the upper limit of the range. Which it has. So what's it gonna be?

    A lot of traders would relinquish responsibility for the trade at this point and leave it up to fate. They might even move up their "stop" to just under this level in order to "capture" whatever profit they might have. This is crap. To begin with, there's no justification for using stops except for catastrophe stops (losing your connection to your broker, losing your internet connection, getting a BSD, whatever). If the trade isn't going as expected, then just get out. Take responsibility. Leaving it up to the market to take out your stop so that you don't have to assume the responsibility for the trade is not characteristic of a successful trader.

    And while I was trying to be as non-directive as I could be earlier, it should be obvious that the trade should be exited at the dbl top or no later than the break of the demand line. A short could then be taken inside the retracement a few bars later. If the trader would rather monitor the situation to determine whether there will be a long entry into a continuation, he could do that. But, unfortunately, there is no long entry into a continuation but rather a series of lower highs. A better option, one more appropriate to trading price rather than trading hope, would be to take the short and see whether price goes down -- yay! -- or price goes up instead, in which case the trader exits his short and jumps back on the train.

    There will be those, of course, whose grasp of support and resistance is somewhat loose. They might prefer to wait and see whether price drops below the last swing low, or the midpoint of the previous rally, whichever comes first. In this case, they're the same, depending on the point from which one begins measuring the rally. In any case, he waits, and after two hours of waiting, price finally drops below his line in the sand. And he wishes he'd exited at the top and gone short. The next time this situation presents itself, however, he exits, goes short, and price rockets away from him in a continuation move. If only he'd just stayed in.

    The is how the market teaches you whatever will lose you the most money.

    A better choice? Trade the price. Not your fears, not your hopes, not your biases, not your opinions, not your ego. Just trade the price. And if it does the unexpected, then trade whatever it's decided to do. You can't be surprised unless you've decided what it is that price is going to do and you're not going to change your mind just because price has decided to do something else.

    I won't go into a lot of detail about these charts since they may be self-explanatory. If anyone has questions, just ask. Otherwise . . .

    As for the afternoon chart, below, there are a couple of things that may require explanation. One is the "fanning" which occurs when price makes lower lows after having failed to breach the previous swing high. The supply line is simply rotated outward to accommodate the price behavior. The second is the "OL", which you may have figured out means "opening low", a sometimes means of support that is worth a heads up.

  3. dbphoenix


    Perhaps this will give you something to chew on, from April:

    Trading price begins with determining the context, i.e., what is the market doing outside the intraday world? By finding the various support and resistance levels -- i.e., those levels at which sellers have turned price down and buyers have pushed it back up -- in the daily and even weekly charts, the trader will have some idea where to find zones and levels of tradeable action in his upcoming intraday chart, though if he wants to trade only daily charts, that's okay too.

    Why bother? Because if you learn to trade price, your edge will never fail.

    The following provides the context for the upcoming trading day, a Monday:


    The NQ, along with everything else, has been in an uptrend for years. During this particular section of the uptrend, dating from 11/12, one can see that buyers appear to run out of steam in January. And though they are able to maintain lower trendline support, they repeatedly peter out before reaching the top of the channel (which is plotted parallel to the bottom line). The Nasdaq isn't having this problem, but the NQ is the trading vehicle we've chosen (we meaning me).

    In any case, the tops of the daily bars dating from January are so regular that one has no difficulty tracking them with a lateral "resistance line" or "supply line" (the dashed red; what you call it doesn't really matter). Along the way, there are a number of trading ranges (sideways movement), but the only one that concerns us on the Sunday prior to Monday's open is the last one, beginning the first week of March. The lateral line below this range is dashed blue (support) and pink (resistance) because it has acted as both, resistance when price was moving up, support after it got where it wanted to go. The link above this range is pink (resistance). It hasn't been breached yet, though price has printed just at the top of it. So, Monday morning, price could take off from here or drop back into range. The potential drama is enough to prevent one from falling asleep.

    This is how the next morning looked from just before the open. If you can, read the chart from left to right, not in hindsight from right to left. And I'll note here that these charts are presented in their entirety because posting them section by section in order to prevent you from seeing "what happened next" would mean one hell of a lot of charts. And a lot of extra work for me. Which would be largely pointless since anyone who wanted to could just flip ahead to see how it all turned out. If you'd rather not know, just cover the chart with a sheet of paper and uncover it bar by bar. If you can. Betcha can't.

    You aren't going to learn how to trade price solely by studying these charts. In order to learn properly without jumping head first into real-time trading, you're going to have to find a charting program that provides "replay", which nowadays is not difficult to do. This will enable you to run old charts in whatever bar or line interval you like as fast as you like, though I suggest that you not run them faster than 2x. Otherwise you miss out on the boredom of it, which is something you'll have to deal with when you begin trading real time. By using replay, you won't know what happens next. All you've got is the "current" bar or line segment and what preceded it, a much more realistic simulation than what is presented here.



    The first step, then, is to bring forward the most pertinent support and resistance levels, in this case the resistance level at the top of the trading range shown in the first chart above.


    As noted earlier, the position of price in re the trading range in place prior to the open left the trader with both potential options of long or short. That it was at the top of the trading range (TR) meant that the Line Of Least Resistance (LOLR) was down, back to the bottom of the range (this is what price does in TRs, until it gets tired of it). On the other hand, the fact that it was behind the ES, the Nasdaq, and the S&P suggested that it might just take off and finally try to catch up.

    At the open, price makes its choice. The trader who is convinced that the market is out to get him won't trust this choice, looking instead for all sorts of ulterior motives. This is a waste of time and energy. Trade what you see, not what you think (if I remember correctly, this phrase was coined by Joe Ross years ago, but it's been adopted so freely and circulated so widely, nobody remembers that, and Ross seems not to care one way or the other; in any case, it's an excellent adage and should be taped to the monitor).

    Price drops immediately. What one thinks about this is beside the point. And there's no time to think about it anyway. The trader instead looks for the first retracement (RET) to go short. He doesn't have to. He could just jump in. But this tactic will result in a lot of small losses and breakeven trades. A lot. So he waits for that pause of indecision and sneaks his order in before the rabble sees what's going on and rushes in.

    The short itself is placed slightly away from the crest of the RET. This is done to avoid the confusion that often takes place when price is about to change direction and also to force the market to come to him. If he's wrong and the market takes off in the opposite direction, his trade is never triggered and he suffers no loss (jumping into the opposite side of the trade is another matter, addressed later). A point is about right, though at least three ticks. Or discover the best distance for yourself through your own testing.


    It is immediately clear, however, that buyers have something else in mind since they appear to reject 2811 soundly. But these things can be tricky, and price doesn't always take what appears to be the obvious course. So as quickly as possible the trader draws, mentally or physically, a "supply" line or "resistance" line (not to be confused with a lateral resistance level) since it is a breach of this line that will tell him to exit and re-assess.


    Traders then sit around for three minutes examining their manicures before buyers decide they're heading north, and they do so. Decisively. Breaking the line. Which means you exit your short. Without even thinking about it. You just do it. No hope, no fear. Just do it. For a small loss. A tiny loss. This leaves you free and clear to look for a trade on the opposite side. Which means looking for the first RET on the buyside. The daylight side. This occurs three minutes later, and you go long in the same way as you went short.


    This looks pretty good, except that you note that price is approaching the resistance level created by that TR from previous weeks (see first post). Sellers might take a stand here, so you draw a "demand" line or "support" line (not to be confused with a lateral support level), either mentally or physically, to remind you when and where to exit your long if necessary.


    And, lo and behold, price finds R (resistance) just where you thought it might and breaks your line. And you're out. Again. At breakeven or with another small loss. A tiny loss. A loss not worth thinking about. Not even a depressing loss. It's only two losses in a row, after all. Man up.
  4. slugar


    Thanks this really helps!
  5. dbphoenix


    Now you're faced with some interesting choices, and these do require a little thought. Not much. But some.

    The first RET technically is not an opportunity to enter short since it occurs just a hair inside your support/demand line. But given the undeniable rejection of that resistance level and given that this little RET also represents a failed effort to try again at that higher high, you may just decide to take it, being prepared and more than willing to exit immediately if everything goes wrong and price makes a higher high anyway. And even though the RET occurs on the upside of your line, the entry will be made below it. This approaches rationalization, but it's a legitimate consideration. All of this, of course, takes seconds to consider when you're trading it in real time.

    If, on the other hand, you're not that aggressive, you can wait for the next RET. You won't make as much, but it is a bit safer, and perhaps you need that. If even that isn't safe enough, you can choose to wait further, remembering that there may not be another RET and you will have missed the opportunity to be in the short at all (generally speaking, the longer you wait, the more likely you are to be stopped out, assuming you get filled at all).


    And now we separate the traders from the hobbyists.

    By now you've drawn your supply/resistance line and it gets broken just 5m later. If you took the first RET, you may be intrigued, but if you took the second one, you're underwater and may not be thinking clearly.

    But if you can sit tight for a moment, just a moment, you'll see that the first break barely qualifies as one. You may after all have drawn your line -- if you actually drew it -- a bit off. So you wait, and the second bar barely registers. So you wait a bit longer, and though the third bar most definitely is outside your line and appears to be heading north, it can't make a higher high than the bar two previous. So you decide to take the chance, being the proficient price action reader that you are, and continue to wait it out. And it is at that point that price drops back below your supply/resistance line.


    Now we have a separate issue. If you waited this long to enter, your chances of being stopped out are that much greater, as mentioned above. In this case, however, you get lucky. Sort of. Because if you enter even a short distance below either of the RETs, you'll be entering at 2812. And unless you're lucky, your fill is going to be terrible. If you enter with the usual stoplimit order, you likely won't get filled at all. If you're crazy enough to enter with a market order, God help you. All of which are more reasons to enter your short as early as possible, in this case no later than the second opportunity ten bars back.

    Now. Unless you're plagued with hope, which in areas outside trading is usually a plus but in trading is a curse, you know that parabolic moves not only don't last but also reverse quickly. Even though a supply/resistance line is drawn here, it's superfluous. If you're riding this, you know full well what's happening to you. But if you can set aside the glee for a moment, you can take full advantage of this move and not get stuck dithering about what you ought to do about it, like everybody else.

    Once this line is broken, you're out. Even if you wait until the following bar, you still have captured as much of the move as one can reasonably expect.


    So now what?

    There is a rally, of course, what Wyckoff calls a "technical" rally, meaning that it isn't prompted by mobs of people just desperate to own whatever it is but rather by short-covering. And since short-covering isn't a real "buy", i.e., something that you're going to possess after you've bought it, the rally doesn't last. But, for the time being, you don't know how far it's going to go, so you have to trade it as if it were real, even though it isn't, if that makes sense. If it doesn't, don't think about it for now.

    It does last long enough for you to draw a support/demand line, which is broken six minutes later. The routine is to wait for a RET after this break so that you can re-enter your short. However, the short is never triggered because price decides instead to resume its trip north. Technically you shouldn't go long here because your support/demand line was broken. But the short side was rejected. So you decide to go ahead and chance the long anyway.


    Unfortunately the long doesn't get very far. How come?

    It is an odd but unusually reliable maxim (as opposed to law) that price that can't retrace at least 50% of the immediately preceding rally or decline shows weakness, or strength, depending on the direction. Here, for example, price just barely retraces 50% of the preceding decline. This suggest weakness. And sure enough . . .


    But lest this go on too long (too late), let's wrap this up since by now you have at least a general acquaintanceship with the routine.

    The long, of course, is exited. Since price made a higher high after the long was initiated, the support/demand line can be "fanned" in order to give a better approximation of where support lies. It doesn't do any good in this case due to the 50% barrier, but it's a habit worth acquiring regardless.


    There is no doubt, however, that there is no more support, at least for the time being, and even though the RET is above the line, the short entry, if taken, is below. Again, this may seem like quibbling, but our ducks don't always line up in a nice row, and chances can sometimes be justified.

    If taken, the short is exited shortly thereafter and you look for a long entry. Given that there is no RET until price works its way all the way back to the 50% barrier, one could decide to pass. However, there's no way of knowing whether or not price will bust through this level. If it does, you're long while everybody else is scrambling. On the other hand, you can wait for the breakthrough, if it happens, then take the next RET up. Trader's choice.

    Whether one takes it or not is of course of no concern to the market, and a short opportunity occurs almost instantly, another case of the RET taking place above the line while the entry takes place below. There is also the matter of price by now having formed a trading range, narrow though it may be. With a trading range, one rarely has the luxury of waiting for RETs because even if they occur they rarely do so until price is nearly at the opposite side of the range, and by that time one has to consider making a U-turn and heading off into the opposite direction.

    Therefore, in a case like this, particularly when price meets resistance at exactly the same level, one can justify jumping in at the first sign of rejection and riding price down to the bottom of the range.

    Here, though, it pays not to exit too abruptly when the bottom of the range is reached. A long at the bottom would not be triggered if set up as usual, and that signal would prompt the quick-thinking trader to re-enter the short. And if he misses it, there's another opportunity four minutes later.

    Price eventually reached 2792 before breaking the supply/resistance line.

    And for those who are interested in Wyckoff's course:
  6. redbox


    Thanks DB, I'll be adding this to my notes.
  7. redbox


    DB, I have a question for you.

    I've been trying to get my head around this whole midpoint business and understand exactly what it means and why. The midpoint has been quoted as a "value area" or as you put it "home". But I still struggle with the why.

    I've been reading the Mark Douglas book The Disciplined Trader. He describes the value area like this:-

    "The distinction I want to make is that the majority of traders don't specifically relate to a fair price or value; they relate to comfort. What gives them comfort is doing what everyone else is doing. In a value area, traders are basically absorbing each other's orders or energy (their beliefs about the future expressed in the form of energy). When I say that traders relate to comfort, I mean some degree less of the fear they normally feel. Most of the trades take place in a value or balance area because it is where most of the traders feel the least fear, somewhere in the middle of the trading range between an established high or low."

    Is this a fair assessment ? If so I might rename it "the comfort area" for my own purposes.
  8. Gringo


    Hi redbox,

    Using the name 'comfort area' or 'value area' or 'home' isn't as important as realizing what actually is happening here. For a minute, lets forget about the 'midpoint' and just focus on what's happening. There is a price level where traders for whatever reason are trading more actively. Buyers believe it represents a good price level to buy and sellers believe it's a good place to sell. They keep on doing that as long as price is hovering around that level where the majority has one reason or the other to buy or sell. As you put it they feel comfortable buying or selling here. There is abundance of supply from sellers and short sellers and demand from buyers and from those covering shorts. In a sense the demand and supply are more or less in equal agreement that what they are doing here is gives them good value. Buyers believe the price is likely to go up while the sellers believe it's likely to go down. This buying and selling continues until one group starts to weaken. For our purposes we'll say the price starts moving up. We don't know or may need the volume to know whether the supply is getting a bit exhausted and reduced causing the demand to raise the price, or the supply staying more or less the same and demand getting stronger pushing supply back and causing the price to rise. In either case the end result is that price starts to move up.

    As the price moves farther and farther from the 'value area' or 'midpoint' or 'comfort area' upwards, there comes a time when the price is unable to go any higher. This is either because the demand is getting exhausted trying to push back supply to raise price this far or the supply gets intense overpowering demand, due seller's belief that at this level price is move likely to go down. Because the 'value area' was perceived to be the 'midpoint' there were lesser and lesser transactions taking place as price rose upwards. As supply takes charge and the price starts to sag below the 'extreme' high and eventually after some tug of war gets back to the 'midpoint'. On the way down the intensity gradually increases as the price approaches the 'midpoint' and the balance is restored.

    Now, the supply is bolder as it was able to push demand down and not allow it to continue it's upward stride unabated. As a result the sellers provide more supply or again the demand isn't up to the task and price starts to move down. As price moves farther and farther from the 'midpoint' the intensity decreases due the perceived value area to be getting farther and farther. There comes a point where price is unable to move downward, either due to demand coming back in or supply getting exhausted from pushing the price down. Whatever the case it may be the price is unable to stay here at this lower level for long, and then returns back towards the 'midpoint' or 'value area' or 'comfort area'.

    This tug of war continues around the mid with price reaching the upper and lower extremes multiple times until one side becomes weaker. It's at this point the price will either break through above the upper limits of this gyration from the 'midpoint' or break through below the lower limits. The limits are the price levels beyond which the price couldn't rise in case of the upper level and drop in case of the lower level. After the break a new 'equilibrium' or a 'midpoint' might be reached after price has trended some or a reversal could take place bringing after a brief excursion into new ground price back into the previous range or value area.

    Lets get back to the range and how the mid and extremes related to comfort or fear. Around the midpoint the buyers and sellers are reasonably comfortable and continue to trade as they perceive the price to be just right. As the price approaches either of the extremes the danger that it might reverse OR break through causes a bit of trepidation for both the buyers and sellers. If the break through is to the upside with price going beyond the previously established extreme the sellers are left hanging. If the break through is to the downside beyond the previously established extreme the buyers are left hanging. It's this fear that causes a reduction in the number of transactions at the extremes and the reasons for the fear are justified. The extreme is the danger point around which the probability of something violent happening is greatest, whereas, the fear is lowest in the middle of the established high or low.

    Those who use price action for trading relish this extreme point. It's the place where as Mamis stated, the information risk is greatest while the price risk is lowest. Information risk is greatest because there isn't much information regarding which course of action the price might take. The price risk is lowest because the moment of the crossing of the 'extreme' or established highs or lows tells the traders something, and risk can be minimized by acting on that something. As Db wrote in the above posts, there are only three courses the price can take here. The price can breakout, it can reverse, or it can retrace after the break out. All these three happen around the 'extreme' of the price range, the area where the greatest uncertainty, hence, greatest fear exists.

    It's here where most traders fear to tread, lay the seeds of success. It is here where the risk is minimized. It is here at the extreme where a master trader displays his craft by carving out those magical wins so baffling to the uninitiated. It is here where the weak dread to venture. And it is precisely here where a budding trader needs to focus to hone his skill and rise above the morass.

  9. Redneck


  10. redbox


    That's great, thank you Gringo. I like to clarify things before I go off half baked. This is slowly sinking in. The psychology part of fear in the charts is fascinating.

    I have actually felt this fear at the extremes myself.
    #10     Sep 20, 2013
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