Dissecting the market in a few bars

J

jjrvat

Beginning of the month, long weekend, markets closed, long holiday: perfect time to start a new thread.

As I pledged when I closed the thread “Day-Trading 2.0 for small traders” I am opening this new thread on price analysis based on real cases, I will start with 2 very common instruments, the euro and the ES, and see how it goes from there.

I also organized in a cleaner, friendly and more interactive way all the information from the old thread in my personal trading blog(www.gourmetrader.com). All attachments and information on basic price analysis are store there with full size and quality so feel free to check them out.

Perspective and the Independent Trader
Online trading has “democratized” the access to the markets. However, and although everybody is trading the same information and markets (in theory at least), there is a huge information gap (not the only one) between small independent traders, professional traders and those working with millions in mainstream financial institutions.

If you are not a young Math, Finance, Economics, etc graduated or have an MBA or related from one of the Ivy League or Oxbridge Universities doing a graduate training scheme for Goldman Sachs (or whatever financial institution) where and how did/do you learn how to trade? Of course, you buy/bought all the books with good reviews in Amazon, and you Google(d) and found 1 millions results. Which are valid? Who is telling the truth?.

In my opinion, it’s a mistake to establish a unique dogmatic approach for trading. There isn’t a right or wrong perspective or a correct or incorrect method. Trading is not an exact science or 100% art.

Successful traders can range between these two extremes. You can be hedging or investing with a long term view based on fundamentals, daytrading a very fast chart formation using indicators, scalping bid/ask unbalances, trading S/R levels, a 100% mechanical system or tossing a coin; it doesn’t matter what you use as long as at the end of the day your P/L is consistently showing positive returns.

Under these premises, the following posts aim to create an honest and balance framework for small independent traders to learn, share and discuss trading issues.

All content is based on my personal opinions and interpretation and by no means try to establish a unique valid trading approach. If you are a successful trader using a completely different approach, feel free to disagree as long as you positively contribute to the debate.

jjrvat
 
Undressing the Euro

The euro is the first instrument I will be using for price analysis. I will try to dissect the euro from the big to the small picture. I am starting with a general overview and after a detail analysis [time] frame by [time] frame.

Overview

The first years of the euro beat most expectations and it produce one of the easiest and clearest long term trends in the markets.

Since the financial crisis and especially after the Greece problems the euro has been in a roller coaster it’s stuck in the middle of an unpredictable mix of currency speculators that aren't interested in fundamentals (German Spiegel ), traders from large financial institutions such as Goldman, Bank of America Corp.'s Merrill Lynch unit, and Barclays Bank PLC “helping” long term investors with inexpensive put options betting on a euro-dollar parity (as The Wall Street Journal explains: "tail-risk" trade because its probability is low, the euro-dollar parity put is a cheap way of ensuring that if the euro sinks dramatically within a year, an investor will generate big returns) and an inconsistent web of political and economic conflicting interest between the big and the small European Union Members (especially between Germany, France and the PIIGS [Portugal, Italy, Ireland, Greece and Spain])

I don’t want to go in too many details on the Euro fundamentals. Needless to say, this is the first time in its short history that the euro is seriously tested. However, the euro skeptics are sometimes exaggerated in the outlook of the currency and they forget that EU countries like Germany, France are very stable and too big to fail and many others are not going to follow the PIIGS disasters.

From a strictly technical point of view, the euro is still 64% higher (+/-135.50 today) from the lows (82.45) and it has “only” lost 12% since the last high (155.88) so from a very long term and basic perspective the euro is still in an uptrend. Just for a quick reference… it’s still above the 38.2% fib retracement and it has a long way down to test a 50% retracement which will be the minimum failure for a collapse.

From a non-technical point of view, most of the sluggish, labor inflexible and aging EU countries have a very important advantage over the US frontrunners, the “Americanized” British or the new kids on the block BRICs and others: That’s mature solid economies that always lag and struggle in booms but have solid economic and social structures that counterattack and “shield” them from external shocks as the mismanagement of a few small players.

In other words, if the EU manages to cope with Greece storm, the currency will consolidate and strengthen. Germany is “forcing” the PIIGS to behave, if successful, the EU in the long term will be miles away in terms of correcting the main macroeconomic problems of the Euro (the instability of the weak members), while the dollar and especially the pound will have to face the consequence of the shortsighted notion that macroeconomic stability (massive deficits) is subordinate to short term gains.

Now we can start in the next post with the only thing that matter in trading: Price.

I'll continue later
jjrvat
 
Long term charts are very powerful. All price notions and analysis works almost flawlessly without exceptions in these charts. Sadly, for most small traders it’s almost impossible to just trade a longer timeframe given the huge capital and time required. Nonetheless, monthly charts in conjunction with weekly and daily charts are a MUST defining key areas and macro direction.

This is a pure price macro direction view on the Euro/Dollar (full size pics here). I am not going in details for now because I am only looking at the big picture, but it’s clear that the new downtrend was confirmed when price broke +/-137.50 area. From a strictly technical point of view the free fall could continue without much support until the +/-128.00 area.



For this time only I am splitting the chart in 4 to show all changes in direction since 2000, trends and to highlight the importance of Swings, Waves and trendlines in action (If you need reference here :"Waves, Support & Resistance Levels, S&R Zones, and Trendlines"). The next charts are pretty much self-explanatory.


The Euro / Dollar 2000 - 2010



The next step is “transposing” these levels to tradable information in lower timeframes (and this applies to any multiple timeframe analysis). I am avoiding all indicators (not even volume). There is no need to blur your charts with studies (at least for this one) if pure price action can give the simplest and most efficient way to read a chart, especially if the only point with this timeframe is defining the general direction.

jjrvat
 
The next 2 chart will complete the big picture for the Euro.

As we know from the previous chart (monthly) the move down was confirmed on February 2010 when price broke +/-137.50. Following the same price analysis and transposing the main trendlines from the monthly chart to the weekly and daily chart we have these views:

Weekly (full size picture here)





In the 1st week of Dec 2009 price broke down on the weeklies (Support A @ +/-146.25) and a few weeks after, in the weekly wave down (19 Jan 2010) it broke down the monthly trendline (and obviously the weekly support B @ +/- 142.16) and also the close correlation with the ES (thats an issue for a different post...)

**** A quick note: Pay attention in the case of the break of the monthly trendline @ point B the break in a faster timeframe lead the longer timeframe break. Why?

After that break we can connect the last 2 swing highs and we have a new weekly down-trendline. A few week ago (15 March week) price tested that trendline and made a new LH swing high.

Price move down fast (too fast) and at the end of last week price confirmed a new swing low LL @ 132.65. Right now from a weekly perspective, the next wave down can be powerful because is a very good setup LH and LL, from a rejection of a major trendline, and its following the same direction of the longer timeframe (monthly).

Daily (full size picture here)

The same analysis goes for the daily chart but with all information from the monthly and weekly charts. Because we are zooming closer to the market I am only interested in the last few bars (the rest of the chart is self-explanatory):


On March 26 price confirmed a LL swing low @132.66 and also broke the sharp daily trendline but it took until the 1st of April to break the last swing high and confirm the move (HH and HL). However, As I write this post price is breaking the last HL swing low @ 133.85 pointing to a change of direction to the short side again and aligning the dailies with the longer timeframes.

**** A quick note: Pay attention in the case of the break up of the last daily swing @ 135.38 (point B) the break in a faster timeframe FAILED. In contrast with the weekly case above. In this case the longer timeframe is leading and not the other way around. Why?

As we get closer to the action I will go in more details in specific price areas. For now the bigger picture (monthly, weekly and daily) are almost 100% aligned. Support level C +/-132.65 seems to be the last major level before the +/- 128 Area.

Time to get closer to the action

jjrvat
 
Quote from jjrvat:

Perspective and the Independent Trader
..it’s a mistake to establish a unique dogmatic approach for trading. There isn’t a right or wrong perspective or a correct or incorrect method. Trading is not an exact science or 100% art.
More...
There are wrong perspectives and incorrect methods as richly illustrated at ET not to mention the proof provided by the proverbial 95% of amateur traders who fail.

Exact science or 100% art? Go to your starting point: logic and rationality are your required intellectual tools. They are often in short supply at ET. But nevertheless consider this chosen order of logic. What should I do starting with limited capital? Where is the most money? How do I make myself rich?

Starting with limited capital: (1) thoroughly prepare by devising or adopting a successful methodology and (2) daytrade, using time intensively, open to close, in a market offering lots of points (eg CL).

Where the most money is: exploit the intraday gyrations, the swings up and down; capture as many points as you can from the daily swings.

Making yourself rich: compound your daily net gains by increasing your position size but only very carefully within a strict rule of limited leverage on your accumulating capital of net gains. You are trading not for a living but to make yourself rich as your top priority.
:)
 
Quote from Cheese:

There are wrong perspectives and incorrect methods as richly illustrated at ET not to mention the proof provided by the proverbial 95% of amateur traders who fail.

Exact science or 100% art? Go to your starting point: logic and rationality are your required intellectual tools. They are often in short supply at ET.


[. You are trading not for a living but to make yourself rich as your top priority.
:)
More...
not busting your chops cheese, but do you realize for every genious here on ET putting down the slightly less enlightened fellow poster, there are walruses of wallstreet calling the best et has to offer simple pedestrians,to get to that make oneself rich philosophy of a higher order of thinking, you must first realize how little you still don't and may never know,look at the guys above you ,not beneath you
 
Quote from ammo:

not busting your chops cheese, but do you realize for every genious here on ET putting down the slightly less enlightened fellow poster, there are walruses of wallstreet calling the best et has to offer simple pedestrians,to get to that make oneself rich philosophy of a higher order of thinking, you must first realize how little you still don't and may never know,look at the guys above you ,not beneath you
More...
When you personally look at the guys above you on Wall Street and see their rewards and success, I agree that they should act as a catalyst to you. But remember ET is a quest usually by the lone amateur. I only make casual contributions to ET where I am not a mentor, teacher, guru or educator. And even though I have a professional background in this business, I know the questions I would ask and have asked. So as a guide to amateurs seeking success, I write most posts with that precept in mind.
:)
 
Cheese, I would like to go back to your comment in response to jjrvt saying "Trading is not an exact science or 100% art." From this and your other comments a system trader could interpret your proposed methodology as being rules which could be put into a computer after which you can mindlessly buy when, say, the blue line crosses the red line and some calculation is above 100 and sell when the red line crosses the blue line and the calculation is below -100.

That's a silly example but if you are following a methodology which allows you to place trades without emotion because the rules are so clear how can it differ that much from what I describe (except in complexity)? Did all your experience as a trader lead up to creating this methodology which now a monkey could trade or are you fully engaged as the session progresses because the methodology takes that much brain power? I assume it is the latter.
 
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