You can learn a lot by observing chart patterns from a distance.
Futures Trading Analysis
- Thread starter Futures Track
- Start date
You can learn a lot by observing chart patterns from a distance.
@llIHeroic ’s answer to OP’s question “How people learn to trade” is, in my opinion, brilliant: Ask questions, and use ‘scientific method’ to answer them.
There are two ways to learn to trade: (a) The ‘sane way’ — learn the ropes from a trader; or, (b) the ‘insane way’ — do it all on your own. I, naturally, took the ‘insane way’. Documented below is my experience of the process, and a few of my thoughts.
Phase I: Literature Survey
I was excited after reading my first book on trading: Van Tharp’s ‘Trade your way to financial freedom’. Risk-reward made ‘sense’ and so did expectancy. So, like lot of newbies I looked at the chart of ES and thought if I can consistently make 4-ticks a day, then I too could Trade my way to financial freedom. This was almost 9-years ago. At that time I didn’t know how naive I was! I lost 25K in the first month. I stopped trading and started to focus on developing a system: Wyckoff’s intra-day methodology offered by SMI, VSA, Market Profile (studied under the master himself — Steidlmayer, took seminars with Dalton), and read numerous books on almost every trading methodology under the sun! The knowledge I gained from understanding the work of other people has been very critical in my development as a trader.
Phase II: The Questions
The first question I asked myself was Why does price stop where it stops?. This question arose in my quest to understand ‘Geometric Price Patterns’. My tool for analysis: 5-min time bar charts. When I failed to come up with a satisfactory answer, I tried 1-min time bar charts. Then came constant volume bar charts, PnF charts, and finally tick charts. The turning point came when the following question arose: What is the justification for using a constant [time/volume/range/tick] bar chart?. I could come up no justifiable answer. It seemed to me that the parameter chosen for any of those charts is arbitrary and had no grounding in market microstructure. All such charts did were to artificially segment a particular dimension of market data (T&S).
Since the market, in my opinion, provided data in three-dimensions: bid-ask spread, order book dynamics, and T&S, I ventured out to build a chart (visualization tool) to help me visualize market information based on all those dimension, and without any artificial segmentation.
Phase III: Understanding Price Action
Convinced that my chart had an economic justification, I ventured out to once again understand Price Action to answer my still unanswered question: Why does price stop where it stops?. Once again, I leaned on the knowledge gleaned during the literature survey phase to kick start the process. However, I did not know how to relate Market Profile to my chart. So I threw it out. VSA was giving me too many false positives, so it went out of contention. In trying to evaluate Wyckoff’s intra-day methodology, I had trouble defining ‘waves’, which led to the question What are these ‘waves’ Wyckoff talks about?. My intent was not to come up with a generalized answer but to find a working definition that I can use evaluate that methodology using my charts. The answer to this question provided me with a way to segment the three-dimensional market data without any parameters. This I considered a major break through in my work.
Around the same time, for the first time, I was reading Ed Lefevre’s book. Given where I was in my learning curve, I didn’t find any information provided in that book useful — things were too cryptic. I was recounting my experience to a colleague (a fundamentals based institutional investor), and I will never forget what he said:
Ideas from Livermore’s model of price movements, combined with Ed Hart’s model of price action (published in a series of newsletters, which I purchased thru’ TrendDynamics during my literature survey phase) played an important role in developing my generic model of price action.
Phase IV: Relating Order Book/Flow and Price Action Patterns
By this time, I had a charting methodology that I was comfortable with, and a generic model of price action that intuitively made sense, but had no justification for it. Moreover, I had still not answered my first question: why does price stop where it stops?.
“The Chicago boys trading bonds only use the book (DOM)”, I remembered one of my contacts telling me. So, I started looking at the DOM for patterns guided by my chart and understanding of price action. One day, I saw a relatively large order on the bid that did not pull when hit, and it occurred at a certain ’node’ of the graph in my chart. This was the next big break through.
Over the next few week I was noticing very similar patterns — unusual book activity at ‘certain’ nodes of the graph in my chart. Incorporating this information into my model of price action provided a richer, market-specific model of price action from which specific patterns of price action emerged.
It became clear to me that I was not the only one looking at the price levels represented in my chart. The fact that abnormal order book activities occurred consistently at certain price levels meant to me that price levels derived from charts played an important role in speculative order placement.
But this also introduced a new set of complications and questions: Are these patterns illusions; if they are not, is there any justification for their existence?
Phase V: Answering the Unanswered Questions.
Complexity theory provided justification for existence of patterns in markets (financial markets, in my opinion, are pattern generating self-organizing complex systems). But how and why do these patterns form?
This [above quote], to me, is the same reason why price stops where it stops!
The puzzle in my mind was finally solved to my satisfaction!
There are two ways to learn to trade: (a) The ‘sane way’ — learn the ropes from a trader; or, (b) the ‘insane way’ — do it all on your own. I, naturally, took the ‘insane way’. Documented below is my experience of the process, and a few of my thoughts.
Phase I: Literature Survey
I was excited after reading my first book on trading: Van Tharp’s ‘Trade your way to financial freedom’. Risk-reward made ‘sense’ and so did expectancy. So, like lot of newbies I looked at the chart of ES and thought if I can consistently make 4-ticks a day, then I too could Trade my way to financial freedom. This was almost 9-years ago. At that time I didn’t know how naive I was! I lost 25K in the first month. I stopped trading and started to focus on developing a system: Wyckoff’s intra-day methodology offered by SMI, VSA, Market Profile (studied under the master himself — Steidlmayer, took seminars with Dalton), and read numerous books on almost every trading methodology under the sun! The knowledge I gained from understanding the work of other people has been very critical in my development as a trader.
Phase II: The Questions
The first question I asked myself was Why does price stop where it stops?. This question arose in my quest to understand ‘Geometric Price Patterns’. My tool for analysis: 5-min time bar charts. When I failed to come up with a satisfactory answer, I tried 1-min time bar charts. Then came constant volume bar charts, PnF charts, and finally tick charts. The turning point came when the following question arose: What is the justification for using a constant [time/volume/range/tick] bar chart?. I could come up no justifiable answer. It seemed to me that the parameter chosen for any of those charts is arbitrary and had no grounding in market microstructure. All such charts did were to artificially segment a particular dimension of market data (T&S).
Since the market, in my opinion, provided data in three-dimensions: bid-ask spread, order book dynamics, and T&S, I ventured out to build a chart (visualization tool) to help me visualize market information based on all those dimension, and without any artificial segmentation.
Phase III: Understanding Price Action
Convinced that my chart had an economic justification, I ventured out to once again understand Price Action to answer my still unanswered question: Why does price stop where it stops?. Once again, I leaned on the knowledge gleaned during the literature survey phase to kick start the process. However, I did not know how to relate Market Profile to my chart. So I threw it out. VSA was giving me too many false positives, so it went out of contention. In trying to evaluate Wyckoff’s intra-day methodology, I had trouble defining ‘waves’, which led to the question What are these ‘waves’ Wyckoff talks about?. My intent was not to come up with a generalized answer but to find a working definition that I can use evaluate that methodology using my charts. The answer to this question provided me with a way to segment the three-dimensional market data without any parameters. This I considered a major break through in my work.
Around the same time, for the first time, I was reading Ed Lefevre’s book. Given where I was in my learning curve, I didn’t find any information provided in that book useful — things were too cryptic. I was recounting my experience to a colleague (a fundamentals based institutional investor), and I will never forget what he said:
“The man, whom many consider to be one of the greatest traders, writes a book on his methodology, and no one buys it. Yet, a journalist writes a book with anecdotes of his life experience, and it become an instant cult-classic. Such is our profession!”
Of all the traders I know, I must be the only one who is yet to finish that book!Ideas from Livermore’s model of price movements, combined with Ed Hart’s model of price action (published in a series of newsletters, which I purchased thru’ TrendDynamics during my literature survey phase) played an important role in developing my generic model of price action.
Phase IV: Relating Order Book/Flow and Price Action Patterns
By this time, I had a charting methodology that I was comfortable with, and a generic model of price action that intuitively made sense, but had no justification for it. Moreover, I had still not answered my first question: why does price stop where it stops?.
“The Chicago boys trading bonds only use the book (DOM)”, I remembered one of my contacts telling me. So, I started looking at the DOM for patterns guided by my chart and understanding of price action. One day, I saw a relatively large order on the bid that did not pull when hit, and it occurred at a certain ’node’ of the graph in my chart. This was the next big break through.
Over the next few week I was noticing very similar patterns — unusual book activity at ‘certain’ nodes of the graph in my chart. Incorporating this information into my model of price action provided a richer, market-specific model of price action from which specific patterns of price action emerged.
It became clear to me that I was not the only one looking at the price levels represented in my chart. The fact that abnormal order book activities occurred consistently at certain price levels meant to me that price levels derived from charts played an important role in speculative order placement.
But this also introduced a new set of complications and questions: Are these patterns illusions; if they are not, is there any justification for their existence?
Phase V: Answering the Unanswered Questions.
Complexity theory provided justification for existence of patterns in markets (financial markets, in my opinion, are pattern generating self-organizing complex systems). But how and why do these patterns form?
“A finite number of traders participate in the markets on any given day, week, or month. Many of these traders do the same kind of things over and over in their attempt to make money. In other words, individuals develop behavior patterns, and a group of individuals, interacting with one another on a consistent basis, form collective behavior patterns. These behavior patterns are observable and quantifiable, and they repeat themselves with statistical reliability.”
From “Trading in the Zone” — Mark Douglas.
This [above quote], to me, is the same reason why price stops where it stops!
The puzzle in my mind was finally solved to my satisfaction!
Final Thoughts
(1) I was surprised that OP did not also ask the question “How long does it take to learn to trade”, which to me is a logical extension to his original question.
The length of time it takes for one to learn to trade depends on the criteria used by the trader to accept the validity of the justifications to the answers to those self-proposed questions. The lower the threshold, the quicker the learning process, but larger the gaps in knowledge.
(2) Based on my experience, the debate that goes on between Order flow purists and Geometric pattern traders is silly. Both are trying to do the same thing at the same price levels. If an order flow trader enters a trade which is not on an edge of a price pattern as indicated in the charts, most likely than not (exception is when price is moving in uncharted territories), the “profiler will be profiled” (reason: they could be dealing with liquidity seekers [toxic flow]). However, most of these traders are pros, and understand this risk and will trade accordingly. The biggest disadvantage of the order flow methodology is its inability to provide exit levels. As a result most traders can seldom stay in a trade for large moves. Instead they retort to a pre-determined ‘x-number of ticks’ type of exit.
Life is a little bit more complicated for Geometric patterns traders. Artificial segmentation of data (time/volume/tick/range bar charts) introduces noise which makes precise entries difficult, even though price patterns are deductible. Drawing trend lines, etc, in my opinion, are different ways to counter this ‘noise’ problem. Sometimes, instead of reducing noise, one could add noise. This is the case with many so-called indicators: they add noise rather than reducing them. This methodology, however, is capable of providing good exit targets.
Another significant drawback is that geometric pattern traders are oblivious to the occurrence of important order book events that could dramatically influence the efficacy of a given instance of a geometric price pattern.
In my opinion, for best results, traders should strive to use Geometric Price patterns to extract price levels which then should be used in combination with order flow information.
(3) Intra-day analysis of markets based on ‘demand’ and ‘supply’ is a dangerous game. What does one mean by ‘demand’ from an intra-day perspective? If it is the demand from people who carry over-night inventory? If so, forget about it. This is almost impossible to deduce. I-Banks and HFs spend fortunes to conceal their (or their clients’) intent, and trying to reverse engineer it is a herculean task.
If by ‘demand’ one talks about demand by speculators who are flat by the end of the day, it is again almost impossible to deduce because this demand is ephemeral.
Moreover, thinking that price can go up only due to demand is naive. Price can go up on weakness (i.e. seeking demand). One instance when this could happen is when a large position is caught on the wrong side of the market. Instead of liquidating and adversely moving the market against herself, she will most likely carry the market in an effort to ignite momentum or if such efforts fails then, at least, she can liquidate that position without adversely moving the market against himself.
With this I will stop. Sorry has been a longer post than I intended.
All the best,
Monoid.
(1) I was surprised that OP did not also ask the question “How long does it take to learn to trade”, which to me is a logical extension to his original question.
The length of time it takes for one to learn to trade depends on the criteria used by the trader to accept the validity of the justifications to the answers to those self-proposed questions. The lower the threshold, the quicker the learning process, but larger the gaps in knowledge.
(2) Based on my experience, the debate that goes on between Order flow purists and Geometric pattern traders is silly. Both are trying to do the same thing at the same price levels. If an order flow trader enters a trade which is not on an edge of a price pattern as indicated in the charts, most likely than not (exception is when price is moving in uncharted territories), the “profiler will be profiled” (reason: they could be dealing with liquidity seekers [toxic flow]). However, most of these traders are pros, and understand this risk and will trade accordingly. The biggest disadvantage of the order flow methodology is its inability to provide exit levels. As a result most traders can seldom stay in a trade for large moves. Instead they retort to a pre-determined ‘x-number of ticks’ type of exit.
Life is a little bit more complicated for Geometric patterns traders. Artificial segmentation of data (time/volume/tick/range bar charts) introduces noise which makes precise entries difficult, even though price patterns are deductible. Drawing trend lines, etc, in my opinion, are different ways to counter this ‘noise’ problem. Sometimes, instead of reducing noise, one could add noise. This is the case with many so-called indicators: they add noise rather than reducing them. This methodology, however, is capable of providing good exit targets.
Another significant drawback is that geometric pattern traders are oblivious to the occurrence of important order book events that could dramatically influence the efficacy of a given instance of a geometric price pattern.
In my opinion, for best results, traders should strive to use Geometric Price patterns to extract price levels which then should be used in combination with order flow information.
(3) Intra-day analysis of markets based on ‘demand’ and ‘supply’ is a dangerous game. What does one mean by ‘demand’ from an intra-day perspective? If it is the demand from people who carry over-night inventory? If so, forget about it. This is almost impossible to deduce. I-Banks and HFs spend fortunes to conceal their (or their clients’) intent, and trying to reverse engineer it is a herculean task.
If by ‘demand’ one talks about demand by speculators who are flat by the end of the day, it is again almost impossible to deduce because this demand is ephemeral.
Moreover, thinking that price can go up only due to demand is naive. Price can go up on weakness (i.e. seeking demand). One instance when this could happen is when a large position is caught on the wrong side of the market. Instead of liquidating and adversely moving the market against herself, she will most likely carry the market in an effort to ignite momentum or if such efforts fails then, at least, she can liquidate that position without adversely moving the market against himself.
With this I will stop. Sorry has been a longer post than I intended.
All the best,
Monoid.
Monoid, thank you very much for sharing your insights and journey (posts #22 and #23). I deeply appreciate them - truly gems!
Last edited:
A successful trading strategy does not have to be complex, nor does a successful trading strategy necessarily have to be a mathematical marvel.
I would encourage the young intrepid types to carefully review two theorems:
1. Occam's Razor
2. Chekhov's Gun
You do NOT need to hire anyone to help you find a trading strategy. You are at a developmental stage - do not be vulnerable to hucksters and PM's. Spend $75 per month for delayed data and a charting package. Do not spend any other funds for anything at this point. Use multiple time frames. Experiment. Do not think that standard T/A studies will ultimately hold up over time and on a consistent basis.
I would encourage the young intrepid types to carefully review two theorems:
1. Occam's Razor
2. Chekhov's Gun
You do NOT need to hire anyone to help you find a trading strategy. You are at a developmental stage - do not be vulnerable to hucksters and PM's. Spend $75 per month for delayed data and a charting package. Do not spend any other funds for anything at this point. Use multiple time frames. Experiment. Do not think that standard T/A studies will ultimately hold up over time and on a consistent basis.
Last edited:
I wanted to snip this out so it wouldn't get missed. While I don't use the term "geometric price patterns," and I don't consider myself to be a chart pattern trader, I do use charts to identify trading levels of interest and then the order book and T&S to decide, or at least guide my entry. For a short, for example, there is always a lower high print at some point. How much of a turn I require depends on when the DOM shows price getting heavy.
All I could add is that, imo, one is more likely to succeed in learning to use charts and order flow to day trade if one puts the idea of "trading" on hold long enough to spend a period of time watching the DOM and watching the T&S and watching one's chart(s) of choice to learn how one's market and its participants tend to behave.
Two excellent posts, @monoid. As always, thanks for sharing.
That doesn't seem like a very good idea, imo. Why not open a real account with a broker who will charge you $10-$15/month for real time streaming data and provide you with a real time demo account based on the same trading platform you intend to use when you go live.
Thats funny. Easily my biggest break through as a trader came when I automated everything I was doing by hand and let it run. While you are still ultimately responsible for everything that happens, bad days went from "I'm an idiot" to the market didn't do what my strategy wanted. I was able to increase size gradually to a point where I was doing 5 times as much. To each there own.
ET gem.
Exactly! Behavioral finance.