If You Can Draw A Straight Line . . .

[thalestrader]

Quote from dbphoenix:

Unless there's some special reason to continue with this, let's stop.

Excellent thread, Db. You do not need me to tell you that you and your thread are better off just letting the occassional "I remind you blah blah blah" comment to pass without a response at all. Stick to your core intent - you have an audience here that matters, many of whom may never reply directly. Those who have a chance of learning something from you are already smart enough to ignore the bloviators.

I hope this becomes a long-lived, well-viewed thread.

Best Wishes,

Thales

 

[dbphoenix]

Sorry to be so late. Busy day.

First, this is what you should have been looking at during today's session, 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.

 

[Redneck]

Quote from dbphoenix:

remember that your charts should be absolutely clean:

no channels,

Ready for whatever fate has in store.

DB,

A request Sir;

Would you be open to drawing TLs / channels / 50% retracements levels..., identifying swings – or whatever - in real time – and taking a snipping tool snapshot of it / them throughout the day

Then posting these snippets after the close


It would give insight as to what you’re looking at/ planning while the day’s PA unfolds – without compromising the no posting trades


I realize you likely see/ keep this stuff in your head/ on a note pad…

But these pictures may give folks a view they normally wouldn't have, of what they should actually be looking for

===================================

And so my request doesn't come across as some passive / aggressive/ underhanded / bassackward way of requesting something


Straight up..., I'm interested… I’m also a perpetual student

Never too proud to ask… never too close minded to learn


btw - No way am I asking for entries/ exits - nor would I... just the process of creating context/ deciphering PA - as it unfolds

==============================

Should the answer be - no….


So be it - it’s all good

RN

 

[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.

So.

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 previous post. And just in case you're wondering if all of this is worth the trouble (Oh no, not another thread on yet another approach), the win rate (the percentage of trades that were winners) for this series of charts was **%. The profit percentage (the percentage of all points traded that were profitable) was **%.

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.

 

[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 2972 before breaking the supply/resistance line.

 

[Redneck]

Thank You

And no I didn't

RN

 

[1a2b3cppp]

When you say "price that can't retrace at least 50% of the immediately preceding rally or decline shows weakness, or strength, depending on the direction," do you mean absolute weakness (eg. price is falling) or do you mean weakness relative to the direction of the rally?

In other words, if price rallies and then retraces back 45%, does that suggest price will fall or the rally will continue?

 

[dbphoenix]

Quote from 1a2b3cppp:

In other words, if price rallies and then retraces back 45%, does that suggest price will fall or the rally will continue?

It suggests that the rally will continue, key word being "suggests", as in "the probabilities are". The depth of retracement is, after all, little more than a measure of resolve, and the longer it takes, the more likely that extraneous events will intervene and alter the outcome, which is why quantification and any sort of mechanical approach will most likely fail.

If this remains unclear, I suggest you review the charts I've posted. They all have these retracement levels noted in one place or another, though not necessarily in every single instance.

 

[dbphoenix]

Given that my forecast for direction and target yesterday turned out to be correct, ego threatens to intrude, but a small voice peeps "watch it, smartass". Even so, given yesterday's move, a new daily and hourly become necessary.

This time I've drawn in the midline.

And the hourly, which provides a good example of why one should not futz with his trendlines. To do so pretty much defeats the purpose of plotting them in the first place. If, for example, in this case, one were to rotate the channel so that it better "fits" the price movement, would he note as easily that the angle of the trend has changed? It is unlikely that he would note as easily the "overbought" (breaching the top) and "oversold" (breaching the bottom) activity*. Would he see that we appear currently to be finding resistance at the midline of this channel? Probably not. And of course we cannot forget or ignore the lateral, which shows us returning to 20. Again. Which may provide support. Again. But how many times can we abuse 20 in this way before it tells us to go screw ourselves?

*A note about this overbought and oversold business. These terms are bandied about pretty carelessly, giving the user as they do a certain cachet of professionalism and expertise and knowledge. But all they are really is an indication that we are outside what have been established as the expected distances from a mean somewhere. For instance, once a mean has been determined (the midlines in these charts), the moves away from it can be illustrated by upper and lower trendlines or they can be expressed in terms of standard deviation. Either way, if price exceeds these norms to the upside, it becomes noteworthy and is termed "overbought". Ditto for the downside and "oversold". This alerts the trader to be prepared for a return to the trend channel, though he must also be alert to the possibility of a trend change.

Which brings us to the forecast for today's direction, and I really can't say. The default position is down since we've reversed off the top of the trend channel. But there's that proven support at 20. Of course we've breached 20 before and there's no reason why we can't do it again. And since 20 is clear to just about everybody now, even those who use larger bar intervals, a break of it might prompt a cascade. In other words, the trader is going to have to be exceptionally alert today to a variety of possibilities, and if he isn't up to it for whatever reason, he really ought to back away and just observe for the time being.

And there is also the possibility that today will be impossibly boring, but we need those now and then in order to recharge. We'll see what unfolds in the next couple of hours.

And a reminder, now that the thread is again becoming overlong: the trader who's trading price must know (1) the trend, (2) where support and resistance lie, (3) what the imbalances between buying pressure and selling pressure are. If he can't determine the difference between up and down without plotting an indicator, he's in trouble, and he really needs to stop before he hurts himself. If he has no idea what support and resistance represent, much less where they lie, again he needs to stop and spend his time observing. Ditto for determining the imbalances between buying pressure and selling pressure. This can be done via demand and supply lines, plotting waves, and examining how long (duration) and how fast (pace) price takes to get somewhere (extent). If he can't or doesn't want to grapple with these elements, then trading by price is not for him.

 

[dbphoenix]

This may be of interest to the advanced class. It's the kind of thing I do when I suspect a trend change. Because I hate being surprised. It does complicate things, which is counter to Keep It Simple, but it still beats those charts that are so cluttered with crap that one can't even find price, much less track it. And it can avoid the aforementioned surprise.

Fortune favors the prepared.

Note that price has found resistance at the midlines of both the primary and the possibly new trend channels. This may be purely fanciful since it all depends on the lines one draws, or it may be a clue to what's in store for today. The wise trader will remember that this may all be nothing more than bunnies.

And one mustn't forget that we have risen 130 points in only a week. Something else to consider.