Making of a method

So then one thread to explore could be to do the same exercise on about 15 stocks. Perhaps I can run a scan for stocks 175% above 200d MA and then pick 15 or so.

Perhaps doing this exercise of simply drawing trend lines on them could be a way to observe. Would you suggest any other small steps at this point?


Quote from dbphoenix:

I see where the misunderstanding is. The diagonal line you have under the last 11 trading days is correct, however, you also need another diagonal line running from the 2/26 low to the 4/3 low, not two horizontal lines. This is a "longer-term" trendline. A diagonal one.

As for a rally, if you'd posted this yesterday, I'd've suggested placing a sell stop just below $177, but it's too late for that. If price rallies from here, place your sell stop just below the low. Make the market come to you. If it continues to rise instead, then just stand aside and wait for your opportunity. Price will eventually reverse and fall. In the meantime, you're not hanging onto a losing trade.

As for the target, who knows? You'll just have to see how it goes. It may inch its way down, it may plummet, it may not decline at all. Price is in charge. You have no control over it. All you have control over is what you do about it, if anything.

And, yes, this is in the realm of mean reversion. It's not always clear where the mean is, but price will tell you by its action. Price may after all fill the gap. Who knows?
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175% is very high. The chief reason why LNKD is so high is the gap up and that the 200 has not yet had time to catch up. In fact price may just consolidate here. That's why you don't want to just jump in based on your "feelings".

As for other stocks, it's important to put these extensions in context. Take N, for example. Go back a year or so and calculate the extension of each swing high from the 200 and how deep each "correction" was. You may find, for example, that each extension is around 30-35% and the corrections range from 20-25% (just a guess; I haven't done the calculations). If you follow this as part of your routine, you can begin looking for signs of weakness when price nears these levels, remembering that "weakness" need not mean collapse, but stocks do pull back (or retrace or correct). If they didn't, they'd never be able to progress. Knowing the range from the shallowest to the deepest corrections gives you something to work with that, again, is more substantial than feelings.

Whether or not 15 is enough is up to you. It may be too many. It may not be enough. Depends on how much time you want to devote to it and how successful you are. If doing this doesn't meet your goals, you will likely feel that it's not worth it and you'll try something else. As for trendlines, yes, maintaining these will provide you with an early warning system if done correctly. Remember that price does not move itself; it's moved by traders. If you can become sensitive to what traders are trying to do, you will be more likely to take advantage of it and of them.

Edit: I should also point out that you're just trying on a new suit here. It may be just what you're looking for or it may be completely wrong for you. If the latter, there are other things to try. It won't take long to find out, and you don't have to lose any money doing so.
 
For N, over the past year, avg extension from 200d MA was 28% and avg correction from swing high to swing low was 11%.

I will do some more of these but just wanted to attach the file to see if these were being calculated the right way.



I have a conceptual question about TA in general:

When you see a Heads & Shoulder or any other well known pattern for that matter - does it indicate that the probability of a move in a certain direction is x because that is what has happened statistically over a long period?

Or is it more about how other traders are positioning themselves and thus about getting perspective?
 

Attachments

Quote from game:

For N, over the past year, avg extension from 200d MA was 28% and avg correction from swing high to swing low was 11%.

I will do some more of these but just wanted to attach the file to see if these were being calculated the right way.



I have a conceptual question about TA in general:

When you see a Heads & Shoulder or any other well known pattern for that matter - does it indicate that the probability of a move in a certain direction is x because that is what has happened statistically over a long period?

Or is it more about how other traders are positioning themselves and thus about getting perspective?
More...

Don't pay any attention to patterns unless you know why they're forming. The pattern in and of itself is irrelevant. The H&S, for example, forms because buyers who missed out on the first surge are given an opportunity to enter on the pullback from what will become the left shoulder. This rush to buy and to create a new high is what causes the increase in volume in the "head". When there is another pullback followed by a failure to make a new high or even reach the old one, all on less volume, buyers begin to suspect that they fucked themselves, and price fails. Just looking at the pattern, then, does not always result in what the books and gurus say it will. The pattern of behavior must be there as well, including the variations in volume.

As regards your LNKD situation, it may well hang up there for quite some time. But it matters that buyers have failed twice to make a higher high. What are they thinking? What will it take to spook them into dumping what they've bought? These are elements which may spark a selloff, not candle patterns or what indicators show. If you focus on patterns, you will likely be surprised and will definitely be late. What you want to do is anticipate an outcome so that you can enter early and be propelled into profit by the panicked behavior of people who haven't anticipated at all.
 
Sorry for butting in what seems to be a good dialogue, but glad to see you back posting DB, I used to read your old posts with a great deal of interest, what made you come back?
 
Phoenix in just two days you have already given me a lot to reflect on. I keep going back to this one below.

Quote from dbphoenix:

<i>In order to succeed at trading, you must have an edge. Your edge begins with the knowledge you gain through your research and testing that a particular price pattern or market behavior offers a level of predictability and a risk to reward ratio that provides a consistently profitable outcome over time. Without it, one is just "playing" the market in order to have something to talk about on message boards. To get it, you have to know exactly what you're looking for and what to do with it once you've found it. This process is what the journal is all about.


Some questions for me to reflect on:
Earlier I had listed my likes and dislikes for the trading styles I had tried. But I am not so sure anymore. There is probably a lot of hindsight bias going on here.

I had no edge in daytrading - if I had one, would I find staring at the screen boring and tedious? Or would I be absorbed and looking for opportunities to apply that edge?

With swing trading - I was not trading my method - just copying someone else's. Would the development of my own method change my view on this style's reliance on market movement?

Position trading - this style allows me to look from 30,000 feet and is a comfortable choice. But am I inclined to lean towards this simply because I have no idea what the hell actually happens on the ground?

Do you have any idea what sort of trading is most comfortable? Long or intermediate-term trading? Short-term trading? Day-trading? Trend-trading? Scalping?

Without an actual method this is difficult to answer -
Is it a kind of reflexive process where the uncovering of an edge leads to more comfort with a trading style which leads to more willingness to put in the work to uncover more of an edge?

I have to think about these high level issues - but I also need to get working on the details at the ground level of price - and hopefully both these levels contribute towards each other.
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Quote from dbphoenix:

So what have you liked and disliked about each of the approaches you've tried?
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DB - nice to see you posting again. ET does need more quality content :p .
 
Quote from FreakofNature:

Sorry for butting in what seems to be a good dialogue, but glad to see you back posting DB, I used to read your old posts with a great deal of interest, what made you come back?
More...

Thank you. Not much going on at "the other place". T2W is all spread-betting and forex. BMT is essentially a street fair (reminds me of that early scene in A Bug's Life where Flick goes to the "big city" to find warrior bugs).

Odd, though, that Baron hasn't sprung for a software package that isn't so 1994. Particularly when so many people want to post charts.
 
Quote from game:

Phoenix in just two days you have already given me a lot to reflect on. I keep going back to this one below.

Quote from dbphoenix:

In order to succeed at trading, you must have an edge. Your edge begins with the knowledge you gain through your research and testing that a particular price pattern or market behavior offers a level of predictability and a risk to reward ratio that provides a consistently profitable outcome over time. Without it, one is just "playing" the market in order to have something to talk about on message boards. To get it, you have to know exactly what you're looking for and what to do with it once you've found it. This process is what the journal is all about.
More...


Some questions for me to reflect on:
Earlier I had listed my likes and dislikes for the trading styles I had tried. But I am not so sure anymore. There is probably a lot of hindsight bias going on here.

I had no edge in daytrading - if I had one, would I find staring at the screen boring and tedious? Or would I be absorbed and looking for opportunities to apply that edge?

With swing trading - I was not trading my method - just copying someone else's. Would the development of my own method change my view on this style's reliance on market movement?

Position trading - this style allows me to look from 30,000 feet and is a comfortable choice. But am I inclined to lean towards this simply because I have no idea what the hell actually happens on the ground?

Do you have any idea what sort of trading is most comfortable? Long or intermediate-term trading? Short-term trading? Day-trading? Trend-trading? Scalping?

Without an actual method this is difficult to answer -
Is it a kind of reflexive process where the uncovering of an edge leads to more comfort with a trading style which leads to more willingness to put in the work to uncover more of an edge?

I have to think about these high level issues - but I also need to get working on the details at the ground level of price - and hopefully both these levels contribute towards each other.
More...

This is probably what takes beginners the most time, the self-analysis, which of course most don't get too until they've failed so much and so often that they're severely damaged. But if, for example, patience is an issue, that pretty much leaves out position trading. And if patience is a BIG issue, that may leave out swing trading as well. Most people think they can avoid it by trading somebody else's system, but that never works out, largely because it's next to impossible to have enough confidence in something that one didn't develop himself to carry the kinds of risk that are necessary to make any sort of decent money.

One could argue that confidence is an edge, and it can be a personal edge, but it can also lead to stubbornness and arrogance, neither of which are conducive to smart trading. And that's not the sort of edge I was talking about there anyway. You should know something about your personal qualities by now that will enable you to sift through your options just like a fairly reasonable stock scan. If you're not particularly patient, as I said above, that leaves out certain options. If you get bored by all the research, that leaves out a fundamental approach.

But the market will be here long after we're all dead, so nothing is lost by taking the time to observe and reflect and at least determine what you DON'T want and DON'T like and CAN'T stand, much less what your objectives are. And observation and reflection don't cost anything.

The entire journal thing is here: http://www.traderslaboratory.com/forums/wyckoff-forum/15535-developing-plan-trading-journal.html
 
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