Making of a method

Quote from game:

"Failures - the market's message that something is no longer as positive as it had been - must begin to occur at the upside....that is, at a better price. In the market's perverse way, precisely when a rebound is alleviation anxiety, the position may be failing. Risk then reappears, requiring the freedom of open mindedness, and the technique of understanding such failure within the context of an apparent rise, so as to make a decision"

Justin Mamis - The Nature of Risk


Db could you please share your thoughts on this passage from page 191? What are some examples of reduction of anxiety but increase of risk?
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I suspect that "alleviation" should be "alleviating". Nonetheless, the seeds of failure must be sown on the way up. Price doesn't just stop rising for no reason; there must be a failure to find buyers, and this doesn't occur in a moment. Sellers find it increasingly difficult to find buyers, so they must lower their prices in order to find them, and price rolls over. Thus those who wait until the last possible moment to exit end up with a far worse price than they expected simply because no one wants to buy at the price they want to sell for.
 
Quote from game:

http://www.sierrachart.com/image.php?l=1369544564403.png


While I don't have much data yet, a casual glance at the numbers indicates that Reversals have been an expensive habit.

They are seductive because when they do work there is a sweet feeling of having caught the turn. But more often than not it ends up being either a chop scenario or an expensive counter trend mistake.

Some ways to deal with this.

1) Tighten up guidelines to define a reversal as a clear break of prior swing.

2) Wait for a larger retracement to form. While the lower high and crossing of DS line is signalling weakness, the reversal is often taking place after faking me out. Unlike a continuation, the larger trend is not on my side, so any move against the reversal leads to quick choppy exits, since the cost of waiting can be high if the trend resumes with a bang.

3) Observe activity inside the retracement and classify it into a risk grade. Include this in decision making by choosing reversals only when RET activity is signalling a clear weakness in the ability of traders to carry the trend.

Sharp reversals look sexy on the chart but the slow topping one's get the job done too.
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You're confusing "reversals" with "Reversals". Depending on your interval, there may be thousands of reversals during your trading session, particularly if you define a reversal as any move counter to what immediately preceded it. On the other hand, there may be only two or three Reversals in a session -- or none -- that are important enough to be tradeable and profitable. These will almost invariably occur off support or resistance of some sort, and the more important the S or R, the more likely the Reversal will be worth taking.

http://cdn3.traderslaboratory.com/f...608585-re-trading-off-daily-charts-image1.png

You will often receive guidance re S&R from previous days and weeks, but sometimes you have to be satisfied with the overnite and premkt. Here, the best you most likely will have is the premkt, but that's okay. If you have no idea where to find S or R, just wait until the opening high and opening low have been established. Here the OH is tested in just few minutes and a short can be taken, 1pt below the test. The premkt low is then tested and holds and that becomes the OL. After that, even though you're returning to the just-formed range, you can take the long, 1pt above the retracement, in anticipation of a breakout to a new high (the supply line has been fanned because of the lower low after the initial break). A long here is actually worth a few points before exiting (the demand line here has also been fanned, also because of the higher high after the initial break). After that, the test of the new high fails and another short can be taken. That short doesn't really go anywhere, leading to the expectation either that strength will be found on the upside or price will simply drift sideways. You get a long setup which you can take if you want it.

The two shorts, then, are taken off reversals that are AT someplace, not just countermovements in midair. The first long is taken off the midpoint of the moves between 15 and 21. The second long is taken partly because the short didn't go anywhere but more because the OH was found to hold (if it didn't and the long didn't work, then you'd just exit the trade). This last long might be characterized as one of those reversals that occur in midair if it looks in RT like the penetration into the range is too deep, but at least there is a retracement to take advantage of which provides some assurance that the reversal is worth taking (if it weren't, the retracement wouldn't go anywhere and you wouldn't be pulled into the trade).
 
Quote from dbphoenix:

On the other hand, there may be only two or three Reversals in a session -- or none -- that are important enough to be tradeable and profitable. These will almost invariably occur off support or resistance of some sort, and the more important the S or R, the more likely the Reversal will be worth taking.

http://cdn3.traderslaboratory.com/f...608585-re-trading-off-daily-charts-image1.png
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I had been looking at S/R as more static, something to be considered only when price starts moving to it's boundary. Your post illustrates a more dynamic understanding. At the time, I was looking at Long 1 as an entry heading right into R created by the opening high, while Long 2 seemed to be just another ordinary set up in the middle of a range.

But seeing how price reacted at prior S/R levels is a rich source of information for making an entry decision. Otherwise, I will be stuck with rules like - 'Do not take a long if price is heading into a prior Resistance level, etc'.

Thanks that was very helpful.
 
Quote from game:

I had been looking at S/R as more static, something to be considered only when price starts moving to it's boundary. Your post illustrates a more dynamic understanding. At the time, I was looking at Long 1 as an entry heading right into R created by the opening high, while Long 2 seemed to be just another ordinary set up in the middle of a range.

But seeing how price reacted at prior S/R levels is a rich source of information for making an entry decision. Otherwise, I will be stuck with rules like - 'Do not take a long if price is heading into a prior Resistance level, etc'.

Thanks that was very helpful.
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If you have a legitimate entry before price hits R and if you're prepared to abandon the long and go short instead if price is turned back at R, then yes, there's no reason not to go long as you approach R. R isn't R until it acts like it. This is part of what Mamis meant by being "open-minded".
 
Quote from game:

http://www.sierrachart.com/image.php?l=1369760289690.png
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If you get a moment, could you please clarify the following for me:

On the chart posted above from Jan 18th:

Regarding Long 3:

1) Would you consider this a Reversal off Support or a reversal from the prior downswing?

2) I did not wait for a retracement on this trade. But can this be considered a bracket trade, where the short did not trigger, while the long was stopped in?
 
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