Making of a method

Quote from llIHeroic:

Also, Smart Money, thank you for taking the time to weigh in to our discussion and freely impart your perceptions to us. We may not agree regarding the variable nature of volume, but I am grateful that we are able to dialogue the matter. In my opinion, your conclusion makes deductive sense only in a simple, closed system.

I will admit that I don't fully understand the theory behind the concept in regards to an open, fractal market, but I have consistently experienced that increasing volume signals a continuance of price in a given direction. That momentum must recede before price makes a significant movement in another direction. Thus, I am of the opinion that decreasing volume is an indicator of potential change. [/B]
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In the spirit of cooperation and education, look at this chart:

http://stockcharts.com/h-sc/ui?s=IBM&p=D&yr=0&mn=11&dy=30&id=p53421107378

Do the volume spikes correlate to violent price changes/reversals? Does the volume build-up seem to precipitate a turn-around? To me they do, though volume readings by themselves aren't enough to make decisions off of...they are warning signs.

Edit: Check out the end of April...see the huge spike at the reversal? Then volume decreases as the crowd agrees with the new upward movement. Then on May 1st, speculators start to jump in which "puffs up" the volume as they climb on...then the volume goes flat, and toward the end of May, you can see the volume rising, precipitating another turn around to the downside. Then as the price drops in early June, people agree that the direction should be down, so volume quiets down.

As an aside, it freaks me out that I spend a good cash on the book "Bar by Bar" and there is very little illustration of volume in the charts. Nothing but price action...I'd have loved to see the volume with those moves. I admit that I don't know what you mean by an open, fractal market...I thought the stock market was a closed market, like a room full of comicbook collectors and dealers.
 
Quote from Smart Money:

In the spirit of cooperation and education, look at this chart:

http://stockcharts.com/h-sc/ui?s=IBM&p=D&yr=0&mn=11&dy=30&id=p53421107378

Do the volume spikes correlate to violent price changes/reversals? Does the volume build-up seem to precipitate a turn-around? To me they do, though volume readings by themselves aren't enough to make decisions off of...they are warning signs.

Edit: Check out the end of April...see the huge spike at the reversal? Then volume decreases as the crowd agrees with the new upward movement. Then on May 1st, speculators start to jump in which "puffs up" the volume as they climb on...then the volume goes flat, and toward the end of May, you can see the volume rising, precipitating another turn around to the downside. Then as the price drops in early June, people agree that the direction should be down, so volume quiets down.

As an aside, it freaks me out that I spend a good cash on the book "Bar by Bar" and there is very little illustration of volume in the charts. Nothing but price action...I'd have loved to see the volume with those moves. I admit that I don't know what you mean by an open, fractal market...I thought the stock market was a closed market, like a room full of comicbook collectors and dealers.
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I am glad to see that you're interested in exchanging knowledge and learning together. Excellent idea bringing in a chart so we can discuss the details of our ideas. We may in fact have been speaking about different occurrences before. It was difficult for me to read the link you sent, so I've created an attachment to demonstrate my observations.

Two quick things:

On Open Market: There is a misconception that the stock market is a zero-sum game. People who are adamant about this do not understand what the stock market is. Think of Company A. They have an IPO and they distribute shares for $20 each. They benefit from the influx of capital. Person X buys a share for $20, and sells to Person Y at $40. Person Y sells to Person Z at $60. The stock is now at $80. This is the last thing from a zero-sum game.

The stock market is not a closed system, because it is based on the efficiency and production capacity of our economy, which is generally advancing in it's capabilities. Delving into discussions or theory about this matter is not an interest of mine.

On Fractals: This merely describes that there are multiple levels of market operation progressing simultaneously. For example, we have been in an up-channel on the macro-level for years. Inside of that, we have had many smaller up and down channels within that container, as price traverses it. Within those, there are more channels on smaller fractals, and so on. They all have the same characteristics and follow the same system of operation.

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The chart I've created ties into this. Let's address the latest activity on the daily fractal. I've drawn in the channels for the last two completed trends. A trend is created with falling and rising volume during a single sentiment. This is shown by the colored "V". After that, if a trend continues, it will undergo a non-dominant movement on falling volume. "Normal" Trends will then complete on a volume surge in the dominant direction.

In that sense, I wouldn't say you are incorrect about the fact that high volume precedes change. However, allow me to specify that falling volume indicates said change. I've annotated the beginning of each trend on the daily chart, and numbered their endings. Context is necessary.

Falling volume in the middle of a trend indicates change back to the dominant direction of the trend when volume rises. Falling volume after a trend has completed is an indication of change of the dominant sentiment itself.

There are smaller trends within the Daily trends, I've annotated the volume drops which indicate change within the trend using arrows. Call this the sub-fractal of the Daily chart, if you will.

Also, I've annotated the effect on the segment you were referencing, April and May. I've used a Weekly fractal for this to save space. The month of April was the latter half of the first movement of a new down trend. The trend from 2008 ended then. May is the first Non-Dominant move up in the new down-trend on the weekly fractal, and occurs on falling volume.

If you zoom out to the monthly chart and apply the concepts I've discussed, you can see that the stock is currently in it's first non-dominant move up within the new down-trend in respect to the monthly fractal.
 

Attachments

Quote from llIHeroic:

I am glad to see that you're interested in exchanging knowledge and learning together. Excellent idea bringing in a chart so we can discuss the details of our ideas. We may in fact have been speaking about different occurrences before. It was difficult for me to read the link you sent, so I've created an attachment to demonstrate my observations.

Two quick things:

On Open Market: There is a misconception that the stock market is a zero-sum game. People who are adamant about this do not understand what the stock market is. Think of Company A. They have an IPO and they distribute shares for $20 each. They benefit from the influx of capital. Person X buys a share for $20, and sells to Person Y at $40. Person Y sells to Person Z at $60. The stock is now at $80. This is the last thing from a zero-sum game.

The stock market is not a closed system, because it is based on the efficiency and production capacity of our economy, which is generally advancing in it's capabilities. Delving into discussions or theory about this matter is not an interest of mine.

On Fractals: This merely describes that there are multiple levels of market operation progressing simultaneously. For example, we have been in an up-channel on the macro-level for years. Inside of that, we have had many smaller up and down channels within that container, as price traverses it. Within those, there are more channels on smaller fractals, and so on. They all have the same characteristics and follow the same system of operation.

---

The chart I've created ties into this. Let's address the latest activity on the daily fractal. I've drawn in the channels for the last two completed trends. A trend is created with falling and rising volume during a single sentiment. This is shown by the colored "V". After that, if a trend continues, it will undergo a non-dominant movement on falling volume. "Normal" Trends will then complete on a volume surge in the dominant direction.

In that sense, I wouldn't say you are incorrect about the fact that high volume precedes change. However, allow me to specify that falling volume indicates said change. I've annotated the beginning of each trend on the daily chart, and numbered their endings. Context is necessary.

Falling volume in the middle of a trend indicates change back to the dominant direction of the trend when volume rises. Falling volume after a trend has completed is an indication of change of the dominant sentiment itself.

There are smaller trends within the Daily trends, I've annotated the volume drops which indicate change within the trend using arrows. Call this the sub-fractal of the Daily chart, if you will.

Also, I've annotated the effect on the segment you were referencing, April and May. I've used a Weekly fractal for this to save space. The month of April was the latter half of the first movement of a new down trend. The trend from 2008 ended then. May is the first Non-Dominant move up in the new down-trend on the weekly fractal, and occurs on falling volume.

If you zoom out to the monthly chart and apply the concepts I've discussed, you can see that the stock is currently in it's first non-dominant move up within the new down-trend in respect to the monthly fractal.
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OK. You raise a good point about the zero sum game issue. It's like a situation where there are there is a comicbook show with five copies of a specific issue of comicbook worth $100. So the value of all of the comics in the room is $500. Someone comes in and buys one of them for a new price...$120. Now it could be argued that the five comicbooks are all worth $600 combined. So $100 was created out of thin air.

I also get what you're saying about fractals. I do use them as a secondary indicator, but I'm mostly a momentum guy. What's interesting is that you...a fractal guy...need confirmation that a breakout has occurred...so from your viewpoint, you see the quiet volume as a sign that a new trend has begun. However, I see the trend starting earlier. My signal is that the volume spiked, and is on it's way down to a quiet level...then it goes quiet, and then picks up again as all you fractal guys finally see price action moving beyond your box and jump in. (Ok, I'm chuckling as I write this), but I really do feel that I can spot a change in momemtum before price action can clear your fractal box. I could be wrong. So in summary, we're like two blind men, describing an elephant. We're saying the same thing.

So maybe there is something to learn here. When I see a volume spike, followed by decreasing volume that appears to be forecasting a change in direction, I can get extra confirmation by charting peaks and troughs of the candles to see if I can find evidence of a breakout. I guess if you see an unusual change in volume on one "zig" or "zag" of your trend box, you can be ready to pounce. Done deal.

Edit: FWIW, I see IBM moving to $191 (or so), before it runs out of gas. (I'm saying I'd be surprised if it doesn't make at least $191) It's close to its upper bollinger, and when a stock is that close to its upper bollinger, it almost always makes it...like its being sucked by gravity. Also, the broader market is poised to do similar, which should help propel IBM up there. FWIW, throwing my crystal ball into overdrive, I see the market moving nicely over the next two trading days, with one of those days much better than the other and the best one likely comes tomorrow (Friday). IBM should do similary. After that, it's going to sputter somewhat, and "toppy" stocks will (probably) start turning around due to profit taking. (Wow...I'm really hanging it out there.)

SM
 
Quote from Smart Money:

OK. You raise a good point about the zero sum game issue. It's like a situation where there are there is a comicbook show with five copies of a specific issue of comicbook worth $100. So the value of all of the comics in the room is $500. Someone comes in and buys one of them for a new price...$120. Now it could be argued that the five comicbooks are all worth $600 combined. So $100 was created out of thin air.

I also get what you're saying about fractals. I do use them as a secondary indicator, but I'm mostly a momentum guy. What's interesting is that you...a fractal guy...need confirmation that a breakout has occurred...so from your viewpoint, you see the quiet volume as a sign that a new trend has begun. However, I see the trend starting earlier. My signal is that the volume spiked, and is on it's way down to a quiet level...then it goes quiet, and then picks up again as all you fractal guys finally see price action moving beyond your box and jump in. (Ok, I'm chuckling as I write this), but I really do feel that I can spot a change in momemtum before price action can clear your fractal box. I could be wrong. So in summary, we're like two blind men, describing an elephant. We're saying the same thing.

So maybe there is something to learn here. When I see a volume spike, followed by decreasing volume that appears to be forecasting a change in direction, I can get extra confirmation by charting peaks and troughs of the candles to see if I can find evidence of a breakout. I guess if you see an unusual change in volume on one "zig" or "zag" of your trend box, you can be ready to pounce. Done deal.

SM
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Nice. I'm glad we are able to come to a point of closure. Thank you for your participation. I think you may have a slight misunderstanding of what I was trying to say, or perhaps you were making generalizations about other traders, such a referencing boxes, but I think we did a good job of explaining ourselves if further reference is required.

If you map out the turns I analyzed for the NQ this morning at game's request though, you'll see that I am aware of turns at the moment they occur, and can often anticipate their likelihood by a few moments in advance. You can't know you had a turn until the volume drops, though. If you get out any sooner you're leaving money on the table.

Take Stock A, average volume 200,000:

Day 1: 60,000 Volume
Day 2: 130,000
Day 3: 170,000
Day 4: 210,000

Price has improved each day. It won't last forever. When are you going to sell? Volume will begin to fall and signal the end of the movement, and then you can know you will extract the maximum profits from the segment.

Anyway, great discussion. Wish you well! Hope game won't mind that we rented his thread for a page or two either.
 
A misconception about what constitutes a winning or a losing method is that "IT" can be explained in a few words or a paragraph. I have been quilty of this as much as many others because for the most part, we post in drips and drabs.

Truth be known, what constitutes any particular method (plan) is far more complex and ingrained to the individual person than what is expressed in a short context in any public forum. What is said over and over is a synopsis of the BASICS. That first layer of the whole process is where most get tangled up in the weeds of never ending possible solutions. Where is the WeedWacker? Where is the herbicide?

The answer is not going to be found in a public forum, it will not be found from any newsletter, it will not be found listening to clowns on any so called business channel, etc, etc.

Thus, the basics need to be untangled until the trader decides on 'how to proceed' to the next level. That level and more is where the individual finds out if they are moving forward or simply spinning their wheels in a never ending clump of weeds.

Extract from others a tidbit or so while understanding that is a tiny, tiny bit of what needs to be done to make the grade.

True, there is nodoji, who explains in detail a lot of how she works. But, it must be understood, to move forward, it is going to take far more than what anyone can explain in a few words or posting a few charts...........HOW each individual performs while dodging hot lead is an innate skillset that is owned by said individual and can not be replicated by others.

:)
 
Quote from bighog:


Extract from others a tidbit or so while understanding that is a tiny, tiny bit of what needs to be done to make the grade.

:)
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That reminds me:

“Adapt what is useful, reject what is useless, and add what is specifically your own.”


― Bruce Lee
 
Quote from game:

FT Day 98 Jan 17

http://www.sierrachart.com/image.php?l=1389980009749.png
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Short #2 was great. Our orders probably went in within 10 seconds of each other, although I was on ES.

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Thought for the Day:

[Disclaimer]: I have no interest in spawning a debate with anyone. If you don't agree with this, simply discard it and move on.

I've seen this make some people angry for some reason, but trends carry over from yesterday's RTH. I am not trying to say the overnight action has no value, but perhaps looking as well at the last RTH close will help you gain some additional insight at the open.

We had what we call a PP1 this morning, which you might understand as something like "momentum exhaustion". A trend accelerates on high volume and becomes unsustainable.

Going into today, it was very likely that this would occur on Bar 1 of the open. We opened dominant down, and this called for a quick reversal to non-dominant long in this case. After the non-dominant leg up completed, we had dominant down-move and trend completion.
 
Quote from llIHeroic:

Short #2 was great. Our orders probably went in within 10 seconds of each other, although I was on ES.

---

Going into today, it was very likely that this would occur on Bar 1 of the open. We opened dominant down, and this called for a quick reversal to non-dominant long in this case. After the non-dominant leg up completed, we had dominant down-move and trend completion.
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Were you able to go long at 1834 (0955 EST) and then short again at 1840 (1220 EST)? Were these trades also due to momentum exhaustion? Or were there other primary reasons?
 
Quote from game:

Were you able to go long at 1834 (0955 EST) and then short again at 1840 (1220 EST)? Were these trades also due to momentum exhaustion? Or were there other primary reasons?
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Long during 9:55 Bar occurred about two minutes in. Was due to unsustainable sub-fractal trend channel like discussed with yesterday's short on Bar 7 (rtl BO). Not quite the same as momentum exhaustion, which occurs before the rtl BO.

12:20 EST short was either a hold through the lateral chain from Bar 10 onward, or if one was fiddling around with the sub-fractal, 12:30 EST would have been the short from lateral BO to the downside; trading fractal sentiment over-rode the previous sub-fractal long sentiment during the lateral BO.

I wasn't trading at 12:20 EST though, so you can take that reasoning with a grain of salt if you'd like.
 
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