Son of If You Can Draw a Straight Line . . .
- Thread starter dbphoenix
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As I look over posts here and there from the past several days or so, it appears that there are a number of people who are applying the notion of "midpoint" incorrectly. This is not only likely to confuse them but also those who happen to be following their "journey".
While the use of the term "midpoint" may have been sloppy here and in the Mother Thread, it is meant to apply to the midpoint of a trading range in order to focus attention on where the most volume has occurred. In this way it is different from a mode in that volume need not have anything to do with price (unless every transaction is for only one share or one contract). It is different from a mean in that the highest level of volume may not exactly match with the level equidistant from the high and low of the trading range. "Mean" is more appropriately applied to "mean reversion", which can apply to both diagonal trading ranges (trend channels) and lateral trading ranges.
A 50% retracement of a rally or reaction, however, has nothing to do with any of this, particularly volume. It is simply a general measure of strength or weakness, i.e., price that retraces more than 50% of a reaction shows strength; price that can't shows weakness; price that retraces more than 50% of a rally shows weakness; price that doesn't shows strength.
Therefore, take care to keep mean reversion, trading range midpoints (or "points of control"), and rally/reaction retracements (MAEs) separate.
While the use of the term "midpoint" may have been sloppy here and in the Mother Thread, it is meant to apply to the midpoint of a trading range in order to focus attention on where the most volume has occurred. In this way it is different from a mode in that volume need not have anything to do with price (unless every transaction is for only one share or one contract). It is different from a mean in that the highest level of volume may not exactly match with the level equidistant from the high and low of the trading range. "Mean" is more appropriately applied to "mean reversion", which can apply to both diagonal trading ranges (trend channels) and lateral trading ranges.
A 50% retracement of a rally or reaction, however, has nothing to do with any of this, particularly volume. It is simply a general measure of strength or weakness, i.e., price that retraces more than 50% of a reaction shows strength; price that can't shows weakness; price that retraces more than 50% of a rally shows weakness; price that doesn't shows strength.
Therefore, take care to keep mean reversion, trading range midpoints (or "points of control"), and rally/reaction retracements (MAEs) separate.
This drop from 37 is a good example. Price double-topped at 0940, then made a slight retracement at 0946. But whether one shorted that or not, the fact that price can't lift itself more than 30% off the bottom (at this point, 11) -- so far -- suggests continued weakness. Not forever, but now. This doesn't mean than one should stay in regardless of the break in the supply line. Whether he exits or not depends on his trading plan. But none of this has anything to do with midpoints or mean reversion. It's simply an informal measure of bulls' will and their strength.
Once the failure to make HH occurred at 0940 EST, price turned down. In hindsight, this failure was the start of the cascade.
I missed the short opp at 0941/0942. At the time, price was at the 32 level. This was right in the middle of the value zone created lasted week between 25 and 41. This, in addition to the strength displayed from 29 (at 0937) to 37 (at 0940) discouraged me from taking a short as I judged price not only to be in the middle of the movement from today's open, but also in the middle of the larger value area from last week. This went against my plan's emphasis on entering at extremes.
How do I gauge this thesis against the case for going short on failure of HH at 0940 EST?
How do I reconcile taking a trade on failure vs it not being at an extreme?
Don't think about it so much. You're trying to think your way through your fear. You may succeed, but you probably won't.
If price reaches the midpoint of a range from one or the other extreme of the range, the rejection of that midpoint can provide an opportunity for a trade. This morning, for example, price reached 36 from 12. Not only was this the midpoint of the range (or congestion) formed Friday morning, but it formed a double top. Even so, one could let that go by and wait for the demand line to be broken, then enter on the first retracement thereafter, at 0946. Even as late as that, he'd still have a 14pt gain.
If it all seems a mess, just draw the lines and stop thinking about it.
Edit: As regards midpoints, halfway points, means and so forth, I'll also point out that price found R at 1300 at the apex of the hinge formed between 1000 and 1100 this morning. Is this a "midpoint"? Yes and no. It is a point of equilibrium, like the middle of a range. But this range is a triangle of sorts, not a rectangle, so is much more difficult to trade.
And as for the 50% retracement, note also that all this is taking place at a level halfway between the high at 0930 and the low at 1110.
Again, if it's all a jumble, just draw the lines.
My fear arises when I don't understand why I am doing what I am doing.
When my logic for taking a trade is clear, I don't undergo hesitation/fear. I am seeing that the performance aspect of day trading is largely about maintaining clear thinking in the face of price movement and not acting when thinking is not clear.
I am looking at this as a healthy fear since it is based on the assumption that there is no real edge except at certain critical points, whether they are at extremes or not. But I suspect you would say that my take on this fear is too optimistic?
I can understand why your fear might be ignited when you don't understand why you're doing what you're doing. And there are two courses to follow: (1) go back to observation, if you can stand it, or (2) just follow price's lead without thinking about it. If you can't do that, then this approach may not be for you.
You're not alone, of course. Everyone who posts to this thread other than Gringo or 40D is afraid of the market. They've bought into all that about the market being perverse and vengeful and out to get you and trying to trick you and it's a war and a battle and full of sharks and blah blah blah. It's all nonsense. People come up with all this crap because they can't or won't assume responsibility for their own failure. How much easier is it to blame the market makers or the manipulators or the "big money" or the "smart money" or the quants or the HFTs or the algos or whatever the hell else?
The market is not sentient. It's just a venue for traders to trade. But people who don't understand what they're doing or what they're looking at will come up with all sorts of reasons why they're failing other than that they don't understand what they're doing or what they're looking at. Which is why it's so much easier for beginners to follow this approach than those who have some experience, particularly those with experience who have also experienced failure. Sometimes a lot of failure.
I know this is frustrating, and the more you've bought into the above, the more frustrating it will be. And you may feel as though you're insulting yourself by drawing lines. But one doesn't become Norman Rockwell from the getgo. He begins by drawing circles and triangles and squares and rectangles. And before you know it, he's got Mickey Mouse.
If the exercise appeals to you, you could always start with my first trade at 0556 and see if you can figure out what I did when I did it and where I did it and why. If that doesn't appeal to you, then perhaps more replay is in order. Or, as I said earlier, perhaps more observation is needed rather than looking for setups. This is the road you're going to have to travel to gain the necessary self-knowledge.
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