Trading Basics
- Thread starter schizo
- Start date
Do you remember when @padutrader stated that reversals don't exist for smart traders? It's ALL a series of continuation.
Similarly, classifying what is range or trend is meaningless. They're just lines. Some lines are flat and some are diagonal. That's all you need to know.
Thanks.
Note: This is not my view of Price Action, but it's a good way of looking at it nonetheless, especially if you're new to PA.
Chart analysis doesn't attempt to forecast or predict prices. It is more about watching the price action and reacting to what happens. The trend followers, for example, work with reactive analysis, following the price wherever it goes rather than to think about where it might be going next. When trading with the trend, you can focus on just the moves the market makes and not get distracted by trying to figure out the duration and direction of the market's next moves. Simply put, you never get in right at the bottom, and you never get out right at the top. You don't allow yourself to fall into the trap of thinking, "Surely, this gotta be the absolute top or bottom." Also, with price analysis, you might find that you do not need to trade every day. Instead, you'd rather wait for the proper trading conditions to present themselves before you take advantage of them. Another thing is that you have no goals in terms of performance. Some traders use strategies that mandate them to make a set amount of money per day. For the PA trader, they know there's a chance the market won't offer them a fixed movement for the day--if at all. They take whatever the market offers them, no more and no less. They're not worried about predicting trends and are more interested in following the current trend.
Chart analysis doesn't attempt to forecast or predict prices. It is more about watching the price action and reacting to what happens. The trend followers, for example, work with reactive analysis, following the price wherever it goes rather than to think about where it might be going next. When trading with the trend, you can focus on just the moves the market makes and not get distracted by trying to figure out the duration and direction of the market's next moves. Simply put, you never get in right at the bottom, and you never get out right at the top. You don't allow yourself to fall into the trap of thinking, "Surely, this gotta be the absolute top or bottom." Also, with price analysis, you might find that you do not need to trade every day. Instead, you'd rather wait for the proper trading conditions to present themselves before you take advantage of them. Another thing is that you have no goals in terms of performance. Some traders use strategies that mandate them to make a set amount of money per day. For the PA trader, they know there's a chance the market won't offer them a fixed movement for the day--if at all. They take whatever the market offers them, no more and no less. They're not worried about predicting trends and are more interested in following the current trend.
Volatility Matters
When the market is trending, you'll notice that the price will alternate from periods of low volatility to high volatility. When there is low volatility, you'll see the market at equilibrium, in consolidation, or moving sideways. When there is high volatility, you will see strong directional movements. The move from one extreme to the other plays out as an expansion of the range that tells you a new trend is starting or the prevailing one is continuing. Hence, every trend will have to alternate between active and passive periods. The passive periods are restful, volatility is low, and the price moves in a consolidation or short countertrend movement that isn't backed by momentum. Then the active portion of the cycle, where the price action has high volatility, will demonstrate itself with a clear and strong move in one direction.
Well, to add some context, you should be mindful of the following:
- TREND: Strong (or fast) trend vs Weak (or slow) trend
- RANGE: Range expansion vs Range contraction
Not sure if this one is even worth posting, since it seems to get rehashed every day on the web.
Money/Risk Management
There is one thing more important than any method of trading anyone could ever teach you. Money management and risk control are critical to trading success. It is not complicated, but there are some very specific rules that you should follow. Unless a trading system is 100-per-cent accurate in all cases, a sound system of risk management and risk control has to be part of it. If you have poor money management skills, you could have the best trading system in the world, one that is right 90% of the time, and you will still lose all of your money. On the other hand, with good money management skills, you could have a fairly inaccurate system, and still get respectable returns. Money management is so important that studies have shown that up to 90% of the variance in fund manager performance can be directly attributed to it. Without a proper money management plan, it is difficult to cut losers and let winning trades run. Many traders also overstay when the market goes against them, they are not flexible enough to change their minds or opinions when the trend is clearly against their positions. Instead of limiting their losses, traders tend to add to losing positions.
Money/Risk Management
There is one thing more important than any method of trading anyone could ever teach you. Money management and risk control are critical to trading success. It is not complicated, but there are some very specific rules that you should follow. Unless a trading system is 100-per-cent accurate in all cases, a sound system of risk management and risk control has to be part of it. If you have poor money management skills, you could have the best trading system in the world, one that is right 90% of the time, and you will still lose all of your money. On the other hand, with good money management skills, you could have a fairly inaccurate system, and still get respectable returns. Money management is so important that studies have shown that up to 90% of the variance in fund manager performance can be directly attributed to it. Without a proper money management plan, it is difficult to cut losers and let winning trades run. Many traders also overstay when the market goes against them, they are not flexible enough to change their minds or opinions when the trend is clearly against their positions. Instead of limiting their losses, traders tend to add to losing positions.
The Bible of Swing Trading. This classic 1950 work describes a mechanical trading method for capitalizing on short-term market swings. Many current trading systems are based on the ideas from this book and was highly recommended by Linda Bradford Raschke.
Taylor Trading Technique is a strategy that utilizes “Three-Day Cycle”. The core premise is that the collective action of the Smart Money drives prices from extreme lows to extreme highs in rhythmic cyclical stages that repeat over and over, spanning a three-day period, hence 3-Day Cycle.
The structure of the 3-Day Trading Cycle is:
Taylor Trading Technique is a strategy that utilizes “Three-Day Cycle”. The core premise is that the collective action of the Smart Money drives prices from extreme lows to extreme highs in rhythmic cyclical stages that repeat over and over, spanning a three-day period, hence 3-Day Cycle.
The structure of the 3-Day Trading Cycle is:
- Day 1 (CD1): Buy
- Day 2 (CD2): Sell
- Day 3 (CD3): Sell Short
- Rally from the CD1 Low to the CD2 High
- Decline from the CD3 High to the CD1 Low Smart Money 3-Day Cycle Trading Strategies
- Force a “Violation” of the previous day Low in order to create a selling panic and then buy as low as possible.
- Force a “Penetration” of the previous day High in order to sell and/or sell short overvalued stocks, futures, commodities, etc.
- “The end of a cycle offers the moment of greatest opportunity…risk & return are best at this point.”
- “Excess (extreme) marks the end of one cycle and the beginning of the next cycle.”
- If the market closes Low in its Daily Range, the Low of that Day becomes the Key “Reference Point” for the Next Day.
- If the market closes High in its Daily Range, the High of that day becomes the Key “Reference Point” for the Next Day.
CYCLE DAY 1
In this example the Decline started on Cycle Day 3 (CD3) and continued into Cycle Day 1 (CD1). Remember, the main task of CD1 trade action is to “probe for a new secure low” from which to begin a new cycle rally. It is also highly probable that “Smart Money” had previously established short positions on CD3 after exiting their longs positions at the end of the previous cycle. Forcing a “violation” of previous day’s (CD3) Low accelerates selling momentum carried over from previous session which increases smart-money short position profitability as price probes lower to projected CD1 Average Range Target. Once reached, open short positions are covered from those selling out longs (at a loss) are “flushed-out”, creating an “excess” or “extreme” cycle low from which “Smart Money” begins to establish new long positions.
CYCLE DAY 2
Cycle Day 2 (CD2) Rally is measured from the Low of Cycle Day 1 (CD1) to the High on CD2. Smart Money having established Long positions at or near Cycle Low on CD1, the new cycle rally now can proceed higher until projected Average Range values have been achieved. Until price reaches the possible CD2 High, entering Long positions may be considered. Once price reaches the projected highs, we should consider taking profits on open long positions and/or be considering opening new short postions depending upon how price closes. If price closes strong, at or near high of day, then expectation would be for continued upside residual momentum into Cycle Day 3. Should price close relatively weak on CD2, then we would be watching for a failure to exceed CD2 High on CD3. Rejection of CD2 High on CD3 would increase odds of lower prices, thus establishing short positions would be warranted.
CYCLE DAY 3