Trading with price action

Quote from OldTrader:

Hello Inandlong....it's been a while...

I use what I call "price action" to trade. Here's how I would describe it.

First, I use charts. The chart is price and volume. That's it. No moving averages, no stochastics, no MACD, no RSI....just a chart.

I guess I looked at my first chart probably 35 years ago. Back in those days none of us had heard of things like stochastics. If you were going to seriously be a technician, you read the Edwards and Magee book...even back then. And I would recommend it even today.

I think it's important to understand chart patterns. Edwards and Magee is the bible for that. Now notice I said "understand chart patterns". I didn't say they were the holy grail. And I didn't say how to use them exactly. I just said it's important to understand. Because once you understand the chart patterns, you begin to understand "price action".

Now personally, if understanding chart patterns were all there was to it, then you could buy the book, memorize a few patterns, and you're off and running. But frankly, I think that's just a beginning of price action.

For instance, I never look at a chart "out of context". Here's what I mean: there's a news background to all charts...a context. It's one thing to look at last weeks chart on the ES for instance without knowing the background. It's another thing to understand that war in the Mideast may be imminent, terrorist actions may take place in the US, and that people are duct taping plastic sheeting to their house and buying gas masks!

Further, along with this particular context, the gold chart shows a sharp downward move off the highs.

Given the negative context, when the market starts to resist decline, start to climb past previous highs, starts to give you some important clues....in other words, the price action is starting to speak to you.

More context: as we move down you watch some of the key stocks holding...like INTC for instance, unable to go down. You ask yourself "why". What will happen to INTC if the market bounces?

You piece all of this together. You watch it weave itself into a pattern until it starts to make sense. The chart is important. But it needs context, background.

News announcements are important. Good news may cause a gap up. If the news was unexpected, the gap may "breakaway". If it was expected, discounted, then the market may be focusing on something down the road, and use the higher prices to sell. It's important to understand what is good news, and what is bad news, so that you can understand if the market is "shrugging" something off. Because that's how the market "tells" you which direction it's going.

Chart patterns become important because they tell you what "should" happen, and therefore you KNOW what to do when and if it doesn't happen. For instance, the break of a neckline on a head and shoulders pattern "should" take the market higher. But if it then fails a few days latter back under the neckline...that tells you a) everyone is trapped and b) a sharp move in the opposite direction is at hand. An example of this occurred in the NDX on Nov. 21. Take a look. A breakout, which then failed back under the neckline a few days latter, and then led to a good move in the opposite direction. In other words, understand the patters, and what they mean. It helps you to know what to do when you see the pattern, and when the pattern does something unexpected.

In the old days we hand drew our charts, then watched the tape all day long. Today, the computer does my charts....I don't watch the "tape" exactly, but I do watch a number of key stocks and indices, tick, trin, vix looking for clues, something that is deviating from the pattern.

I don't want moving averages or stochastics, or any other squiggly line interfering with the price action. While these may be helpful to some, I have a problem with them. Here's why: stochastics for example might tell you when the market is oversold according to it's formula. The problem is that ALL of the really good moves up take place with stochastics overbought. I would hate to miss a great move because I thought the market was overbought. Just as bad, when a market quickly moves to a peak and reverses, you might still be waiting for your indicator to say something instead of acting.

What I'm suggesting is that it's all in the price action. What I'm encouraging you to do is to "play the market", not to "play the indicator". When the guy who's watching stochastics decides the market is overbought, he makes his trade, it shows in the price action.

Same thing with moving averages. Some people don't realize that Edwards and Magee do not tell you to go long or short just because a trendline breaks. Nope, what it means according to them is that a trend that was up, is no longer up, when the trendline breaks. BUT, importantly, it may not be down at that time. Same thing with moving averages. Yet people put these on their charts, and then start to believe in them. They're just a squiggly line folks, and a delayed one at that.

Hope this helps some.

OldTrader
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Yes...

nitro
 
Quote from OldTrader:

I use what I call "price action" to trade. Here's how I would describe it. ...I use charts. The chart is price and volume. That's it. No moving averages, no stochastics, no MACD, no RSI....just a chart.

....35 years ago...if you were going to seriously be a technician, you read the Edwards and Magee book... And I would recommend it even today.

I think it's important to understand chart patterns....because once you understand the chart patterns, you begin to understand "price action"...but frankly, I think that's just a beginning of price action.

For instance, ...there's a news background to all charts...a context. It's one thing to look at last weeks chart on the ES...it's another thing to understand that war in the Mideast may be imminent, terrorist actions may take place in the US, and that people are duct taping plastic sheeting to their house and buying gas masks....!

Given the negative context, when the market starts to resist decline, start to climb past previous highs, starts to give you some important clues....in other words, the price action is starting to speak to you.

...as we move down you watch some of the key stocks holding...unable to go down. You ask yourself "why". What will happen...if the market bounces?

You piece all of this together. You watch it weave itself into a pattern until it starts to make sense. The chart is important. But it needs context, background. ... Because that's how the market "tells" you which direction it's going.

...What I'm suggesting is that it's all in the price action. What I'm encouraging you to do is to "play the market", not to "play the indicator.

Hope this helps some.
OldTrader
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Thank you OldTrader for your wisdom. Your post is very meaningful. Thanks for your time and consideration.

I particularly appreciate your reference to chart patterns, a la Edwards and Magee and your insistence on understanding chart patterns in their context versus simple recognition.
 
damn good post... thanks

I too was taught to draw charts by hand.

Your explanation of the interpretive nuances of analysis is right on.

Was going to post a long reply... but you covered it well. So as a discretionary trader wlll simply add that to me (also) trading is an art form wherein one must not only know and understand (and appreciate) the primary colors... but how they mix into secondary and intermediate ones, and then... how all of this can merge on canvas to produce a "work of art"!

Regards,

I:cool:
 
I use a lot of things for trade entry, but for trade exit the only thing that matters is price. I like to use trailing stops. This takes away about half of the angst involved in stock trading and frees up a lot of time, I am not glued to the screen just because i have a trade on.
 
Quote from jack hershey:



It will be quite clear where oldtrader's screw up that he currently holds. "overbought" to oldtrader says "here is a signal for you to take action". He apparently does not know what the action is that he should take because he takes the opposite knowing that he has a paradoxical view. By doing the two steps he can cure himself since he is already half way there. The second one will be most illuminating to him. Once he calibrates himself on stochastics he can see that his TA vis a vis Magee and the proper understanding of stochastics is in perfect correspondence.

we all have to work through each opportunity that shows up to get to the best place. It is worth the effort instead of saying you like being stuck in a place instead.
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I do not intend to hold myself out as an "expert" in any particular indicator, to include stochastics. I've already stated that I don't use stochastics. So if I explained something about stochastics incorrectly, it should be clear why that is....I don't use it.

I freely admit that I must be missing something about stochastics that you evidently see and understand. For instance, I see stochastics get "overbought". Sometimes the market turns down from this position, sometimes it keeps going and stochastics stays overbought. In other words, there is nothing particularly consistent about what the market does when stochastics gets to a particular position.

Now YOU evidently know what YOU are supposed to do when stochastics does certain things. You evidently have several different settings for stochastics which you use in some manner. In other words, you have evidently learned how to use stochastics to your benefit.

But here's what I know. I know without a trace of doubt that there is no holy grail. You could use various settings on stochastics, and act in certain ways depending on what those settings are telling you to do. But a day will eventually come when the market will do things that stochastics did not predict. At that particular point you will have to decide a simple question....was it the stochastics you did not understand or interpret correctly, or was it the market you didn't understand?

Perhaps it's a fine distinction, but one that I feel is worth making. You can choose to understand the market. Or, you can choose to understand stochastics as an aid to understanding the market. I taken the first road, you evidently have taken the second.

The interesting part of this is that I believe I can tell when a market is overbought without the aid of an indicator. I don't need a formula or a set of squiggly lines set to a particular setting to tell me this.

Either way, I am well aware that there are different methods for trading the market. I'd say that most people use indicators of one type or another....so whether you have one more adherent or not should not affect you one way or the other.

OldTrader
 
Quote from OldTrader:



I do not intend to hold myself out as an "expert" in any particular indicator, to include stochastics. I've already stated that I don't use stochastics. So if I explained something about stochastics incorrectly, it should be clear why that is....I don't use it.

I freely admit that I must be missing something about stochastics that you evidently see and understand. For instance, I see stochastics get "overbought". Sometimes the market turns down from this position, sometimes it keeps going and stochastics stays overbought. In other words, there is nothing particularly consistent about what the market does when stochastics gets to a particular position.

Now YOU evidently know what YOU are supposed to do when stochastics does certain things. You evidently have several different settings for stochastics which you use in some manner. In other words, you have evidently learned how to use stochastics to your benefit.

But here's what I know. I know without a trace of doubt that there is no holy grail. You could use various settings on stochastics, and act in certain ways depending on what those settings are telling you to do. But a day will eventually come when the market will do things that stochastics did not predict. At that particular point you will have to decide a simple question....was it the stochastics you did not understand or interpret correctly, or was it the market you didn't understand?

Perhaps it's a fine distinction, but one that I feel is worth making. You can choose to understand the market. Or, you can choose to understand stochastics as an aid to understanding the market. I taken the first road, you evidently have taken the second.

The interesting part of this is that I believe I can tell when a market is overbought without the aid of an indicator. I don't need a formula or a set of squiggly lines set to a particular setting to tell me this.

Either way, I am well aware that there are different methods for trading the market. I'd say that most people use indicators of one type or another....so whether you have one more adherent or not should not affect you one way or the other.

OldTrader
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Oldtrader,

Well said.
 
Quote from nkhoi:

Jack stoc, FYI
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Thanks for the chart including indicators. I was unable to read the settings on the stochastics or the MACD. If this isn't something proprietary would you post the settings involved?

With the settings I can take a look at some charts to observe what happens with them. I guess the principle is that if one is good, then 3 must be 3X as good huh?

Or there's another theory out there that a guy should watch several different time periods in terms of charts...perhaps 1 min, 5 min, 30 min.

I suppose the point is that the stochastics are derived by formula from the price action. So different settings on the stochastics just puts a different type of spin on the price action...just like different time periods in charts put a different look to the chart.

OldTrader
 
Quote from OldTrader:



Thanks for the chart including indicators. I was unable to read the settings on the stochastics or the MACD. If this isn't something proprietary would you post the settings involved?

With the settings I can take a look at some charts to observe what happens with them. I guess the principle is that if one is good, then 3 must be 3X as good huh?

Or there's another theory out there that a guy should watch several different time periods in terms of charts...perhaps 1 min, 5 min, 30 min.

I suppose the point is that the stochastics are derived by formula from the price action. So different settings on the stochastics just puts a different type of spin on the price action...just like different time periods in charts put a different look to the chart.

OldTrader
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OldTrader it is GREAT to see your posts again :)

I wanted to state publicly that you have helped me a great deal to expand my time horizons (I weaned off just trading on 1 and 3 minute charts and start looking more at 15, 30, 60 min) and to learn more about what is actually moving the market and ways to read it. My trading has improved considerably from your ideas.

Thank You.

I notice a lot of indicator supporters tend to blast your assertions but I feel they only do this because they don't want to lose confidence in what they are trading with, regardless of the solid truth of your postings. So don't take it personally.

I have found a combination of charts that works well for me to read "the big picture". Some of them are pure candles only and a few have indicators, mostly just MACD because it is when price action DIVERGES from what the lagging indicators are telling you that good opportunites arise - at least for me.

IMO, the understated value of indicators is to tell a person when NOT to trade - such as when an MA cross shows nothing more than chop. I use indicators more as a filter when not to trade than when to trade.

Please keep sharing your experience with us.

Sincerely,

Paul
 
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