Rule 1 – If you cannot see trends and patterns almost instantly when you look at a chart then they are not there. The longer you stare, the more your brain will try to apply order where there is none.
If you have to justify exceptions, stray data points and conflicting evidence then it is safe to say the market is not showing you what you think it is.
Rule 2 – You can torture a chart to say anything you want. Don’t do it.
This is very similar to Rule 2 but it there is an important point to drive home. You can cherry pick indicators to justify whatever biases you bring to the table and that attempts to impose your will on the market. You cannot tell the market what to do – ever.
Rule 3 – Be sure you check out one time frame larger than the one in which you are operating (a weekly chart for a swing trader, a monthly chart for a position trader).
It is very easy to get caught up in your own world and miss the bigger picture getting ready to smack you. It can mean the difference between buying the dip in a rising trend and selling a breakdown in a falling trend.
Rule 4 – Look at both bars (or candles) and close-only line charts to see if they agree. And look at both linear and semi-logarithmic scaled charts when price movements are large.
Short-term traders can ignore the latter since prices are not usually moving 30% in a day. But position traders must compare movements at different price levels.
As for bars and lines, sometimes important highs and lows are set by intraday or intra-week movements. And sometimes intrday or intra-week highs and lows are anomalies that can safely be ignored. Why not look at both?
Rule 5 – Patterns must be in proportion to the trends they are attempting to correct or reverse. I like the trend to be at least three times as long as the pattern. (more…)
Archives of “Price action trading” tag
rss10 Points For Traders
- Don’t trade your opinions trade a carefully written trading plan that expresses a methodology with an edge.
- Don’t trade your emotions trade your quantified entry set ups.
- Stop exiting when your scared and exit with your trailing stop is hit.
- Only trade when the market environment gives your system a green light, go to cash when the market gives your system a red light.
- Stop trying to force trades, trade the signals not the noise. Wait for a reason to trade.
- In losing streaks trade smaller and smaller until you start winning again.
- Quit trying to make some great public “call” about a bottom and focus on making money.
- Sometimes it is not about making money it is about keeping what you have and playing a strong defense.
- The sloppy the price action the pickier you have to be with your entries.
- The more volatile the market the smaller you should be trading.
Markets: They Trend, They Flow, They Surprise
Markets go up, down, and sideways. They trend. They flow. They surprise. Have markets changed? Not only have markets changed, they will continue to change. Check your history books. If you have a valid market philosophy, learning to accept that change and flow with it is your greatest asset. No matter how ridiculous market moves appear at the beginning, and no matter how extended or irrational they seem at the end, following trends is the rational choice in a chaotic, changing world.
That thinking leaves trend followers as generalists when it comes to their trading strategy and that’s not easy to accept for many. The dominant trend within universities is ever-narrower specialization. A higher premium is placed on deep knowledge within a single field (read: fundamental expertise in one market), versus broad wisdom across multiple fronts.3
For example, one trend following practitioner started trading trends in 1974—making hundreds of millions in profits and perhaps billions for clients. The major strategic elements of his trend following trading systems have never changed. He was blunt: “The markets are just the markets. I know that is unusual sounding.” (more…)
10 Trading Books -Every Trader Must Read
“If there was easy money lying around, no one would be forcing it it into your pockets.” – Jesse Livermore
There is so much garbage out there concerning trading online and the temptation for easy money that many new traders are lured into childish beliefs about getting rich quick, following a guru that can predict the future, or confusing a salesman for a trader. Contrary to popular belief, trading is not about picks, predictions, or personal gurus. Trading is really about entry signals with an edge, following price action, and learning to trade a system that fits who you are as a trader. Real long term profitable trading is about, risk management, robust trading systems, and mental and emotional discipline. I would not trust anyone that did not have those three things at the core of their trading. Here is the right reading path for a new trader to follow to avoid all the hype, foolishness, con-artists, and childishness that arises from ignorance of a solid understanding of the subject of trading in the real world in real time.
Trade Like a Casino: Find Your Edge, Manage Risk, and Win Like the House (Wiley Trading) “If we are properly managing the risk and adhering to a positive expectancy model, the act of trading a position should be boring.” – Richard Weissman
Trading Without Gambling: Develop a Game Plan for Ultimate Trading Success “If all your decisions were made during nonmarket hours with timing and execution being your main concern during market hours, you will dramatically increase your chances of success.” – Marcel Link
Trend Following (Updated Edition): Learn to Make Millions in Up or Down Markets “Trend followers are the group of technical traders who use reactive technical analysis. Instead of trying to predict a market direction, their strategy is to react to the market’s movements whenever they occur. This enables them to focus on the market’s actual moves and not get emotionally involved with trying to predict direction or duration.” – Michael Covel
Market Wizards, Updated: Interviews With Top Traders “The most important rule of trading is to play great defense, not great offense.” & “Don’t focus on making money; focus on protecting what you have.” – Market Wizards (more…)
The Blind Traders and the Market
There is an old parable known as “the blind men and the elephant.” In this story, there are four blind men who are asked to determine what an elephant looks like. The first blind man feels the leg of the elephant and says, “The elephant is like a tree because it is large and round like a pillar.” The second man feels the tail and says, “The elephant is like a rope because it is small and coarse.” The third man feels the ear and says, “The elephant is like a fan because it is flat and thin.” The fourth man feels the trunk and says, “The elephant is like a snake because it is long and curves.”
A king comes to the four blind men and says, “all of you are correct.” The king goes on to explain that each one had drastically different descriptions of the elephant because they are all feeling different parts. So, they are all correct. The elephant has all the features described by the four blind men.
This parable is a good analogy describing different types of profitable traders. Many of the arguments that erupt between traders on social media are due to not understanding the others time frames or not understanding the other trader’s position sizing, stop loss level, or expected winning percentage. Also too many cult members of Elliot Wave, Trend Following, Market Profile, Day Traders, and option traders etc. think their way of trading price action is the only way when their way is only one of many paths to profitability. There are as many ways to trade price action to be profitable as there are profitable traders.
The elephant in the room is that profitable traders do a few things in common: (more…)
Trade Like You Are Water
“Really good traders are also capable of changing their mind in an instant. They can be dogmatic in their opinion and then immediately change it. If you can’t do that, you will get caught in a position and be wiped out.” -Steve Clark
The greatest traders have a huge conviction about their edge and trading method after confirming its ability to create long term profits. It is hard for many new traders to grasp that great traders are able to change their opinion about a trade in a manner of minutes for many reasons. Unlike other professions that are paid to be right,it costs traders if they will not admit they are wrong quickly. In a mechanical system stops must be taken when they are hit, in a discretionary system price movement is the dictator and the trader must be the slave. If you are short a stock and resistance is broken through and closed above with power, then you are wrong, you are now short a break out. If you buy support and the stock plunges far below where you expected the bounce then the stock has broken the range and may be in a down trend. (more…)