I think thegoose is questioning/highlighting the $3 move, it has just jumped up and bit me a bit about this $3 dollar move being problematic in using old trading strategies that rely on price levels for their triggers in this day and age. In livermores time and indeed right up to 2001 the fractional pricing of stocks, 1/16th of a dollar being the smallest move or put it another way, to livermore $3 was a 48 point move, to us now, today, it is a 300 point move. I'm sure the original intention of a method written for the US market pre decimalisation will be flawed if this fact is not taken into account.
LMC, I was very confused because I agree with your concerns. I don't understand how the higher the price goes, the LESS it has to retrace to call it a swing e.g. $6 pull back of a $30 price stock is 20% and that is then considered a "natural reaction" and yet $6 of a $100 stock is only 6% and yet it still classifies as the same level of swing. This seems to
directly contradict what he writes in his book which is that the higher the price of a stock, the more
severe the reaction even when it is a "natural" one.
But referring to your points on the demical system - doesn't the volatility expansion since Livermores time compensate for this? Having looked at the Market Key, a 48 point move would result in way too many swings being recorded. Perhaps a 300pt move is now equal to his 48pt move? Does this even make sense? My head is spinning...
I was intrigued by the Key but never dared to think it would work - not when so much time has gone by, the markets have changed and volatility has picked up...and yet the numbers I put in tell a very different story.
Regardless of these concerns on the Market Key, I really think 300 point is far too large to leave on the table, personally believe it's more important to look for his MO was in the bucket shops, this I firmly believe to be key and not his Market Key.
His strategies on the most part seemed to involve price pivots and watching the price very carefully around these areas in order to see if it was behaving properly if the price was to continue on the line of least resistance. In "How To Trade In Stocks" he mentions several such trades including round number pivots and how the stock should behave when it goes through them which is to say it should go up quickly and sharply and to sell if it fails to do this.
He also writes of buying record highs as when the overhead supply is gone, the market should presumably put in quite a rally.
So, this is where the Market Key comes in. It is not a system so I don't understand why everyone says that its a red herring or that its not the key to anything etc. The Market Key is simply a means of "charting" via the numbers. It simply tells you when a stock is BEHAVING CORRECTLY. The pivots are recorded before your eyes and of course you can quickly see the multi year highs and lows and the round numbers just like he traded. It also allows you to record the market action of two different stocks so that you are immediately drawn to discrepancies. But what I really like about it is that when you use the Key you realise that the possible buy or sell signals that you get are taken when price stalls at previous major lows (support) or breaks the low but doesn't follow through (the stock has a false break and with no follow through there is no real stock being supplied, some market players are trapped etc) and vice versa for highs.
But Livermore says in his book that the Key details
only the more "complex" pivotal points and as a result it is clear to me that, as he also says, one must use it as a basis to do your own research on the field of pivots.
Livermore learnt to tape read by continously observing prices and recording them. I have always believed that by writing prices down on paper and noting the patterns they make, you can learn more than by simply looking at a chart as when people look at a chart they look at the
wrong things. Many traders look at the height of the candlesticks (how much green or red they see) so they are focusing on the size of the move and the length of the trend etc but they seem to rarely focus on the
actual price and its relationship to other prices.
I was talking to a trader here the other day, incidentally, that has watched ONE market, 12 hours per day for nearly the last year. The guy knew the market so well from watching the charts that he could literally draw the history of it out on several different timeframes. And yet the funny thing was is that when I asked him - he had absolutely no idea what the price was! This was a real eye opener for me.
