Afternoon people……
Okay, I’ve just spend about three days (on and off) reading through the entire thread from start to finish. It is a very good thread and, apart from a small scattering of posts, stays pretty much on topic.
The subject area is a very interesting one and is one which I, and a number of good friends whom I rate, have studied at great length. I approached DBP on another thread and he has invited me to contribute here if I felt I had something to say.
There are a good few points which I would like to raise. Some may have been mentioned before but, in my opinion, need reemphasising due to their importance. Obviously much of what I am writing is just opinion based on my own observations.
Firstly, I feel that is important to understand why we would want to make certain ‘observations’. As traders our primary focus needs to be set on detecting situations which allow us to execute a trade which has a better than evens chance of success. There is no other reason to study market activity of any nature. Because of this one needs to consider, at all times, the suitability of any method that one is using to establish such ‘opportunities’.
I’d invite anyone to express what their ‘ideal trade’ was.
My guess is that any subsequent expressions would all boast the same central theme. For me, one of the best scenarios is opening a trade and seeing it go immediately into profit. Who likes trades which go immediately against you ? Answer : Nobody.
With that in mind I feel that it is important that people realise that, in the back of ones mind, everyone is looking for the same thing. It is important to remember that there is no ‘holy grail’. I feel that this point is still lost on many people. Some very basic principles apply which separate the very successful traders from the largely unsuccessful traders. These main two principles would be 1) realise that you are wrong very quickly and apply a stop – what you expected is not happening so get out, and 2) realise that you have successfully detected a moment of high probability and set about managing the trade as to maximise any potential return whist hopefully reducing any risk of a loss.
The last paragraph or so may seem ‘off topic’. Let me suggest that it’s not. It should be at the heart of what all good traders are looking for. This is essentially where perceived ‘support’,’resistance’ and interpretation of ‘volume’ can help us. It can help us detect areas where ‘higher percentage probability events’ occur most regularly. Having identified such an area will hopefully allow us to plan a trade which takes into account, not only the higher probabilities, but also the fact that we will know quickly if our ‘higher probability event’ is not occurring. By quickly I don’t just mean ‘time’ but also ‘price’. When we place a stop, to protect our capital, we place it because of simple Money Management. We should not assume that out trade will only close (at a loss) because our stop has been hit. If we observe other things that are not in keeping with our predicted ‘high probability event’ then we should have no fear of covering quickly.
The problem with any thread like this, as I have previously mentioned, is that readers are drawn to it because they perceive easy answers to difficult questions. (ie holy grail again). The fact is that trading, especially in the shorter time frames, is a probability business. Come to think of it, just like in physics, everything has probability.
I feel that a few people here maybe under the impression that observing a series of price and bars will indicate whether the market will head up or down. This is not the case. All we can do is take a trade and then observe whether the subsequent action is in keeping with a market which we feel should be reacting in a certain way. If it is in keeping then we manage our position, if it is not in keeping then we close our position.
Having made those points there are a number of further points which I would like to make regarding support / resistance and volume. The real subject area if you will.
Firstly, in my experience, you get high volumes at price levels which market participants feel are important levels. This ‘importance’ could be for a whole multitude of reasons. For some it might be a sensible level (based on perceived S/R) to keep a stop, for others it maybe the perceived level that a breakout is validated. The market moving to a certain point may provoke fear in one man whilst provoking greed in another. The individual reasons why large and small amounts of trade occurs doesn't necessarily concern us. It is when they occur that is our direct interest. The market is an auction where the conflicts of short term supply and demand are resolved. The important words here are ‘short term’. This term is relative. When you trade you look to trade at key levels you are doing so because you believe that the higher volumes maybe causing a short term price anomaly. That is to say that the market is discounting something either too early. The result therefore is an opportunity to take advantage of a possible over or under pricing of any given instrument. Effectively that’s why we like high volume bars – we are hoping that the fact that people are ‘urgently’ doing business means that they are accepting / paying a lesser / greater value for something. Statistically these are times when we get either continuation patterns or reversal patterns. This is, in my opinion, because the slightly longer time frame balance of the supply and demand has been altered. People call this many things, ‘shaking out the weak hands’ is one such term which sums up what has happened. Effectively, ‘informed participants’ have taken advantage of the shorter term anomaly and accumulated / distributed the stock / future / bond etc. This effectively now means that that there are, on balance, slightly less weaker hands than there were before the anomaly. So, in the case of a stock which is rising, this means that the prices are slightly better supported on the next timeframe.
Secondly, in my experience, low volumes mean much less. The main purpose of low volume is to help us detect high volume. People seem to be attempting to attach too much significance to low volumes. Low volumes effectively means that the current price is not attractive to either a buyer or a seller. Because of this less business is conducted. It is my opinion that the low volume business, conducted, in the bars immediately after a high volume bar, is simply the short term differences in, buying / sell pressures, equalising in the current time frame. The anomaly is resolving itself through short term trade. I find that trying to establish what the market is ‘doing’ in low volume bars is pointless and, expressed in percentage terms, is little more than 50:50. Low volume bars indicate that nothing major is happening – if something has changed it changed in the high volume bars. Movement of price in the low volume bars may however be an indication of what has happened as longer time frame equalisation of buying / selling pressure takes time to resolve.
Thirdly, it is easy to pick up impaired logic when trading the markets. On of the most common bits of impaired logic (and it’s been mentioned in this thread), is the logic which states that we need to identify buyers and sellers. I have seen it stated that “It looks like stock ABC is nearly all buys today”. Implicitly this can not be the case. The simple principle of the market is that for every buyer there is a seller and for every seller there is a buyer. There is no third party which either facilitates or restricts trade (apart from the exchange itself which may from time to time impose rules or suspend business, however, these instances are very rare indeed). The only way someone or something can push a price lower is to create an anomaly. The only way to do that, as we have discussed, would involve large volume which, in turn, would imply that a particular price was important.
The market does not exist for anyone’s benefit. It is there to perform a function. If anyone suggests that someone is using the market to gain an advantage then I would suggest that that person is wrong. ( I await a barrage of argument on that point).
I hope this raises a few points for further discussion. In the meantime why don’t we introduce some realtime charts to the discussion. I suggest we keep it simple with the three main US Index Futures, ie ES, YM and NQ. Any takers ?
Steve.
