Straight Line Approach, The (the SLA)

[mckaldey]

So if the stride is broken and one is for example trading countertrend or into a predefined level one would/could just exit - traders choice?

And in general there is a difference between the value after which the trade is most likely going against the trader and the value which makes a reversal more likely?

And another value can be defined after which one could realize first profits?

Which all can be a subject of testing...

 

[dbphoenix]

So if the stride is broken and one is for example trading countertrend or into a predefined level one would/could just exit - traders choice?

And in general there is a difference between the value after which the trade is most likely going against the trader and the value which makes a reversal more likely?

And another value can be defined after which one could realize first profits?

Which all can be a subject of testing...

The chief question is whether the trader is concerned about his trade or about what traders are doing, i.e., the balance between demand and supply. If he's concerned primarily about the state of his trade, almost any decision he's going to make will most likely be a bad one. If he focuses instead on what traders are doing, then his trade will take care of itself.

As for how much is too much, i.e., how much is not so much that a continuation is out of the question and how much virtually guarantees a reversal, then, yes, that's a subject for testing. I considered adding something to the book about it, but this will change not only with regard to the instrument but with each bar interval. If, for example, one is trading the daily, determining the trouble signals on a 1m isn't going to do much good. A plus is that this is relatively quick and easy to do as it can be done on static charts, and one can determine how much is too much in an evening or so. If one is trading multiple intervals across multiple instruments, it will of course take longer. One needn't do it at all, of course, but, if he doesn't, then every time price backs up a tick, his sphincter will start to tighten and he'll begin to feel faint.

As for "realizing first profits", I assume you're referring to some sort of scaling out. For that, look at the end of Appendix E for an example of that.

Db

 

[dbphoenix]

Here's an example from this morning.

You enter your short at the rejection of Thursday's high (1). After price has pulled away from that and retraced (2), you can plot your supply line. This is broken at 1026. Now how much is too much? Price rallies 2.25pts before continuing its decline. Eventually it makes a lower low (3) and you can fan your supply line. The next time the line is broken, price moves 6.75pts. This is too much, and price moves in the opposite direction, all the way to 25 in this instance.

So 2.25 may or may not be fine depending on how many instances you have to record before you have confidence in what you find. Can you give it room to move 2.5? 3? 4? How much is too much? Or would you rather exit at any break and then deal with re-entry? Where are you with regard to fear (see Appendix F, which is duplicated in the Articles section here)?

Db

 

[dbphoenix]

I posted this to someone's journal last weekend. It's interesting to watch AMT unfold.

 

[Mateus]

People commonly focus on lines rather than on what buyers and sellers are doing and when and where and how, the latter of course being the whole point of Wyckoff, on which the SLA is based.

So if you don't understand why I drew the lines that I drew, just ask.

And if you haven't been reading the W thread, you should begin. It's closed in order to keep it as brief as possible, but you can always ask questions about it here if you're trying to combine the two (anyone who isn't is welcome to ask questions about W via PM to me).

Db

Db,
As suggested I have started to read the W thread. Instead of racing through i am taking the time to read each post and articles published to better digest the information. This is why I haven't been posting charts etc. Plus I have limited time outside of work and domestic commitments.

Having read everything up to post 14 n the W thread I would like to know why volume isn't included as a main component of the SLA method (at least the 14 page pdf that I have).

In terms of questioning the motives behind each action in the market and using volume to determine possible answers per Wyckoff's method - I am thinking that it might be a good idea at this stage (beginner) for me to select and follow an instrument where I can see the volume traded? Opposed to Brent and WTI where this doesn't seem to be readily available.

Thanks

 

[Mateus]

Daily shows price tested 1st-Feb Swing high on 26-Feb. Price closed below SH level which suggests supply outweighing demand. Will wait to see if price retests and can close above 36.20.

Overall weekly trend is down so I would expect price to be more likely to fall than rise as sellers in charge.

I assume the decade long low is significant. Price has risen since it was broken but it hasn’t been breached. Is this buying to cover short positions and/or traders assuming the downtrend has run its course? Can you explain the significance of the higher lows but horizontal S/R line?

Thanks

 

[dbphoenix]

If your lines are drawn incorrectly, then everything that follows is of little to no use. Begin again with the weekly.

Just out of curiosity, why trade this when the NQ is so much simpler and easier?

 

[Mateus]

If your lines are drawn incorrectly, then everything that follows is of little to no use. Begin again with the weekly.

Just out of curiosity, why trade this when the NQ is so much simpler and easier?

I do have a reason for my interest in Oil but all things considered it isn't a particularly good one. I will now focus on the NQ which is something I have had at the back of my mind for a while.

Thanks

 

[dbphoenix]

I do have a reason for my interest in Oil but all things considered it isn't a particularly good one. I will now focus on the NQ which is something I have had at the back of my mind for a while.

Thanks

Even so, there's a lot of useful information in this oil chart that is being missed because the lines aren't drawn correctly. Given your interest in it, I suggest you review your work as the rules apply to all charts, whether Brent or the NQ or whatever.

If one wants to trade the present correctly, he must know where he's been. That means beginning with the weekly (in order to get to the correct daily in order to get to the correct hourly).

Beginning with the first swing high on the weekly after exiting that range, refer back to the rules:

1. Track the balances between supply and demand with straight lines along swing points, swing lows if price is rising, swing highs if it’s falling.​

Where are the first two swing highs on the weekly?

 

[Mateus]

Even so, there's a lot of useful information in this oil chart that is being missed because the lines aren't drawn correctly. Given your interest in it, I suggest you review your work as the rules apply to all charts, whether Brent or the NQ or whatever.

If one wants to trade the present correctly, he must know where he's been. That means beginning with the weekly (in order to get to the correct daily in order to get to the correct hourly).

Beginning with the first swing high on the weekly after exiting that range, refer back to the rules:

1. Track the balances between supply and demand with straight lines along swing points, swing lows if price is rising, swing highs if it’s falling.​

Where are the first two swing highs on the weekly?

To be clear, when you say "existing that range" do you refer to the range ending June-2014?

If so I identify the first two as indicated

 

[dbphoenix]

To be clear, when you say "existing that range" do you refer to the range ending June-2014?

Actually July, but yes.

 

[Mateus]

Actually July, but yes.

Is this better?

 

[dbphoenix]

Is this better?

Better, but still not there.

One reason why beginners find this so simple is that they don't bring any baggage with them to the charts. It is absolutely essential that those who are interested in this read the charts from left to right and analyze them as though they had been traded in real time. Otherwise, these lines are useless. The pdf from the original thread is what it is because those trades were done in real time. Therefore they aren't all pretty, and some require judgement that may be beyond someone who is new to this. Even so, the trades that are squidgy are few, and the principles apply throughout.

I don't want to torture you with this, so I'll do the beginning of this for you. Note that if these lines are drawn correctly, i.e., drawn from left to right as if they had been drawn in real time, you get important information regarding the slope of the price action, ending in an eventual climax (I'll assume that volume was high at the bottom of it -- in Jan '15).

Study the three charts below and tell me (a) if you understand why the lines are drawn as they are and (b) what comes next.

 

[Mateus]

Better, but still not there.

One reason why beginners find this so simple is that they don't bring any baggage with them to the charts. It is absolutely essential that those who are interested in this read the charts from left to right and analyze them as though they had been traded in real time. Otherwise, these lines are useless. The pdf from the original thread is what it is because those trades were done in real time. Therefore they aren't all pretty, and some require judgement that may be beyond someone who is new to this. Even so, the trades that are squidgy are few, and the principles apply throughout.

I don't want to torture you with this, so I'll do the beginning of this for you. Note that if these lines are drawn correctly, i.e., drawn from left to right as if they had been drawn in real time, you get important information regarding the slope of the price action, ending in an eventual climax (I'll assume that volume was high at the bottom of it -- in Jan '15).

Study the three charts below and tell me (a) if you understand why the lines are drawn as they are and (b) what comes next.

a) You drew the lines between swing highs. From one SH to the next. The reason you drew at swing highs is because price was falling and a swing high is evidence of transactions made when buyers try and fail to increase the price. An imprint to show the attempt and that at that point supply was greater than demand. The reason you linked the lines between swing highs is to track the imbalance between supply and demand. The supply point is changing as price is falling, the first SH was supply zone at end of Sept - by mid December the supply zone had fallen to SH number 2. The lines are drawn in such a way so that a change in the balance between Supply and Demand is detected immediately.

b) If we're referring to January '15 and per what I have read so far by Wyckoff - There will be a reaction to the (assumed climatic) low. Demand at this point will be "good quality" because sellers will be covering their shorts. The danger point would be the Swing low and you could go long on a break of the SL. Watching to see what level of support will be offered and if price gets close to or breaches the Swing low.

(I am aware that what happen's next is on the chart but this is pretty much what is described by Wyckoff so I'm more trying to deepen my understanding than predict what is going to happen 12 months ago)

If support holds above the Jan swing low draw a demand line between Swing Lows and stay long until it is broken.

 

[dbphoenix]

a)
(I am aware that what happen's next is on the chart but this is pretty much what is described by Wyckoff so I'm more trying to deepen my understanding than predict what is going to happen 12 months ago)

Good for you on two counts.

One, learning to read from left to right. This is a far more common challenge than one might expect. But unless one learns how to do it, he can end up in some very confusing places, particularly when he has to decide whether to go long or short and isn't quite sure whether price is going up or down. As with so many things, if one gets off to the wrong start, he will likely stay that way all the way up to the present. Add to that the fact that the chart tells one things along the way that practically prescribe a course of action when the time comes to make a decision.

Two, bringing Wyckoff into it. I don't know that it's really necessary, but those who want to truly understand price movement will study the Wyckoff material in order to become proficient. Like quitting your job and becoming self-sufficient proficient. Though the SLA is based on Wyckoff, it is enormously beneficial to obtain a thorough grounding in the basics.

If support holds above the Jan swing low draw a demand line between Swing Lows and stay long until it is broken.

Correct. And when a higher high is made, that demand line can be swung down and a parallel line can be drawn, what Wyckoff calls an Overbought Position Line. This tells you for one thing that some will be taking a countertrend trade and some will be looking for an end to this upswing. Knowing what to expect prevents unpleasant surprises.

All of this provides the basis for the next leg of the downtrend. Once it's underway, a supply line is drawn across the first two swing highs and a parallel line is drawn under the intermediating swing low. Thus your channel. A blowup of that channel follows. Note that in January price is just a bit "oversold". What does that tell you with regard to possible actions you might take? What tactical advantage does being aware of this give you?

 

[Mateus]

Thank you for the feedback.

All of this provides the basis for the next leg of the downtrend. Once it's underway, a supply line is drawn across the first two swing highs and a parallel line is drawn under the intermediating swing low. Thus your channel. A blowup of that channel follows. Note that in January price is just a bit "oversold". What does that tell you with regard to possible actions you might take? What tactical advantage does being aware of this give you?

This tells me that selling may have run its course and that there is a possibility of a good long opportunity. Perhaps because there aren't any more buyers below this selling climax and/or those who sold are now buying to cover their positions. So my possible actions would be to monitor price with a view to take a long position* at an appropriate opportunity (retracement). In addition I would prepare a short position* if this "oversold" price area was breached and price fell below it - but consider this a higher risk trade.

The tactical advantage to observing the oversold position is that if price was indeed oversold we have a reliable position to place a stop order. We also have a point we can use to detect the strength of price buy looking to see how close support falls to this swing low. Either increasing or decreasing probability of success for a long trade.

Actual immediate actions would be to draw in a demand line on the daily between the first two swing lows and wait for a reaction - observe how low price falls before finding support - take this as confirmation of the strength of the long side. Adjust DL as necessary and observe.

*I am not actively trading an account only observing and trying to learn.

 

[dbphoenix]

Thank you for the feedback.



This tells me that selling may have run its course and that there is a possibility of a good long opportunity. Perhaps because there aren't any more buyers below this selling climax and/or those who sold are now buying to cover their positions. So my possible actions would be to monitor price with a view to take a long position* at an appropriate opportunity (retracement). In addition I would prepare a short position* if this "oversold" price area was breached and price fell below it - but consider this a higher risk trade.

The tactical advantage to observing the oversold position is that if price was indeed oversold we have a reliable position to place a stop order. We also have a point we can use to detect the strength of price buy looking to see how close support falls to this swing low. Either increasing or decreasing probability of success for a long trade.

Actual immediate actions would be to draw in a demand line on the daily between the first two swing lows and wait for a reaction - observe how low price falls before finding support - take this as confirmation of the strength of the long side. Adjust DL as necessary and observe.

*I am not actively trading an account only observing and trying to learn.

This tells me that selling may have run its course and that there is a possibility of a good long opportunity. Perhaps because there aren't any more buyers below this selling climax and/or those who sold are now buying to cover their positions.

You have it reversed. Think about buyers and sellers and the level of activity and what that does to price. Activity begins to increase on the 12th and price rises. Therefore, buyers are not only absorbing supply but pushing price higher. There are more buyers, not less. And as they succeed in pushing price higher, those who were short begin covering, which is why price is able to advance with so little effort during the week of the 25th.

The low is reached on the 20th. There is then a test on 2/2. This RET, however, is not confirmed, and there is a further test bottoming on 2/11. At which point do you switch to the hourly and begin trading this? What do you look for? Where in real time would you look for a trading opportunity? Or, if trading the daily, again, where would you begin trading it? What do you look for, etc? Would you wait for the reaction? How would you know whether or not it was the "real" reaction? How would you manage this?

Db

 

[Mateus]

You have it reversed. Think about buyers and sellers and the level of activity and what that does to price. Activity begins to increase on the 12th and price rises. Therefore, buyers are not only absorbing supply but pushing price higher. There are more buyers, not less. And as they succeed in pushing price higher, those who were short begin covering, which is why price is able to advance with so little effort during the week of the 25th.

Please clarify - when you refer to the 12th above do you mean 12-Jan or 12-Feb? I think when you say week of 25th you refer to Jan-25th. In lieu of volume figures is activity determined by the increase in difference between the daily high and low?

The low is reached on the 20th. There is then a test on 2/2. This RET, however, is not confirmed, and there is a further test bottoming on 2/11. At which point do you switch to the hourly and begin trading this? What do you look for? Where in real time would you look for a trading opportunity? Or, if trading the daily, again, where would you begin trading it? What do you look for, etc? Would you wait for the reaction? How would you know whether or not it was the "real" reaction? How would you manage this?

Db

The RET is not confirmed because a higher high was not made. after 2-Feb price advanced toward LSH but supply prevented it advancing - does this indicate supply was not exhausted on the 20-Jan? In which case wouldn't one have anticipated a need to draw a SL one the DL was broken? [the DL on the chart was between 20-Jan and 26-Jan extended upwards]

If I'm confident the 20-Jan low was the climatic low and buyers are in charge now. If I see price fail to make a higher high after the first test then I should expect another test - assuming there is still resistance from supply. 9-Feb sees price fall considerably through the LSL and close near the low of the day. The next higher swing low after 20-Jan is 26-Jan. If price holds above that point then could the test be considered real? If trading the daily a long position could be entered above the 9-Feb swing low with a stop at 26-Jan swing low price?

I'm honestly not sure how to transition from the daily to hourly charts to find an entry. My assumption would be to use the daily to find reasonable entry prices as I have read what you write about key market participants and big players paying attention to daily high/lows. Keep in mind the daily LOLR is up and find a corresponding situation on the hourly?

I think it might be better for me to continue to read about analysing the market price and volume information from Wyckoff and your own material before thinking about making entries? Unless you think otherwise. I'm happy to go slow and steady.

 

[dbphoenix]

Please clarify - when you refer to the 12th above do you mean 12-Jan or 12-Feb? I think when you say week of 25th you refer to Jan-25th. In lieu of volume figures is activity determined by the increase in difference between the daily high and low?

Jan 12. By the following week, it's all over. Volume is necessary to determine activity unless one is watching price move. But no one but daytraders are going to be doing that. One can have an increase in difference between daily highs and lows with no increase in activity at all. An increase in the difference simply means an increase in disagreement.

The RET is not confirmed because a higher high was not made. after 2-Feb price advanced toward LSH but supply prevented it advancing - does this indicate supply was not exhausted on the 20-Jan? In which case wouldn't one have anticipated a need to draw a SL one the DL was broken? [the DL on the chart was between 20-Jan and 26-Jan extended upwards]

The rally is called a "technical" rally, usually consisting of at least some short-covering. In order to determine whether or not the buying was "real", one must see how price behaves after the test. If there's genuine interest, price will rise; if not, it will fall and generally make a lower low. However, price has to get past the swing high of the technical rally. If it doesn't, then you're looking forward to ranging. All this is explained in Wyckoff's analysis of the NYT Average.

If I'm confident the 20-Jan low was the climatic low and buyers are in charge now. If I see price fail to make a higher high after the first test then I should expect another test - assuming there is still resistance from supply. 9-Feb sees price fall considerably through the LSL and close near the low of the day. The next higher swing low after 20-Jan is 26-Jan. If price holds above that point then could the test be considered real? If trading the daily a long position could be entered above the 9-Feb swing low with a stop at 26-Jan swing low price?

As long as price holds above the climax low, the test was good. However, that doesn't mean a V reversal. Given the decline in price, one can expect a lengthy bottoming process, as with the market in '09. As for the Feb swing low, I show that taking place on the 11th, but, yes, one could take the long off the daily at that point. Where you put your stop will depend on what price has to do to prove you wrong. If it makes a lower swing low, i.e., lower than the 11th, I should think that would be sufficient. Otherwise, a stop below the climax low. Depends on your risk tolerance.

I'm honestly not sure how to transition from the daily to hourly charts to find an entry. My assumption would be to use the daily to find reasonable entry prices as I have read what you write about key market participants and big players paying attention to daily high/lows. Keep in mind the daily LOLR is up and find a corresponding situation on the hourly?

Find the trading opportunities off the weekly. When you see what you think may be one, switch to the daily. In this case, the oversold condition in January constitutes a potential trading opportunity. And if you consult an hourly chart, you'll also see a higher low at that point. Trading opportunities aren't addressed in detail in the pdf. There's more on them in the book. However, it should be clear that any bounce off a trend channel should be viewed as a trading opportunity, as would be a bounce off the upper or lower limit of a range. These are shown in the pdf.

I think it might be better for me to continue to read about analysing the market price and volume information from Wyckoff and your own material before thinking about making entries? Unless you think otherwise. I'm happy to go slow and steady.

Re your last question, understanding what you're looking at and what to do with it is always preferable to jumping in and seeing how it goes.

Below are daily and hourly charts for that oversold segment. The lines aren't exact, but you can see that an earlier entry is possible if using the hourly than if using the daily. Which is safer will depend on your risk tolerance.

Db

 

[Mateus]

Re your last question, understanding what you're looking at and what to do with it is always preferable to jumping in and seeing how it goes.

Below are daily and hourly charts for that oversold segment. The lines aren't exact, but you can see that an earlier entry is possible if using the hourly than if using the daily. Which is safer will depend on your risk tolerance.

Db

Thanks again for the input/feedback. I am going to return to the material in the Wyckoff thread as it keeps coming up again and again. It's good to be getting consistent information and seeing how it's applied effectively. I'm looking at the year long study of the NY Average and will post any questions I have here.

Regards