sdoma

This is not a religious post, just a metaphor. In the bible, when Moses asks God, "what are you called?" God answers: "I am." The significance of the answer isn't obvious, but is important. Basically, in many ways, to name something is to assert possession of that thing, or power over it. The Hebrews call God Yahweh which means "he is." It's not a real name per se. To the Hebrews, God was so important that he didn't need a name, and you certainly aren't in a position to assert possession of him anyway, or to define something beyond your ken. What does this have to do with VSA? Candlesticks? Well, these are all names. I think that people take one aspect of price action and name it; at that point, they've asserted possession, said "I define it and thus it is mine." Then, somebody else does something with another piece of price action, and then they compare the size of their wenies and get all pissy with each other. Yours might be a half inch longer, but mine is thicker and isn't it the girth that's important? Then you go into a discussion of nerve distribution in the vagina and, well, you know how this goes. So, let's all stop comparing our dongs and go pick up a special someone to use it on.

There are several ways you could get in, and I'll show you two ways you could play this, just bear with me. I don't look at levels as Support or Resistance per se. After all, you can lay any random horizontal line on a chart and it will look like S/R at points. Try it, it will blow your mind. I consider important levels to be places where decisions are made by the hive mind we call the market. These levels are where the hive mind does a gut check: is this the appropriate thing to be doing? Are we overbought/sold now? Etc Etc. I think this is why so many people get rocked trading levels; they just fade the level or play for continuation in a robot-like manner. Instead of beginning with one set entry, ask yourself: What are the range of possibilities you can reasonably, expect for the market at this level? Generally, at this price zone on the British Pound, prices could: -Blow right through it and keep going down -Turn on a dime and rocket up -Stall and reverse -Stall and continue -Stall and consolidate, which includes fake-outs in either direction I figure that if price roars right through the zone or reverses violently, I may or may not catch that movement. As batty as that can make me, I've come to accept that. There's plenty of money to be made without shooting from the hip. The situations that yield more methodical trades with known entry or exit points are those where the market hits a level like this and stalls. This way, you have an idea where you are wrong, especially counter trend. If the market makes a new low, you're wrong, end of story, full stop, whatever. I find VSA-like techniques and price action to be very useful for these types of scenarios, so the first chart I've attached is a combination of VSA and candlestick reading. On this chart, the horizontal red line is the three day low, and it's a five minute. Candle one is a test of the level. Notice that you have a relatively wide range (44 ticks) and the volume is 957 contracts. As of yet you do not have enough information to act, but everything is relative and you need a baseline to relate to. Candle two is a hammer candle. It closes on its low but does not break the low of the previous candle. It has an 18 tick range but traded 1134 contracts. This is noteworthy because it traded more size in less range relative to the previous candle. Not only did prices stall but we had participation. Now, this info has biased me somewhat towards a reversal trade, but still isn't enough for me to act. After all, this could be an attempt at bottom fishing which gets overwhelmed in the next few minutes. The faders get it shoved in their faces, puke and prices rip to the downside. I want to see enough buying to push prices up past the wick of the hammer before I get in. After all, I know we are at a major level and if I'm right, this trade is going to pay me well, so I don't need to suck every red cent out of the move. My potential entry is at the green line. If prices make a new low, my hypothesis is invalidated as Steenbarger would say. So, on this trade you'd want to risk a tick below the low of the hammer. There was a breakout on high volume which would have triggered the entry. As is common, you had a push back and then continuation. Another entry would be to wait for that reversal and then buy a midpoint retracement, which would have gotten you in at a similar level, but that's IF you get the retracement. That's why I like the first entry better. I hope this helps, and ask any questions you want.

Oh yeah. Market Profile works no matter what market you use it for. Also, since you use TPO's, you don't necessarily need volume to trade it which actually makes it very good for forex. I just labeled up a British Pound chart yesterday for 10/3/08. This is a future chart but it tracks the cash very closely. Prices opened within value and tested the nearest reference point - value and the three day low. Think about it, when it opens up and things are same old same old, there isn't really much money to be made. Traders will wait for it to lean one way or the other and jump in. And there is lots of money to be made when prices break a major intraday level and start to run. So, the market knows this and will usually test those nearby reference points. In any event, it traded a bit lower and tested, but couldn't find any more sellers and you saw a very nice rally. These types of moves used to catch me by surprise all the time. I would have fought the rally. But now I understand this type of action, and it really is logical once you get it. When you see this type of behavior, it sets up beautiful trades, and it stops a knee-jerk fading mentality since it makes you quantify your counterauction trades. Also, if you know you are traveling towards a major reference point like the previous day's high or low, the week's high or low, etc, you should NOT fade before you get to that point. If you play it at all, you should try and scalp it with that as a target. Think about it this way: When a market is going down, that's because the dominant market participants think that whatever is being traded is too expensive. When it tests to a major high or low, it's seeing if people still think it's too expensive at that point, and they want to see what the broader market thinks as it approaches that major level and draws increasing amounts of attention and analysis. The answer is significant because those levels set the tone for the day or week or whatever. So the market fell seeking answers, and found them. Don't predict, just go with the flow.

That's really interesting. I am going to start looking at it, and I'd love to know your thoughts.

I like to look at the Eurostoxx and DAX, as well as taking the important news releases, if any, that occurred overnight. Oftentimes I find that the Asian markets don't move the American markets all that much. Perhaps I'm wrong about that since you like to look at the Nikkei.

It does. I do a lot of the same things. I just think some people were taking Steenbarger's comments out of the context in which he made them. He didn't put it like this, but I think if you look at those movements and relate them to value of the previous day session, and longer term value, it really starts to get crystal clear why you see reversals and continuations. I will use today's ES chart as an example. I have found that value is often a lot clearer if you take a longer period (3 and 5 day value like Cisco does) or you take a market movement, such as a trend or bracket and crush it. This chart uses 9/27, 9/30 and 10/1. This is not only a three day crush, which is one of my favorites, but it also encompasses all of the price action from the break on 9/27, a range extension down if you will. In this case, it's not a great example as you saw the break on either chart, but I still think you see the auction a little more clearly with the 3 day value chart. So, I think I'm like you in that I use the overnight info but only as it relates to what goes on in the domicile market. Taken by itself it isn't very important. All that's really important is where it causes the market to open in relation to day value.

I think it's accurate if you understand that he's talking about something very specific. He's not saying that what happens during the night session has no meaning. Steenbarger uses the overnight high and low, for example, and does include the overnight movements in a greater overall context for his analysis. I think what he is saying is that moves which occur during the night session reverse or stall more often than they continue, and I agree with that. Moves during the night session do not predict the day session's move. It's just contextual information. Think of it from a market profile perspective. A large overnight move will cause prices to open out of value, be it yesterday's value, 3 day or 1 week, whatever you like to use. Now you have to evaluate if this move from value is proper and correct. If it is found to be an overreaction by the daytime participants and doesn't attract further participation, you will see that move stall or reverse back into value. Whether it is proper or not is what you must quantify, and that's a difficult thing to do sometimes.

You are suffering from trading anthropomorphism. Your focus is short term, so everybody's is, right? Wrong. The elephants in a given market, the big funds, banks, and central banks, are not flat at the end of every given day like most of the people who post here. Their perception of value is what controls long term price action, hence the term VALUE INVESTING. Your most famous proponents of value investing are Benjamin Graham and Warren Buffett, both of whose philosophies are oriented on the long term. There has to be lasting demand to move prices. People have to buy and then want to keep whatever security you are trading. They have to be able to justify their positions to the board of directors when they do their quarterly and annual reports. Saying "it's going up, so I'm long" is a good start, but not enough justification. They have to back up their perception of the value of that security. So, for example, if they think that their current position in the overall stock market is a good value and should increase, they have to justify that with economic projections and the like. Remember, these people take HUGE positions and can't just get out at the click of a mouse without dramatic consequences. So, if prices move out of where traders have found value for some time, and there aren't compelling enough reasons to shift the big boys' perception of value with it, they will stop buying and might even sell some of their position in a bull move or start buying a bear move. Once day traders and short term traders realize this, they liquidate and many reverse, moving prices back into that value zone.