Trading The Wyckoff Way

[Niko 10]

Unfortunately, these kinds of discussions (whether or not something is occurring at the moment), when they take place on message boards, are doomed from the start

Db

 

I think that I finally got your point DB, I guess the theoretical(if one can give it that name) discussion about market principles (and by that I mean W principles) is far more usefull for novice traders (I don´t know about advance traders as I do not know any personally) than guessing where oil or the ES or whatever other instrument, is going to be next Friday or by fall.

 

Now regarding the subject of climaxes, and reviewing W definition:

 

"* The phenomenon of the Selling Climax is caused by the panicky unloading

of stocks (supply) by the public and other weak holders which is matched against

buying (demand) of (l) experienced operators; (2) the large interests and sponsors

of various stocks who now either see an excellent opportunity to replace at low

prices the stocks they sold higher up, or wish to prevent further demoralization by

giving the market support temporarily; and (3) short covering by the bears who

sense a turn.

 

Stocks thus become either temporarily or more lastingly lodged in strong

hands. An abnormal increase in volume is one of the characteristic symptoms of a

selling climax, since supply and demand must both expand sharply under these

conditions. But the supply is now of poor, and the demand of good quality; and

since the force of supply now will have been exhausted, a technical rally ensues.

If buying on the break (i.e., during the Selling Climax) was principally for

the purpose of supporting prices temporarily and checking a panic, or relieving a

panicky situation, this support stock will be thrown back on the market at the

first favorable opportunity, usually on the technical rebound which customarily

follows a selling climax. This, and other selling on the rebound, may increase

supply sufficiently to drive prices through the lows of the climax day and bring

about a new decline, that is, a resumption of liquidation."

 

Regarding the abnormality of volume (underline done by me) and from an historical perspective, the volume last Friday on Oil was high, but definitely not abnormal.

Edited June 7, 2012 by Niko

[Niko 10]

Hello Niko, I was reading Neills Tape Reading & Market Tactics, Chapter V Turning Points on Heavy Volume and thought this could answer your question;

.

 

Thanks tupapa, I have read that book a long time ago, and did not get as much from it, as I was focused on indicators and algorithms. I just got it back from the library, as I think this makes perfect sense.

[DbPhoenix 42]

I think that I finally got your point DB, I guess the theoretical(if one can give it that name) discussion about market principles (and by that I mean W principles) is far more usefull for novice traders (I don´t know about advance traders as I do not know any personally) than guessing where oil or the ES or whatever other instrument, is going to be next Friday or by fall.

 

Now regarding the subject of climaxes, and reviewing W definition:

 

"* The phenomenon of the Selling Climax is caused by the panicky unloading

of stocks (supply) by the public and other weak holders which is matched against

buying (demand) of (l) experienced operators; (2) the large interests and sponsors

of various stocks who now either see an excellent opportunity to replace at low

prices the stocks they sold higher up, or wish to prevent further demoralization by

giving the market support temporarily; and (3) short covering by the bears who

sense a turn.

 

Stocks thus become either temporarily or more lastingly lodged in strong

hands. An abnormal increase in volume is one of the characteristic symptoms of a

selling climax, since supply and demand must both expand sharply under these

conditions. But the supply is now of poor, and the demand of good quality; and

since the force of supply now will have been exhausted, a technical rally ensues.

If buying on the break (i.e., during the Selling Climax) was principally for

the purpose of supporting prices temporarily and checking a panic, or relieving a

panicky situation, this support stock will be thrown back on the market at the

first favorable opportunity, usually on the technical rebound which customarily

follows a selling climax. This, and other selling on the rebound, may increase

supply sufficiently to drive prices through the lows of the climax day and bring

about a new decline, that is, a resumption of liquidation."

 

Regarding the abnormality of volume (underline done by me) and from an historical perspective, the volume last Friday on Oil was high, but definitely not abnormal.

 

Actually, oil was pretty decent. Better than the indices, anyway. Traditionally, one looks to the indices for "permission" to give the green light to initiating or increasing positions in stocks, if one can find stocks that are mimicking the actions in the indices. Commodities, though, are a different animal, and can move quite nicely regardless of what the indices are doing.

 

Nonetheless, it's important to keep an open mind with regard to all these tests and bounces and rallies and so forth and in particular avoid the pundits. I believe you noted, for example, that oil found support at the midpoint of that August-November range. This occurred at the same time that the SPX and NDX found support at previous swing highs and TR midpoints. They also happened to be flirting with their respective demand lines. Is all of this coincidental? Is all of this little more than tests of trendlines and value areas? Whether so or not, it's certainly worth keeping in mind, particularly if one plans to ride this for any distance.

 

Db

[tupapa 10]

I am interested in following oil with you guys so hopefuly we can all learn to read the market following wyckoffs teachings.

 

A few days ago, DB posted a chart showing a potential Support level at 82.5, the midpoint of the August-October range.

 

 

On Friday the 1st, we had a down bar with high volume, that closed away from the low indicating potentially climatic action.

 

On Monday the 4th, traders tested the 82.5 level and longs entered with conviction, confirming the importance of this level.

 

On tuesday volume decreased and price reached a point of equilibrium forming a doji bar.

 

Buyers steped in on wednesday with higher effort but we closed below the highs of the day.

 

So where are we now and what are our thoughts? Who is taking part in this rally? Is it due to shorts covering or is "good quality buying" entering the market?

 

If this rally is due to shorts covering we may expect a further decline, and how do we tell this?

 

We look at volume and the rapidity of price change, if after this rally the market reacts with less volume and narrow spreads, we can assume there is little stock for sale at this level and the market has completed a secondary reaction.

 

We would then sit tight and wait for volume to come in and confirm our expectations for an advance.

 

It is worh noticing the downward Trendling is still intact and we may see a resumption of the trend, with an increase in volume breaking the 82.5 support level.

 

This is my modest analysis on what I have read in this forum and from B.Neills book and I look forward to reading other traders opinions.

[DbPhoenix 42]

When trying to disentangle traders' motives for doing what they do, or what they appear to be doing, it is often helpful to look at intraday charts.

 

On Friday the 1st, we had a down bar with high volume, that closed away from the low indicating potentially climatic action.

 

On Monday the 4th, traders tested the 82.5 level and longs entered with conviction, confirming the importance of this level.

 

Yes and no. Prices come to rest for a variety of reasons, one of which is the attempt of those who are holding a lot of whatever it is to support price. After all, they're holding it, so they don't want it to fall much further. They don't want to be forced to sell at a lower price. If they're forced to sell at all, they want the best possible price, not the worst.

 

The action here suggests a softer landing than one might perceive from using an EOD chart (I'm using CL here as a proxy for WTIC since I don't have intraday charts for WTIC; it should be close enough).

 

 

 

Notice here that sellers test 86 twice on the 31st, perhaps gauging demand. When the response is disappointing, price falls again the next day, and sellers again test, this time at 82.5. Price comes back and closes at 83. Not a rush of longs, but not a plunge, either.

 

On Monday, price follows the same angle of decline. Perhaps those who had been supporting price are putting shares (or contracts, whatever) back onto the market to test demand again. Maybe new sellers are putting shares on the market because they don't want to assume the risk of further downside. Maybe new short-sellers are being brave. Whatever. This doesn't last long, and price rallies back to where it closed the previous session. Good news. And it hangs there for quite a while. Then another rally, to 84, above the previous session's congestion zone. Then still another rally to 85, all good news.

 

On the 5th, price retreats, but it's not a rout, and it finds hypothetical (possibly coincidental) support at 83.5. Another bit of good news. Price then morphs into a hinge and ascends from there.

 

All of which suggests to me that this is business as usual, a series of tests and retests, gauging the levels and forces of demand and supply. I don't see any panic or any other sort of drama here, though there clearly are trading ops, depending on one's own style.

 

And remember, please, that this is only my take on the action. It's not like I'm channeling Wyckoff or anything. I post this only to show that there may be more going on backstage than one might guess if he were to use only EOD charts. Trading off intraday charts is not necessary. But they can provide "inside" information.

 

Db

[DbPhoenix 42]

If this rally is due to shorts covering we may expect a further decline, and how do we tell this?

 

Sorry, I meant to address this. It's partly volume and partly price action. If that sounds like a duh!, what I mean is that one must consider both, not one or the other in isolation. And one must avoid using volume as an indicator. Volume is just number of transactions, nothing more.

 

If the volume on the rally is "light" but price is rising (which in a rally it would do), then one can assume there is little selling pressure. This may be because short-sellers are covering (which, by doing so, means they're buying, not selling, and probably won't short again, at least until price is higher, perhaps at a resistance level). It may also be because holders would like to sell but want to do so at higher prices, so they're giving buyers a pass. Or they may not want to sell at all, in which case price will continue to rise with little to stand in its way. Prices can in fact rise farther than the "big volume" crowd would have one believe. Sometimes the volume is practically non-existent. It all depends on what the sellers have in mind.

 

In other words, forget about the "rallies need big volume" stuff. All that is necessary for price to rise is that sellers sit on their hands (and of course that someone is willing to pay the asking price).

 

Db

[DbPhoenix 42]

This won't come as news to anybody but the indices appear to have found R at their last swing highs. All three of these are back inside their regression channels.

 

Db

 

 

 

 

[tupapa 10]

Sorry, I meant to address this. It's partly volume and partly price action. If that sounds like a duh!, what I mean is that one must consider both, not one or the other in isolation. And one must avoid using volume as an indicator. Volume is just number of transactions, nothing more.

 

If the volume on the rally is "light" but price is rising (which in a rally it would do), then one can assume there is little selling pressure. This may be because short-sellers are covering (which, by doing so, means they're buying, not selling, and probably won't short again, at least until price is higher, perhaps at a resistance level). It may also be because holders would like to sell but want to do so at higher prices, so they're giving buyers a pass. Or they may not want to sell at all, in which case price will continue to rise with little to stand in its way. Prices can in fact rise farther than the "big volume" crowd would have one believe. Sometimes the volume is practically non-existent. It all depends on what the sellers have in mind.

 

In other words, forget about the "rallies need big volume" stuff. All that is necessary for price to rise is that sellers sit on their hands (and of course that someone is willing to pay the asking price).

 

Db

 

If we witness climatic action, followed by a swift rally on lower volume, don't we assume it is due to shorts covering at once and an opportunity to sell short?

 

This is from Wyckoffs "Analysis of 1930-31 charts"

 

After such agreat decline within three weeks, this is an indication of more rally. This comes on the 23rd, and gives us an opportunity to sell short again while the market is still strong or when we see the rally is failing. Such an indication is given by the way it rallies on the 23rd. On this day, the average recovers to nearly 107, closing at 105½, but the volume falls off to under 3,000,000 shares and we therefore suspect that it is merely due to shorts who all tried to cover at once

 

http://www.traderslaboratory.com/forums/attachments/131/8727d1228584126-trading-wyckoff-way-1931-analysis.png

 

Looking at the attached chart and reading it from left to right, we witness climatic action on the 21st of september. In this situation, as a novice tape reader I woul ask myself:

 

1- Is good quality buying entering the market? In which case I would expect a reversal.

 

2- Is the buying due to shorts covering and/or poor quality buying? In which case I would expect a brief rally, with no following of buyers that would lead to an "effervescent rally" and a continuation of the downward trend.

 

You say that Volume shouldn't be used as an indicator, but I was under the impression that we need volume in order to differentiate between Good quality buying (Reversal) and Poor quality buying (Retracement)

 

 

Thanks DB for your patience and help, I really appreciate your feedback on this as at the moment (and after a lot of reading) everything is still very confusing.

[DbPhoenix 42]

If we witness climatic action, followed by a swift rally on lower volume, don't we assume it is due to shorts covering at once and an opportunity to sell short?

 

This is from Wyckoffs "Analysis of 1930-31 charts"

 

After such agreat decline within three weeks, this is an indication of more rally. This comes on the 23rd, and gives us an opportunity to sell short again while the market is still strong or when we see the rally is failing. Such an indication is given by the way it rallies on the 23rd. On this day, the average recovers to nearly 107, closing at 105½, but the volume falls off to under 3,000,000 shares and we therefore suspect that it is merely due to shorts who all tried to cover at once

 

http://www.traderslaboratory.com/forums/attachments/131/8727d1228584126-trading-wyckoff-way-1931-analysis.png

 

Looking at the attached chart and reading it from left to right, we witness climatic action on the 21st of september. In this situation, as a novice tape reader I woul ask myself:

 

1- Is good quality buying entering the market? In which case I would expect a reversal.

 

2- Is the buying due to shorts covering and/or poor quality buying? In which case I would expect a brief rally, with no following of buyers that would lead to an "effervescent rally" and a continuation of the downward trend.

 

You say that Volume shouldn't be used as an indicator, but I was under the impression that we need volume in order to differentiate between Good quality buying (Reversal) and Poor quality buying (Retracement)

 

 

Thanks DB for your patience and help, I really appreciate your feedback on this as at the moment (and after a lot of reading) everything is still very confusing.

 

I believe you'll find the answers to your questions (and more!) in the Breakouts, Retracements, Reversals thread and the Volume thread. If not, I suggest you ask your unanswered questions there, in whichever thread is the most appropriate, for the benefit of others.

 

Db

[DbPhoenix 42]

I'm surprised that no one has mentioned the short from yesterday. If you didn't see it, then you've got more reading and studying and thinking and practicing to do. If you saw it but didn't take it because you took the long and it didn't work out and you think you're useless and stupid and you'll never get this, then you need to go sit in a corner somewhere, preferably with the Zen posts, and contemplate your universe, preferably with chocolate in some form.

 

Db

[Niko 10]

I'm surprised that no one has mentioned the short from yesterday. If you didn't see it, then you've got more reading and studying and thinking and practicing to do. If you saw it but didn't take it because you took the long and it didn't work out and you think you're useless and stupid and you'll never get this, then you need to go sit in a corner somewhere, preferably with the Zen posts, and contemplate your universe, preferably with chocolate in some form.

 

Db

 

Db, are you referring to Oil?.

 

In hindsigth, I see a zone of interest (Is this what you are referring to?) at 87(the midpoint from the last congestion at 90), when analysed with the volume profile information.

 

See red line in the chart.

 

[DbPhoenix 42]

Db, are you referring to Oil?.

 

No, I was referring to the SPX and NDX, above (post 230).

 

 

[tupapa 10]

The following is my interpretation of the short on the NQ futures last Thursday. I am aware that this is just hindsight horseshit, but I also believe that analysing this reversal (and others) should help me identify them in real time. Hopefully it will also help others, and we can all gain something.

 

At pre-market, the market is fairly quiet with price slowly ascending up to the Resistance Level at 2570. Buyers push price up to this level, with some effort but they find big supply at 14:32, the next 3 bars confirm the power of sellers as they push price down to 2562, below the last swing low.

 

Now buyers step in again and we can draw our support line at 2562, however, their effort is very poor (decreasing volume) and so is the result (Lower High).

 

Now its turn for the sellers, who push price with big effort (increasing volume) and decent result (Lower Low).

 

At this point I notice 2 things:

 

1- We can draw a Supply line from the top at 2570, crossing through the LH at 2567 that forms a descending triangle with the support line at 2562.

2- Volume is drying up inside the triangle, showing less buyers coming into the market. Unless new buying power comes in, the selling will drive prices down considerably, until we find a new value area where buyers are comfortable.

 

At 14:48, the Support line is breached with a quick recovery and buyers try, once again to push price higher. Although they manage to break the supply line, their effort is very poor and price is quickly rejected forming yet another Lower High (and now the trend should be evident).

 

At 15:00 we move to a dead center with very low volume, the market is very quiet and it is the last chance if buyers want to reverse things.

At 15:02, volume comes in with a large range "near bozo" bar confirming the downtrend.

 

We could enter at the breakout (first arrow) or wait for a low volume reversal (second arrow).

 

We then draw a supply line and there is no need to exit the first contract until it is broken (15:24). After this, the market keeps making Lower Highs and Higher Lows until around 16:20. Nothing about the volume indicates climatic action, so there’s no reason to exit the rest of our position, until we make a Higher Low, or we break the last swing point.

[tupapa 10]

I posted a hindsight analysis of the NQ trade on the CouldaWouldaShoulda thread.

[Niko 10]

... For the latter, pick some period from the past at random, in oil if you like, some period where you don't know what's going to happen in the immediate future (if after you start it begins to look familiar, pick another period and start over). Then start at the far right edge and begin this sort of exercise again. This will give you a much more accurate estimate of just how much progress you're making in this type of analysis.

 

Db

 

Following on DB´s advise, I am working on a period that some of you might remember, that is Aug 1999 to march 2000 on the Nasdaq (maybe those between 20 and 30 not as much). This is just before the collapse of the dot-com bubble.

 

If you remember the news back then, by march the targets of the gurus were much higher and the experts of the new economy argumented that the markets paradigm had change, and the old rules did not aply to this new economy.

 

http://www.thestreet.com/story/897915/1.html

 

Preliminary, I think it was quite obvious from a W stand point that the last two weeks of march were indicative of something (I will elaborate more on that on my analysis)

 

I have attached the chart in case someone else is interested in performing some W analysis too, I will post mine when it is ready.

 

Edited June 10, 2012 by Niko

[DbPhoenix 42]

Following on DB´s advise, I am working on a period that some of you might remember, that is Aug 1999 to march 2000 on the Nasdaq (maybe those between 20 and 30 not as much). This is just before the collapse of the dot-com bubble.

 

Not to rain on your parade, but if you remember it, you should find something else for this exercise. It will be of most benefit if you have no idea what's going to happen next, whether it's the next day, week, or month.

 

Db

[DbPhoenix 42]

The following is my interpretation of the short on the NQ futures last Thursday. I am aware that this is just hindsight horseshit,...

 

Hindsight horseshit is what this thread is all about, specifically, trades that one could have taken, should have taken, or would have taken if only, preferably trades that were foreseen and posted in the Foresight thread. What is not acceptable is the "here's a trade I took" nonsense.

 

At pre-market, the market is fairly quiet with price slowly ascending up to the Resistance Level at 2570.

 

To cut to the chase, your short is right here, unless you want to end up a wider distance from your stop. IOW, your stop is above 70. Where you enter depends entirely on whatever reconciliation you've made between your confidence and your fear.

 

Buyers push price up to this level, with some effort but they find big supply at 14:32, the next 3 bars confirm the power of sellers as they push price down to 2562, below the last swing low.

 

Which, with the proper sellstop, gets you into the trade. If price instead rises, your entry goes unfilled.

 

At this point I notice 2 things:

 

1- We can draw a Supply line from the top at 2570, crossing through the LH at 2567 that forms a descending triangle with the support line at 2562.

 

Never mind triangles, wedges, H&Ss, Pivot Points, Fib, or any of the rest of that. None of it is pertinent and it will only complicate the decision-making process. If nothing else, you won't have time for it if you're trading intraday.

 

We could enter at the breakout (first arrow) or wait for a low volume reversal (second arrow).

 

You have quite a few arrows, but if I'm looking at the correct one, that's not a breakout. In fact, there are no breakouts here. Or reversals, unless you're scalping.

 

Nothing about the volume indicates climatic action,...

 

Climactic.

 

This is nice analysis of traders' behavior and how it affects the price movement, but in terms of the trade, there are too many layers here.

 

Put simply, (A) you have noted R (we will assume you have noted R); (B) you are in a downtrend. Therefore, when price hits R, you place your sellstop there, at whatever point you use for setting these stops (bar, candle, % below R, whatever). Then you sit back, relax, and wait. If your sellstop is hit, you place your coverstop just above 70. If it isn't, you either go get breakfast or wait for a retracement after the breakout, if any, if you've decided to trade countertrend.

 

And that's it. Unless you want to trade continuously and scalp every turn. But that's something else entirely, and I wouldn't even think about getting into that except in a trading room environment. If you're not an expert trader, just forget about it.

 

One other suggestion: get rid of the colors. Not only are they a distraction, they're misleading. If the candles really help you, fine. Otherwise, use bars instead.

 

Good job. Thanks for reawakening this thread.

 

Db

[DbPhoenix 42]

Since no one is ready to post a foresight trade yet, I'll put this here.

 

We've examined the S/R here perhaps to the point of "oh no not again", but I feel obligated to point out the additional opportunity -- a "third chance" -- to go short here.

 

The first op (1) was posted some time ago. The second (2) was posted as well, for those who didn't take (1). The third (3) occurred last week, with a second chance on Friday. A third chance (actually, fourth) presents itself now, for those who want to assume the risk. Second and third chances don't usually work out the way one would want. If price is coming back to the entry point, the implied demand will probably put a stick in one's spokes. But a legitimate short is a legitimate short, and if one is willing to assume the risk, place his coverstop, and stick to it, who's to say he shouldn't?

 

Given that we may be setting ourselves up for an extended sideways nonmove, I'd be reluctant to initiate a new position here. But since others won't be trading with my money, they're welcome to do whatever is right for them. Longs may, after all, get tired of supporting price and just let the thing go. It happens.

 

Db

 

[DbPhoenix 42]

See how it works? Price rises rather than falls, so the short entry is never triggered. Now you're free to look for a retracement to support. If price drops below support instead, then other options present themselves.

 

Db

 

[tupapa 10]

Looking back at my chart I don't think I made my entry strategy clear.

 

The following chart shows 4 potential entries I identified, each of them marked with a red arrow.

 

I am in an early stage of testing and trying to identify which entry I feel more comfortable with. I would only take 1 of the entries, going short with 3 contracts and scaling out as I explained in my previous post. (Following the method outlined in the trend thread, cheers for that db)

 

So this is how I perceive each of these entries:

 

1- Selling the climactic action, this is the most profitable entry but I would likely wait for a retracement of some sort for further confirmation. I would place my stop 1 tick above the high of the climax (blue dot).

 

2- This entry would be executed after a low volume retracement and would require a wider stop at the top of the Lower High (second blue dot). I would probably take this entry.

 

3- This is the entry I was referring to as "Breakout Entry", meaning that we breakout of a descending triangle. I wouldn't take this; I would rather wait for a retracement for further confirmation, which takes us to point 4.

 

4- The final entry after another retracement of low volume, showing very little buying interest. As usual, I'd place my stop 1 tick above the previous lower high.

 

 

Out of the 4, I would probably take number 2, and it is the entry I am focusing on in my testing. I like to see some confirmation rather than buying/selling the climactic action. I believe some call this a Ross Hook?

 

To cut to the chase, your short is right here, unless you want to end up a wider distance from your stop. IOW, your stop is above 70. Where you enter depends entirely on whatever reconciliation you've made between your confidence and your fear.

 

So in your opinion, the stop should be placed above 70 regardless of where we enter?

[Niko 10]

Not to rain on your parade, but if you remember it, you should find something else for this exercise. It will be of most benefit if you have no idea what's going to happen next, whether it's the next day, week, or month.

 

Db

 

Ok, Db, I will take it into account. I was just curious about the fact that a W type analysis on this chart, would have sound the alarms to those long or interested in being long by the end of april, the last two rallies were on decreasing volume, and the last two corrections had an increase in volume.

 

But you are right, the fact of knowing what is going to happen does bias one´s mind.

[DbPhoenix 42]

Ok, Db, I will take it into account. I was just curious about the fact that a W type analysis on this chart, would have sound the alarms to those long or interested in being long by the end of april, the last two rallies were on decreasing volume, and the last two corrections had an increase in volume.

 

But you are right, the fact of knowing what is going to happen does bias one´s mind.

 

You're correct that a "W type" analysis would have sounded the alarm. In fact, I did so when I was part of The Motley Fool (and those who paid attention, and there weren't many at TMF, saved a hell of a lot of money).

 

But for this type of exercise, it's next to impossible to avoid having one's perceptions affected by foreknowledge. If you want to do it just for the hell of it, feel free. But blind analysis will be of greater benefit to your trading.

 

Db

[DbPhoenix 42]

See how it works? Price rises rather than falls, so the short entry is never triggered. Now you're free to look for a retracement to support. If price drops below support instead, then other options present themselves.

 

Db

 

Like standing aside until the market decides what it wants to do. Note that both the ES and NQ have dropped back into their trend channels, below their supply lines, below their individual levels of what had been resistance.

 

If you don't know what to do, don't do anything.

 

Db

[DbPhoenix 42]

Looking back at my chart I don't think I made my entry strategy clear.

 

The following chart shows 4 potential entries I identified, each of them marked with a red arrow.

 

I am in an early stage of testing and trying to identify which entry I feel more comfortable with. I would only take 1 of the entries, going short with 3 contracts and scaling out as I explained in my previous post. (Following the method outlined in the trend thread, cheers for that db)

 

So this is how I perceive each of these entries:

 

1- Selling the climactic action, this is the most profitable entry but I would likely wait for a retracement of some sort for further confirmation. I would place my stop 1 tick above the high of the climax (blue dot).

 

2- This entry would be executed after a low volume retracement and would require a wider stop at the top of the Lower High (second blue dot). I would probably take this entry.

 

3- This is the entry I was referring to as "Breakout Entry", meaning that we breakout of a descending triangle. I wouldn't take this; I would rather wait for a retracement for further confirmation, which takes us to point 4.

 

4- The final entry after another retracement of low volume, showing very little buying interest. As usual, I'd place my stop 1 tick above the previous lower high.

 

 

Out of the 4, I would probably take number 2, and it is the entry I am focusing on in my testing. I like to see some confirmation rather than buying/selling the climactic action. I believe some call this a Ross Hook?

 

 

 

So in your opinion, the stop should be placed above 70 regardless of where we enter?

 

I understand the strategy, but I suggest that it will fail, even if you're satisfied with scalping for ticks. This doesn't mean that it will absolutely positively fail, but I suggest that failure is more likely than success.

 

First, the more traders who see a particular level of support or resistance, the more likely it will be/become important, that is, it can't reach importance if few if any traders know it's there. Consider the following (the red line marks the right edge of your chart, more or less):

 

 

 

 

 

Notice that with every increase in bar interval, more and more of your swing points disappear. By the time one gets to the hourly chart, only two remain. How can your S/R levels/points matter if so few people even know they exist? (Notice also that your "triangle" disappears rather quickly.)

 

As for the stop, yes, it's placed above the climactic swing point (for a short). The market couldn't care less about your risk tolerance. It recognizes only where demand was outbalanced by supply and price rolled over. You can place your stop above any relatively inconsequential swing point you like, but I can almost guarantee that it will be splatted like a bug on the windshield. If you're going to use S/R, then you're going to need as much help as you can get, and the more people who are using those same levels, the more likely they will be there to turn price aside (which they are unlikely to do if they don't even know the points are there). If you don't want to enter at the correct point but would prefer to enter farther away to decrease your information risk, that's fine, but your price risk increases. No way to avoid it.

 

You're going to have to develop a feel for the turn. This is most easily seen with a very small interval. You may see volume increase or decrease as price reaches R. You will likely see the spread narrow dramatically, as in your chart. You'll detect a struggle to push through, followed by a rapid and decisive failure. If you place a sellstop below that last, narrow bar, then you will be swept into the short by the failure. If there is no failure, then your trade isn't triggered.

 

But aside from all of that, you must address your risk tolerance. There are three types of risk -- information risk, price risk, and time risk -- and you have to find the right balance for you.

 

Db

[tupapa 10]

Very nice Db, thanks for the post, I hadn't considered what traders using different bar intervals would be looking at and how it would influence their decision making...

 

I'd never heard about information risk, price risk, and time risk, could you let me know where I can read more about this?

 

Thanks,

 

Tupapa.