Mapping the Territory

[DbPhoenix 42]

Charts are a visual record of price movement. If one isn't interested in price movement, one may not find much of value in them. As a map, however, they are about as close to the "territory" of price movement as you're going to get, one degree of separation, if you will.

 

But then we begin to fiddle with it: time bars, volume bars, tic bars, range bars, equivolume bars, candles, lines, histograms, etc, etc. Then we lay on the Fib and the Gann and the Wolfe and the Pivot Points. Plus all the infinite number of indicators with all their variations. Eventually price is nearly lost, and we can't even determine the trend, much less where we are in it. This is analogous to travelling someplace and drawing a map of that place, then moving on to some other place, checking off that particular task, believing that it's "done", relying on the map one has drawn for far too long. Revisiting that place after a number of years, one finds that the territory has changed dramatically, that landmarks and signposts are no longer there, that one's map bears little relation to what is, only to what was.

 

In the market, the transaction and the agreed-upon price is the "territory" and everything begins there. If we massage it, or ignore it entirely, we become disconnected with what the market is doing. In order to know what to do at the time that one needs to do it, one has to be connected with what is happening in front of him, not on a fanciful representation of it. He has to walk the territory, not just trace a route on a map, a route that may not even exist in the present.

Call it fantasy, prejudice, opinion, judgment, or what you will, when the high abstraction collides with bare facts, it is the facts that have to give way if your value system places such a high premium on rightness that your tender ego cannot suffer the slightest setback. Many men cannot afford to take monetary losses in the market, not because of the money itself so much as because of their oversensitive, poorly-trained selves. The humiliation would be unbearable.

 

The only way that occurs to such men to prevent such painful situations is to strive to be always or nearly always right. If by study and extreme care they could avoid making mistakes, they would not be exposed to the hard necessity of having to take humiliating losses over and over again. And so? And so, too often, rather than settle for a relatively minor loss, our friend will stand firmly on the deck of his first judgment, and will go down with the ship. The history of Wall Street, and of LaSalle Street, too, is studded with the stories of men who refused to be wrong and who ended up ruined, with only the tattered shreds of their false pride left to them for consolation.

 

How to avoid such unnecessary tragedies? Be always right? You know that isn’t possible. Keep away from the speculative market entirely? That is one answer, but it’s rather like burning down the barn to get rid of the rats.

 

There are other answers, and they are simple. They are standing there, right at hand, like elephants in the front hall, if we can only see them. In the first place, there is no rule that we can’t change our minds. It’s not necessarily wrong or a mistake to believe that Fruehauf stock will go up from $24 to $60. What is wrong is sticking to the opinion after the evidence clearly shows that the conditions have changed. The rational approach is to be ready at all times to consider new evidence, and to revise the map accordingly.

 

In the second place, it need not hurt so much to have to change one’s mind. Unless we are so wedded to absolute standards that we cannot entertain anything that will conflict with what we decided in the first place, we can alter the map to any degree we want, or completely reverse our position. If we have a good method of evaluation, in which we have confidence on the basis of observed and verified results, we will not have to think of these changes of opinion as defeats. They are simply part of the process of keeping our maps up to date. If we plan to travel to Boston over Route 20 and there is construction underway on a five-mile section of the route, we don’t try to blast our way through. We take the detour. We go by the territory as it now is, not by the old map. And if the road is blocked entirely and no detour possible, we don’t shoot ourselves, or run our car over a cliff; we simply turn around and go back home and try again tomorrow.

 

John Magee,

General Semantics of Wall Street

[fast 10]

If I’m interpreting you correctly, the lesson is that we have a tendency to lose sight of price when we use indicators. I agree with that.

 

The solution, however, isn’t to stop using indicators (since they can be, and are, valuable aids in our, collectively speaking, trading endeavors), and I’m not saying you suggested that we should stop using indicators, but there are those that do. The key is in simply understanding that there is a distortion (of sorts) between indications and price.

 

For example, a cycle low is the lowest low in price between the previous and subsequent cycle high. We can use an indicator to aid us in determining the cycle low (an actual price point). However, the actual cycle low may not be at the exact price point as indicated by our indicator. So, what is right? Answer: price! Is the indicator useless? Of course not. The indicator aids us in our efforts by getting us close. In this case, it helps us hone in on the territory where we are likely to discover the actual cycle low.

 

After one uses certain indicators for a long period of time, there comes a point when one can often accurately identify what would have been indicated had one used (but stopped using) particular indicators. However, the continued use of indicators can help ensure that we continue to use objective measures. For instance, what wave of a trend we are in is in part a function of cycle lows and cycle highs; however, what would or would not constitute a cycle low can change depending on the criteria or settings we use with our indicators. So, there can be subtle nuances that may go unnoticed by looking at price alone, and if such subtleties go unnoticed, then the odds of being consistent drops.

 

All the while, yes, we need to remain consciously aware of what price is, regardless of what our indicators indicate. After all, knowing our precise location as it relates to the price structure of the market is important—whether we use indicators or not.

[DbPhoenix 42]

If I’m interpreting you correctly, the lesson is that we have a tendency to lose sight of price when we use indicators. I agree with that.

 

The solution, however, isn’t to stop using indicators (since they can be, and are, valuable aids in our, collectively speaking, trading endeavors), and I’m not saying you suggested that we should stop using indicators...

 

Actually, that's exactly what I suggested, and I disagree that indicators are valuable aids. Rather, they are a distraction.

 

In any case, if you find them helpful, by all means use them.

 

Db

[fast 10]

Actually, that's exactly what I suggested, and I disagree that indicators are valuable aids. Rather, they are a distraction.

 

In any case, if you find them helpful, by all means use them.

 

Db

 

I now understand that you do not hold the belief that indicators are valuable aids, and I understand that you hold the belief that they are distractive, but I'm not up to speed on why you hold those beliefs.

 

I would be inclined to agree that indicators can sometimes be a distraction. For example, too many indicators (especially one's that serve to indicate nearly the same thing) may divert our attention from what we think does matter. I suppose you think that is price, and although I agree that price matters (it certainly does--it's very important), I would submit that the widely held and growing notion that it's the only thing that matters is misguided.

 

Consider a strategy that relies on trading only when the general intermediate trend is up. It can be difficult to discern the exact point (while unaided by a valuable indicator) when such a trend is beginning to climb, especially when the previous price movements are unusual. For example, pinpointing where the 50SMA transitions from being flat to curving up can be a challenge when choosing to not avail ourselves to such an indicator.

 

There's no question as to the importance of price, but being aware of what prices are (and prices alone) wouldn't be nearly as important (to me) if I didn't have a good understanding of how that price relates to the general structure of the market. A plan that calls for trading retraces after the 50SMA has moved up would certainly make the 50SMA indicator a valuable aid, especially since not having it could result in choosing a retrace during a period when the 50SMA is flat.

 

In fact, one of the most valuable lessons that I've learned as a trader is to never (ever) swing trade retracement patterns when the 50SMA is flat. Can money be made during those times? Sure, but that's not the point. The point is that knowing the actual price isn't as important in this instance as knowing where the actual price is in relation to the object of that indicator.

 

None of what I’ve said in this post or the last was meant (in any way) to suggest that what you have brought to our attention is unimportant. I totally agree with you about the dangers of losing sight of price when we bombard our charts with indicator after indicator. We do need to keep it real (as they say) and maintain a watchful eye on what I suspect you think is vitally important: price. Of course, I too, think price is of utmost importance, but I am remiss to submit to what I believe is a faulty notion that price and price alone is the only thing that matters—since a lot that isn’t price goes a long way in our (most of us, that is) decision making process.

Edited July 9, 2012 by fast

[DbPhoenix 42]

The Wyckoff trader, however, doesn't require a moving average to tell him whether price is trending or trendless, just as he doesn't require an indicator or indicators to tell him when price is gaining or losing momentum.

 

Db

[MightyMouse 12]

I disagree. Price is just another indicator and is the mechanism most used to lure traders into taking the wrong trades. Price is one of the easiest components on a chart to manipulate. When they think price is low enough, it is price traders are looking at. When they think price is high enough, again, it is price they are looking at. Smoothed price can prevent the trader from taking that bait. It is possible that traders push prices to a particular level, seeking liquidity, or exhausting demand. Correct me if I am wrong, but I think it is not possible that traders push prices up simply to make price cross, say, a 50sma.

 

Price is constantly leading traders in the wrong direction. In any trend price spends a great amount of time going the wrong way. Price's misdirection during a trend is what I believe makes it difficult to stay in a trend. As a practical example, consider Crude since late March to today's close. It is down +- $20 a barrel. How many active traders were able to capture the equivalent on a per contract basis? To put that into dollars and cents that is $20,000 per contract traded in 3 months. Following along with the daily action, it most likely constantly felt like the move was ending, making unsuspecting traders liquidate their perfectly good positions. On the other hand, had you traded using a very simple MA indicator, you could have captured the bulk of the 2000 tick move. Did the price action trader capture 2000 or more ticks during this time period? I think price can be as distracting as any other indicator that we put on a chart.

[DbPhoenix 42]

Price "indicates" that a transaction has taken place, but that is not what is generally meant by "indicator". Price exists independent of the trader. It has no settings. The trader may summarize it or smooth it or bundle it or chop it up and reassemble it, but he cannot change the transaction itself. That ship has sailed.

 

As for leading traders in the wrong direction, that's pretty much the trader's problem, stemming to a large extent from his lack of comprehension of what he's looking at. A bad map, as it were.

 

As for oil, a Wyckoff trader may have made a few temporary misdirected turns, but there was nothing particularly difficult about the play: a buying climax followed by an entire month of trendlessness, a drop below that trading range, a failure to repenetrate it, then a simple downtrendline leading to today. Whatever emotional baggage the trader may have brought to the market had nothing to do with the demand/supply dynamic and how it manifested itself in the price movement (or, if one prefers, the transactions which were displayed on a "tape" or on a chart).

 

Db

[DbPhoenix 42]

The mention of oil reminds me of this discussion from four years ago. It may provide at least some clarity for those who are genuinely interested in how all of this works.

...................................

 

All of this hindsight chatter about oil serves as an example of the "Wyckoff way" of trading, that is, a different kind of thinking that focuses on price movement as a result of imbalances between buying pressure and selling pressure, particularly against levels or zones of support and resistance, all of which is in turn a manifestation of trader behavior. Understand the behavior and you understand the illustration, whether on a chart or on the tape or on or in some other form. Understand the behavior and its illustration and you are set up to profit from it (one can also profit from this via indicators, chart patterns, "event trading", and so on, but none of this is pertinent to the Wyckoff approach.

 

Participants have demonstrated this kind of thinking in their analyses of the price movement as it wends its way up and down through a continuing series of crests and troughs. These waves are a language, narrating the behavior of buyers and sellers. And whether participants' every opinion has been correct or not, they have worked toward understanding the story that's being told by price movement and its accompanying volume (transactions) and toward gauging and interpreting the continuous changes in buying and selling pressures with the intent of finding the line of least resistance.

 

By doing so, I hope that they have demonstrated that everything one needs to know in order to make a trading decision is in the price movement, again whether illustrated by chart or tape. While there are undoubtedly many traders -- retail and professional -- left holding the bag at tops and bottoms, the Wyckoff trader will not be one of them. He does not allow himself to be distracted by extraneous information of whatever sort. Price behaves a certain way (that is, traders telegraph their intentions by their transactions), and he's out or in, as the case may be. He can wait for moving averages to cross each other or for some other indicator or news or a particular kind of bar or candle or pattern to signal or confirm an action, but he doesn't need to, except for personal reasons. None of this is therefore part of the approach. This has the effect of keeping everything very simple and relatively easy to understand IF one can focus on the approach at its most elemental until he thoroughly understands it. At that point, he can play with it as much as he likes, if he chooses to do so. But while those modifications may alter the approach as he implements it, they do not alter the nature of the original (and 2, 3, 4, 5).

 

In order to save flipping back and forth, the following chart was posted at the beginning in order to provide the macro view. It's a typical and ordinary bar chart.

 

 

 

But the waves of buying and selling can be illustrated quite clearly without bars. In fact, for many Wyckoff traders, they are easier to see with a line.

 

 

The tests are the same, the trend is the same, the signals that the trend is over are the same (see, for example, the inset). A chief difference, however, is that one needn't get entangled in quandaries over what individual bars "mean" (if anything). One can in fact convert trading activity (or volume) into a line, depending on his software. Some Wyckoff traders find it even easier to detect the "pulse" of the market in this way.

 

As for jargon, nothing special: climaxes, technical rallies, reactions, springboards -- that's about it. The goal is clarity and simplicity, not obfuscation and complexity.

 

As I've said elsewhere, price doesn't care about you or about how you care to view it or illustrate it. It exists independently of your charts and your indicators and your bars. It couldn't care less if you use candles or bars or plot this or that line or select a 5m bar interval or 8 or 23 or weekly or monthly or even use charts at all.

 

Therefore, trading by price, or at least doing it well, requires getting past all that and perceiving price movement and the balance between buying pressure and selling pressure independently of the medium used to manifest or illlustrate or reveal the activity. For most people, this requires a perceptual and conceptual shift. Some find this shift relatively easy to make. Others find it impossibly difficult. If you fall into the latter category, keep in mind that there are many ways of making money in the market. This particular approach is only one of them.

[fast 10]

The Wyckoff trader, however, doesn't require a moving average to tell him whether price is trending or trendless, just as he doesn't require an indicator or indicators to tell him when price is gaining or losing momentum.

 

Db

 

Now I'm embarrassed. I had clicked on the "latest posts" button and came across your post and found it interesting. I responded, but I inadvertently did so with disregard to the subform I was in. I did not even for a moment consider the context and how it relates to what you wrote in your post. My apologies.

 

I should probably refrain from speaking about that which I have very little background knowledge—I am not as familiar with Wychoff as I perhaps ought to be.

[DbPhoenix 42]

No need to be embarrassed. The road less traveled can be unexpectedly interesting.

 

Db

[bj139 10]

What are these linear moving averages drawn through the lows and highs on your charts? Interesting.

 

Bill

[DbPhoenix 42]

They are supply/demand lines. See the Glossary.

 

Db

[SunTrader 10]

Wychoff would probably be the first to say - his is not the only way.

[ForexTraderX 10]

They are supply/demand lines. See the Glossary.

 

Db

 

I agree with just about everything you've said here Db. I have one setup, that has one particular "filter" to see if a fast and slow MA are in a strong trend, particularly after a period of consolidation (IE: breakout). I run a few hundered tests to see if it improves my trading, and lo and behold, I get about a 10% higher win rate, and make about 10% more money with less variance.

 

But, I also use supply and demand areas, but particularly with an eye towards a potential "stop run" that sits slightly above an area where price was consolidating or congested previously...thus, I have a situation where larger traders are using stops to fill their exits at the apex of a move, while simultaniously just a few pips below are losing traders looking to get out at break even, not to mention new market participants looking to buy value...

 

all the while we are in an uptrend as defined by H/H and H/L, in accordance to a trendline, and better yet if we've just made an impulse move to break a previous downtrend line. Of course, This is best to catch the market off guard, in fact, better still to have such a trend change and impulse move up on BAD news... only to see the word off the newsfeed show people "confused by the recent change in price action" yet price continuing to go up. This tells me we may have a full blown short squeeze on top of it all.

 

Then, if we can actually get a bit of good news, which the market responds to with elation and explosive moves upwards, this tells me we also have now an underlying sentiment shift, where not only do we have a full blow short squeeze, but a real buying of a percevied undervalued asset or market.

 

But, I also get a live newsfeed myself, that LITERALLY tells me exactly where stops, bids, and offers are in the market, as well as large option positions, and their expiration time, and sometimes barrier options as well, as well as the interested parties who stand to make a great deal of money should price be on the other side of that option line when expireation a few hours away comes to pass. Very good to know about to know what side I want to be on, and if i should be looking to push into a level at a certain time or distance, or if i should fade the push in, with a 10 pip stop, and catch a nice 5:1 on the reversal.

 

And of course if the underlying fundamental picture looks good as well, and the market was really only pulling down because of irrational overreaction to an overall insignificant or significant but not directly affecting situation, that's even better.

 

Better still if that trendline break upwards was preceeded by a parabolic move down.... you know, a true full lblown exhaustion/panic situation, and if the COT report shows both large and small specs at record extremes of holding short, all the while the commercials have been absorbing liquidity out of the market at a faster pace than it will be available to be re-captured by specs once the specs get caught too short as the market finally decides it's all sold out, and there is no obvious impending and large scale central bank or soverigen invervention to try to stop this new bullish move...

 

 

Then ya. Ya. Then, I think I like a long. Long is good.

 

In fact, to let you all in on a little secret, markets will often gun into some of those more "technnical" levels like a 200 day MA, if it is able to do so after a period of consolidation, and on a low liquidity day like a holiday or a friday, and particularly if there is a potential catalyst in the news coming up in the next day or so.... it's a good bet to look for those big techincal levels, particularly MA levels, as well as previous highs and lows that have been established, but not yet retested... those have lots of tight clusters of stops...perfect for larger traders to use to exit AND enter new positions at the very turning point of the market. Heck, it's there massive orders that NEED that tight block to be able to get in and out without 20+ pips of slippage due to their $100 million position they need to cover, and another $30 mill they intend to take the other direction.

 

Oh, and for those that are skeptical...here's a bit from a live newsfeed source I have... this just came out 6 minutes ago i fact:

 

 

EUR/JPY, EUR/USD, EUR/Crosses vulnerable to real money selling from Japanese banks, trust, regional and custodian names on JPY repatriation, linked to huge EUR21bln Spanish bonds and redemption due today. EUR/USD at 1.2287-88, with focus on the above huge repatriation. Focus on Italian bond auction today as well - good to watch any spike in borrowing costs.

 

 

"EUR/USD at 1.2286-88, looking a tad offered after the rally to 3-week highs of 1.2390, vs its 2-year lows of 1.2042 seen last week. Not surprised to see some correction down, after the sharp spike up from 1.2115-20 levels. Interestingly - the same levels last Wednesday and Thursday - on ECB Ewald Nowotny ESM banking license on Wednesday and then ECB Pres Mario Draghi on ECB will do whatever on Thursday. EUR/USD offers at 1.2300-10. Bids 1.2275-80, stoploss below 1.2270/50. EUR/JPY at 96.25-30, eye break of 96.00 handle again, after the 3 JPY rebound from 12-year lows of 94.10-14 to 2-week 97.33. WL"

 

 

Go ahead, watch those levels that the offers, bids, and stops are quoted at.... and see how price reacts around them today

 

So... anyway. ya. indicators? Good luck guys. I hope they work for you. As for me, my indicator is the overall sentiment of the bigger players, the zones where there are large amounts of losing trades who would love to get out at break even, the price points where your stops are, and the flow information like above to know where the REAL institutions and banks and nations are buying.

 

Hope that stochastic/MACD combo works for ya.

 

As for me, I just look to find out where someone wants to buy a few hundered mil of EUR or GBP, and put my order 1 pip ahead of theirs. It still doesn't always work, but I do get to do this for a living...at least, as long as my psych doesn't get the best of me I do.

 

Because that.... well, that I have no answer for, and still struggle with it myself. I guess i'm really just a crappy trader.

 

Maybe I shoulda stuck ot the indicators.

 

TraderX