Decission points...!

linkon7

Well-Known Member
#1
I want to initiate a discussion on the various decision points that we face while trading. Most of us have gone through various setups and methodology and have come to the conclusion that holy grail doesn't exist. There never will be a easy trade and every trade has a equal chance of going wrong no matter how strong the signal is.

It all boils down to aligning with the market direction, identifying low risk opportunity and trade/risk management.

Getting the market bias right is sometimes very difficult and the best of us get it wrong sometimes. Mostly we blame it on the lack of discipline or lack of proper planning or bad execution but end result is mostly the same. After every trading day we constantly search for the missing piece in our trading style. Our intuitions are always proven wrong by the market and somehow we end up fighting a losing battle.

I think it all comes down to decision points. Its a matter of knowing what to do and then having the guts to do it when the time comes.

There are 6 ‘types’ of day identified by using the Market Profiling technique.

* Normal Day – Not as common as the name might suggest. Typified by early entry of other-frame buyers or sellers creating a large initial price range. The action then wanders back and forward during the day in standard auction fashion as buyers and sellers struggle to get the upper hand.

* Normal Variation on Normal Day – Less extreme initial price action, as if the other-frame buyers/sellers are waiting and watching in order to build their conviction. Then the market mnakes a more dramatic move followed by standard 2 way auctioning to the close.

* Trend Day – One side of the other-frame is in control right from the open, and for the whole day. A succession of higher highs/lower lows forms. Experts have determined that this day type shows a high level of directional confidence throughout the day. The initial range is often narrow.

* Double Distribution Trend Day – This is a variation on a trend day. Looks similar to a normal variation on a normal day, except more time is spend wandering in the first range while the other-frame buyers/sellers build up conviction to make the market move. Something ‘changes’ mid session to cause a change in conviction – perhaps insider news or a report.

* Non Trend Day – Often looks like a Trend day at start (narrow range). Then meanders with no conviction in a range bound area. Often seen before a big news announcement as the market waits to see whether it should jump up or down.

* Neutral Day – Like a non-trend day, except other-frame buyers and sellers are active, they just happen to agree on value (broadly speaking). Traders say this day type is characterized by range extension beyond the initial balance during the session as the two sides test the edges of each other’s tolerances. Has 2 variations – “Neutral Center” in which price closes near the open (no resolution between buyers/sellers), and “Neutral Extreme”, one side wins, closing either up at the top of the range, or down at the bottom.
 

linkon7

Well-Known Member
#2
The Open often tips the Market’s hand as to what sort of day this is going to be (other things remaining equal). Four types of Open can usually be detected in any Market:-

* Drive – This is the strongest and most definite type of Open. Usually caused by other-frame buyers/sellers reaching strong conviction before the market opens. From the very start the market will auction aggressively in one direction and is unlikely to come back and test the opening range at any point. The initial large move happens in the first time period, i.e. the first half hour, but other large moves may happen later. Generally indicates a Type 3 Trend Day or a Type 2 Normal Variation Day. This Open type is uncommon.

* Test Drive – This Open starts in a similar way to the Drive Open, but stops and reverses. The market is taken lower to go higher or vice versa. The initial large move and reverse back past the Open happens in the first time period, i.e. the first half hour. This is caused by other-frame buyers/sellers wanting to test a previous support/resistance to ensure there is no remaining business there – when this has been confirmed by price rejection, it will roar off the other way. The extreme that has been tested has slightly less chance of holding than the extreme set at the start of a Drive Open, but is still strong. Generally indicates a Type 3 Trend Day or a Type 2 Normal Variation Day, obviously trending in the OPPOSITE direction to the Drive Day type. This Open type is uncommon.

* Rejection / Reverse – Like a test drive, but the initial large move and subsequent reversal take longer to develop (i.e. more than the first half hour). The initial extreme is only likely to hold during the day about half the time. The participants are less convinced than in Drive or Test Drive Opens, and the counter buyers/sellers effectively enter ‘late’ to force price to reverse. Indicates a two-sided trading day, i.e. low probability of a trend day, and that the initial extreme may be re-tested. Generally indicates a Type 1 Normal Day or a Type 2 Normal Variation Day.

* Auction – This Open falls into 2 subtypes, although both look like a market with no firm conviction in either direction. In the first subtype, if the market opens within the Value Area of the previous day, a non-convictional day is likely to develop, as market sentiment remains unchanged from the last session and other-frame buyers/sellers are not strongly present. Any extremes established early have a LOW probability of holding. Usually a Type 1 Normal Day, Type 4 Non Trend Day or Type 5 Neutral Day will develop. If on the other hand the Open is “out of balance” (i.e. outside the previous day’s Value Area) then a “big Day” is likely. Although it may appear to be wandering randomly, the mere fact that the Open was OUTSIDE yesterday’s Value Are suggests the activity of strongly convictional other-frame buyers/sellers. Usually a Type 4 Double Distribution Day will develop.
 

linkon7

Well-Known Member
#3
Relationship of Open to Yesterday’s Range
The Open in relation to yesterday’s range can give valuable clues as to today’s expected range. A Market that opens within the Value Range is generally in balance, and awaiting new information.

The Market can open in one of 3 ways, each of which can be accepted or rejected by the Market.
* Within yesterday’s Value Area – If the price auction spends more than 1 time period within this area, it tends to indicate an acceptance of price, i.e. balance. Range will most likely be similar to yesterdays, with one extreme forming the end to measure from. As long as the extreme holds, the range to the other end will probably be similar in size to yesterday. If the Open is rejected, i.e. it moves in the first time period beyond yesterday’s entire range, there is no way of telling how far it may go in the initiative direction.

* Outside the Value Area, but within Yesterday’s Range – Not quite as balanced as #1, but still relatively balanced. Likely to produce a range similar to a #1, but offset either to the long or short side. As in the first case, if the Open is rejected, i.e. it moves in the first time period beyond yesterday’s entire range, there is no way of telling how far it may go in the initiative direction.

* Open Outside of Range – Conditions have changed and the Market is out of balance. Other-frame buyers/sellers can often make the Market move substantial distances in short times in the direction of the initial break out WITHIN 1 TIME PERIOD. Alternatively, price may auction around the new level (typically for more than 1 time period), and has unlimited potential in EITHER direction. A trend day (3) is likely to develop from this. If this Open is rejected, and price moves back into yesterday’s range within the first time period, there is unlimited potential in the OPPOSITE direction to the initial breakout.

My own feeling on this is that any interest in ‘Market Direction’ is wasted effort – watch for strong penetration or confirmation of major support/resistance – if you see it, go with it. Expect trouble at the NEXT level of support/resistance, and be prepared to jump off if it turns against you. Major support/resistance = pivot/sr123, or anything that develops during the day (e.g. the close, the high low, the fibs, whole numbers, last week’s high low – LET THE MARKET TELL YOU WHERE the levels are!).

It is probably wise to stay out of: –

* Non-trend days – The day’s range is small. Activity is scarce. Go home.
* Just before a News Day – Big News can screw up a market – witness the 150-point jump either way in the Dow in 3 minutes on news of a large interest rate cut in November 2002. Keep an eye on the calendar and go flat a safe distance before a news announcement.

General Rule – Have Patience! If the market is meandering, WAIT for real activity. Never trade because you get bored.
 

linkon7

Well-Known Member
#5
I'll be reproducing a lot of contents from "MIND OVER MARKET" by James F. Dalton, Eric T. Jones & Robert B. Dalton to carry this discussion forward.

Excellence in any endeavor, be it carpentry, medicine, athletics or futures trading, is only achieved through a careful balance between the analytical and intuitive powers of your mind.

A skilled carpenter blends his or her knowledge of angles, tools and building materials with the creativity of mind and body that comes only from years of experience in the craft. The expert surgeon is also keenly aware of the fusion of knowledge and intuition. Regardless of the number of diagnostic tests, once the incision is made knowledge takes a back seat to intuitive judgment, for every patient's physiology is different.

The key element that has long separated tremendously successful traders from all others is their intuitive understanding that time regulates all financial opportunities.

Our goal is to arrive at a healthy balance between the powers of objective observation and intuitive decision making—a rare talent possessed by only the best of traders.
 

DanPickUp

Well-Known Member
#6
I'll be reproducing a lot of contents from "MIND OVER MARKET" by James F. Dalton, Eric T. Jones & Robert B. Dalton to carry this discussion forward.

Excellence in any endeavor, be it carpentry, medicine, athletics or futures trading, is only achieved through a careful balance between the analytical and intuitive powers of your mind.

A skilled carpenter blends his or her knowledge of angles, tools and building materials with the creativity of mind and body that comes only from years of experience in the craft. The expert surgeon is also keenly aware of the fusion of knowledge and intuition. Regardless of the number of diagnostic tests, once the incision is made knowledge takes a back seat to intuitive judgment, for every patient's physiology is different.

The key element that has long separated tremendously successful traders from all others is their intuitive understanding that time regulates all financial opportunities.

Our goal is to arrive at a healthy balance between the powers of objective observation and intuitive decision makinga rare talent possessed by only the best of traders.
Hi linkon7

James Dalton, a nice guy. Had some mails with him in the past. Was mentioned to me by the LBR Group . Will definitively follow this thread.

DanPickUp
 

linkon7

Well-Known Member
#7
The Role of the Marketplace

Consider the purpose of the market for a moment. Most traders don't take the time to understand the very foundation of the market they are trying to master. The carpenter could not build a functional bird house if he never stopped to ask himself "Just what is the purpose of a bird house?" The reason for this basic oversight is directly related to von Oech's challenge of the rules. Most people do not want to know the purpose of the market. They do not want to have to think rationally and objectively about the bigger picture. Most market participants, in fact most people in general, would rather be given a set of rules to blindly follow than to have to use personal insight and innovative thought.

Again, the majority of the people who trade futures do not make money. The purpose of the futures market is similar to any other market. It exists solely to facilitate trade, and it does so by auctioning from high to low and low to high, in order to find an area where trade can best be facilitated.

Think of trade facilitation in terms of your corner grocery store. If the price of peanut butter is too high, shoppers will refrain from buying, and the grocer will realize that price is too high. He will then move price lower until the buyer responds by purchasing the product. If the grocer moves price too low, however, his inventory will be quickly depleted as buyers take advantage of price below value. Finally, the price will balance somewhere in between the two extremes, where value is established and two-sided trade can take place. Price must move too high or too low before both the grocer and the shopper know it has gone far enough. The same is true in the futures market. The market auctions up until the buyer will buy no more, and down until the seller will sell no
more, in the process establishing extremes of price.
 

linkon7

Well-Known Member
#8
* Normal Day Not as common as the name might suggest. Typified by early entry of other-frame buyers or sellers creating a large initial price range. The action then wanders back and forward during the day in standard auction fashion as buyers and sellers struggle to get the upper hand.


5662 is where most of the trading took place and range between 5647 to 5677 is where 70% of the whole day's trading took place. 5688 to 5628 is the opening range and high probability trades are fading of the extreme.
 

linkon7

Well-Known Member
#9
* Outside the Value Area, but within Yesterday’s Range – Not quite as balanced as #1, but still relatively balanced. Likely to produce a range similar to a #1, but offset either to the long or short side. As in the first case, if the Open is rejected, i.e. it moves in the first time period beyond yesterday’s entire range, there is no way of telling how far it may go in the initiative direction.




Yesterday's value area was 5814 to 5679. We did open below the value area but we stayed inside yesterday's range. General expectation is of a big fall outside yesterday range provided today's opening range low (5628 ) is broken. As long as the day's opening range low is held... neither side will show any conviction...

Auction – This Open falls into 2 subtypes, although both look like a market with no firm conviction in either direction. In the first subtype, if the market opens within the Value Area of the previous day, a non-convictional day is likely to develop, as market sentiment remains unchanged from the last session and other-frame buyers/sellers are not strongly present. Any extremes established early have a LOW probability of holding. Usually a Type 1 Normal Day, Type 4 Non Trend Day or Type 5 Neutral Day will develop. If on the other hand the Open is “out of balance” (i.e. outside the previous day’s Value Area) then a “big Day” is likely. Although it may appear to be wandering randomly, the mere fact that the Open was OUTSIDE yesterday’s Value Are suggests the activity of strongly convictional other-frame buyers/sellers. Usually a Type 4 Double Distribution Day will develop.
 

linkon7

Well-Known Member
#10
Imagine two children, each racing to complete a giant jig-saw puzzle. Both are working on the same puzzle with an equal number of pieces (the same structure), but one child has a picture of the finished puzzle and one does not. Obviously, the child with a knowledge of the whole picture will finish first.

The Profile graphic is much like an intricate puzzle. Its structure reveals more and more as the day nears completion. But, like the child with a picture of the finished puzzle, traders with an understanding of the "big picture"—those that can see the market develop before it is revealed by structure—are generally the first to put together the pieces of the market.
 

Similar threads