M6 - Man, Mind, Money, Markets, Method & Madness

This all are important in market as all together makes a good strategy and a great experience of the market.This all together makes the whole system for creating and making profit.

My Scores

Notes on crude :

You Sure You Are Looking At Charts Properly?

http://lessons.tradingacademy.com/article/you-sure-your-are-looking-at-charts-properly/

There is so much education, and so many books and articles on how to properly analyze price charts. While I find many flaws in the conventional wisdom regarding this topic, one certainly leads the pack and is the focus on this piece. The foundation of conventional chart analysis according to the trading books and all the education out there is “support and resistance.” When a new trader learns about these terms the light bulbs go off because support and resistance are turning points in markets and if you can identify turning points in advance, what more could you possibly need to do?

The trap here is that the new trader is unaware that conventional support and resistance rules help you identify turning points about as much as eating ice cream three times a day will help you lose weight. While there are many flaws with conventional support and resistance, I will focus on one important one in this piece to both help you understand it and help you profit for it. To make my points, let’s take a look at a recent live trading session with our students. This was a shorting opportunity in the Forex market in CADJPY.

Our live trading room instructor Bachir identified a supply level where banks were selling CADJPY. The blue lines on the chart represent targets 1 and 2 for this shorting opportunity. Our rule based strategy told us that the CADJPY was likely to rally up to supply, then decline to the blue lines before trading through the supply level. Notice the circled area on the chart which is the focus of this piece. Many traders would look at that area of congestion and conclude that price is not likely to decline through that area as there was lots of trading activity, a congestion of candles, which means support to many traders.

CAD/JPY Setup



That circled area actually represents the opposite or “support” if you know what you’re looking for. What will cause price to turn higher is a significant supply/demand imbalance. That circled area suggested no supply/demand imbalance. Notice how many candles are in that area. More importantly, how much time price spent there which is essentially the same thing. If supply and demand were that much out of balance, price would not spend that much time in that area. The Logic: The less time price spends at a level, the more out of balance supply and demand is at that level.

Conventional technical analysis teaches traders that strong support and resistance levels are areas on the chart where you have lots of trading activity, many candles on the screen, and above average volume. If you think the simple logic through, I think you will find that the opposite is true as I am suggesting above.



As you can see, price met entry for us and fell right through that area and down to the profit targets. I do get emails from people in situations like that saying “support didn’t hold” or “it blew through demand.” My reply is always the same… That area is NOT an area that would cause price to turn higher, it is certainly not demand. In fact, we expect price to move right through that level because there is nothing to stop if from falling. What most will see as “support” is actually nothing.

The big flaw is that conventional technical (and fundamental) analysis ignores and doesn’t understand that the only focus of chart analysis needs to be unfilled buy and sell orders from banks and institutions, nothing else. In my example in this piece, not only does conventional technical analysis have the whole support and resistance concept wrong, it’s actually backwards.

How The Markets Work It Off

http://lessons.tradingacademy.com/article/working-it-off-2/

No, this is not an article about weight loss! It is more about preventing financial loss. As traders we often rely on technical indicators for signals to help identify turning points in the prices of both the markets and our stocks. In fact, many people rely on them as the basis for their software to tell them when to buy or sell. There is a major problem with trading in only this manner. While it is true that a signal from a technical indicator can foretell a reversal in price, it can also signal a pause in price before resumption of trend. A trader who solely relies on those signals for their trading decisions will often take trades that are stopped out for a loss.

So what should a trader do? Obviously they need to look at supply and demand and price action as a major decision maker for trading or investing. If you are a regular reader of these articles, you will know how successful traders like Sam Seiden, Gabe Velasquez, Rick Wright, Don Dawson, and others emphasize using the levels rather than indicators for decision making.

When most think of the market trends, they tend to think of only two directions, up or down. However there is another direction the markets can take and that is sideways. Imagine if you were in the lobby of a 40 story building with no elevator. Now, if I told you that there was $1 million in a briefcase at the top of the building that you could have if you climbed the stairs, what would you do? Of course you would start climbing! Most of us would tire at some point and need to rest. Would you stop climbing and go down stairs to rest? Of course you wouldn’t. You would stay at the highest level you had reached and wait until you gathered strength to resume climbing.

Prices will often move sideways in a strong trend for a rest as well. Prices rise due to aggressive buyers pushing prices higher. When prices have risen too high, many potential buyers will back away as price has become too expensive. When they see that no one is selling to make the price cheaper, they will resume in the buying for fear that they will miss out on profits. This pause will cause many traders who are already in the stock to book profits too early for fear of a reversal that never comes. It may also tempt traders into unwarranted shorts as they try to pick the top of the markets.



Watch the price action as you come away from those overbought/oversold situations. Prices may simply pause and move sideways at those areas in order to work off the indication and allow more traders to enter into the trend. As with real estate, the key is location. An overbought indication at supply is one to heed as is an oversold at strong demand. Other indications may be false and lead to over trading.



So use the indicators as they are intended, as a decision support tool for your trading on supply and demand.

The above example basically depicts "hidden divergence" as posted by anilnegi somewhere in this forum.

Going thru some fascinating concepts that apply to man and nature. Nassim Taleb (Trader, Fund manager, Option guru - he published weakness in option pricing formulas theory created by Noble prize winner Black Scholes commonly adopted by traders, Professor of Risk Engineering etc, etc) has expounded principals which though abstract are equally applicable to trading. One concept is of Hormesis in which exposure to what may even be poison, consumed in minute doses, builds up the body's immunity to it. Mythology has that kings in the olden times used to do this to avoid being murdered by ingesting poison. The same concept is also used in medicine. The vaccine that we are given when small contains minute traces of the diseases, but being exposed to it, activates our bodies immune system. Another example is exposing ourselves to just beyond our capacity or ability to weight lifting, running or such, our bodies overcompensates anticipating such experience as the norm, and improves performance. The reverse is also true. Astronauts living in space are not exposed to gravity and hence their bones weaken. How is this related to trading.? The concept is that exposure to stressors (while respecting risk) such as chaos, volatility, etc builds into a trader the ability and confidence thru exposure to handle such situations deftly. This compared to trading in normal environment. The difference of traders exposed to such stressors will be better equipped to face challenges and benefit from them. This is an abstract concept that I infer that to be a good and all round trader, one would over time exposé self to higher degrees of discomfort and seek to profit and benefit from chaos, randomness and volatility. In essence, what is stated is 'That which does not kill you, makes you stronger.'

Will post as I go along.

The theory of learning or acquiring skills

As humans, we tend to learn quicker under periods of stress, by making mistakes and going thru uncertainty, evolving as we go along and getting the concepts clear. For e.g language. Nobody has learnt to speak their mother toung in a textbook style, starting with grammar, and fitting appropriate words. Language is learnt best by facing situational difficulty, from error to error. More so when there is a need to communicate under more or less straining circumstances. Learning comes by a process of suspending fear of making mistakes.

Note : Found this analogy perfect of how we evolve as traders.... By trial and errors, using that which works and eliminating that doesn't. The important point made is that we learn when we eliminate fear of making mistakes, and accepting that they will be a process of trading and our growth as traders. This of course implies that we need to take time to reflect upon the things that we do, and more importantly while suspending fear of making mistakes, ensure that we understand risk that comes along.

The journey to being a trader : Just my thoughts on a sunday morning.

From a dabbler, to being an objective or a good trader, the final step on the journey requires a trader to understand that trading is all about understanding risk and probabilities. A good trader will enter a position because besides looking at a setup or a pattern, he is objectively calculating the amount of risk or bet that he is willing to take on the entry. He knows the maximum amount of loss or cost there is to the trade. Being objective, he will enter a trade when the probability of reward to the risk that he is willing to take is 2:1 or better. With this calculation in mind, a trader thus is not afraid to enter a position, because he knows the maximum amount of loss that his entry/position will involve. A good trader is thus objective. There is no 'gut' or 'feel' or emotions attached to a trade. In his mind, he has quanitified the most adverse outcome. i.e the maximum risk that he can take. An entry will thus be justified, in any circumstances when he knows that for an x amount of loss or risk, he has the probability of 2x or 3x or more to gain. So even with a 50% chance of the trade going wrong, with a 2-1 type of reward a trader will come ahead. For e.g in case of Nifty with a max SL of say 20 points over 10 trades, where 5 trades are stopped out, the net result is as follows :

5*50*20=loss of 5,000
5*50*40=gain of 10,000
Net 5,000*Lot size allowing for slippages and brokerage, but limiting gains to 2R

If the RR is reduced to 1.5 then :
5*50*20=loss of 5,000
5*50*30=gain of 7,500
Net 2,500*Lot size allowing for slippages and brokerage, but limiting gains to 1.5R

In trading there are many variables, and perfect patterns and setups can reverse at any moment. Only those traders who are fixed or rigid in their beliefs or have full faith in their patterns or systems will find it difficult to exit a trade when it is moving against them, and take painful risk that are damaging both emotionally and financially. The traders, who are only objective have no issues going from long to short to long, or vice versa as they are analyzing each entry, and managing their positions objectively, trailing SL's and taking exits and allowing for clawbacks in their trade.

Another point from my experience is over reliance on indicators. While I do use 20SMA and Supertrend, settings 2, this is just a visual guide to gauge the trend, and the price or the price action is the most important aspect of trading. And for this again what better indicator that visual pivots.? Marking the LL, HH one can gauge if the price action is sideways or trending. Why is raw price action so important to a trader? It is because in my opinion what indicators track. What is happening can be gauged not by looking at the indicators, but the price, and indicators follow the price and not vice versa. An analogy for this would be if a ship is moving north in the direction of the compass, it is not the compass that is directing the ship, but rather the direction of the ship that is being indicated by the compass.

Having said that, some quotes on taking risk :

Do not fear about making mistakes. There are no mistakes made, but only learning if you have gained or benefitted from the experience. - Miles Davis
It's not because things are difficult that we dare not venture. It's because we dare not venture that they are difficult - Seneca
I am always doing that which I cannot do, in order that I may learn how to do it - Pablo Picasso
Don't be afraid to take a big step. You can't cross a chasm in two small jumps - David Lloyd George
Do one thing every day that scares you - Eleanor Roosevelt

Pearls don't lie on the seashore. If you want one, you must dive for it - Chinese proverb
Take calculated risks. That is quite different from being rash - General George Patton
I can accept failure. Everybody fails at something. But I can't accept not trying. Fear is an illusion - Michael Jordan
Anything that is successful is built on a series of mistakes - Billie Armstrong
If you look at it, people who don't take risks generally make about two big mistakes a year. People who do take risks generally make about two big mistakes a year - Peter Drucker


Take risks: if you win, you will be happy; if you lose, you will be wise - Anonymous
To dare is to lose one's footing momentarily. To not dare is to lose oneself - Soren Kierkegaard
Life is inherently risky. There is only one big risk you should avoid at all costs, and that is the risk of doing nothing. – Denis Waitley
You'll always miss 100% of the shots you don't take - Wayne Gretzky

And finally :

The way to develop confidence is to do the thing you fear and get a record of successful experiences behind you. Destiny is not a matter of chance, it is a matter of choice; it is not a thing to be waited for, it is a thing to be achieved - William Jennings Bryan