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Price and Volume: Practicum

This effort is centered around the Law of Supply and Demand and how it's manifested in price and volume. It's not about tactics per se. Understanding the law comes first (though one can, of course, trade without having the slightest idea what supply and demand are). Once that law is understood, there are many, many sets of tactics that can be employed to profit from what one has learned, not only with regard to entry and exit, but also with regard to trade management. The charts used for illustration employ a 5m bar interval. However, the principles of supply and demand, support and resistance, and trend apply regardless of the bar interval, whether 5m, 60m, daily, weekly, etc. I should add, however, that, even though these charts use 5m intervals, it's important to consult at least one chart with a larger bar interval, at least 60m in this case, if not daily or weekly, in order to get some idea of the general or "macro" trend. It's also important to consult at least one chart with a shorter bar interval, e.g., 1m or 2m or even a tick chart, in order to see what's going on within each candle or bar, particularly the long ones (if using a daily chart, one would want to bracket it with, for example, a weekly chart on the one hand and maybe a 15m or 30m chart on the other).

Before opening our booklets, however, it becomes necessary to address some basic principles (laws, such as the Law of Supply and Demand are absolute; principles are not). Otherwise, it is unlikely that the trader will know what he's looking at. The most important of these principles has to do with support and resistance.
But first a housekeeping note. It is very likely that after finishing all this, you will want to find something in particular without having to scroll back and forth, back and forth. If and when that comes to pass, press the Ctrl and F keys on your keyboard to bring up the Find box. Type in whatever word you want, such as support, and you'll be transported to all instances of that word in this document. Ain't technology wonderful?

Now. Support (S) and resistance (R) provide those zones at which or in which one expects to see some action. To trade without regard to support and resistance can mean a lot of little stopouts and a lot of breakevens, called amongst the more lurid traders a "slow bleed". Essentially, support and resistance levels can be found at those levels or zones in which a relatively large number of trades took place. These trades need not have occurred on only one occasion. In a base, for example, when "big money" is accumulating shares, these trades take place over an extended period of time over a narrow range of prices. Therefore, all told, many trades have taken place even though volume has been low. Many trades can also occur in a broader range over a period of time which may be shorter or longer than an accumulative base. For example, if a given level is hit repeatedly and price is "supported" there by professional demand, that level becomes strong support, even though the number of shares traded during any one occurrence are not impressive. Ditto all of this for resistance. There will be a level at which shares or contracts or whatever are repeatedly sold, though the reasons for the sales may be difficult if not impossible to determine. These sales can take place in a "zone of distribution" (see the Demand/Supply pdf). Or they can take place over time when a particular level is repeatedly tested.

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Support and resistance, then, can be found in a swing point or the top or bottom of a reaction (see Trendlines), but it is highly unlikely that the support or resistance found there will be important as it doesn't represent enough previous trades. In other words, there just aren't enough traders who care about it to make it important. For the same reason, whatever support and resistance seem to be found with indicators or trendlines are most likely coincidental since these other lines don't represent previous trading activity. In fact, they're constantly moving. The term "law of reciprocity" or "principle of reciprocity" is sometimes applied to the tendency of support to become resistance when it's penetrated, or vice-versa. However, "law" and "principle" are a bit high-toned to apply to this concept. There is nothing absolute about S/R. In fact, S/R can be quite soft. For example, if a given level is tested repeatedly as support, those holders who bought there may eventually begin to become concerned over these tests and over the fact that whatever they bought isn't going anywhere. Some of them may decide to sell some of all of whatever they bought if and when another test occurs. In this way, support fails. Even "failure", however, may not be as important as first thought. S/R isn't, and need not be, rigid. In fact, it is quite flexible. A level or line can be penetrated to what seems to be an intolerable degree, but if price rebounds to that level or line and finds S/R there yet again, then that level or line can become even "stronger" (more important) than it was before, which is why it's better to think in terms of S/R "zones" than of specific prices. S/R may, in fact, be too soft for some traders to fool with. However, if one understands that correctly-drawn S/R lines represent levels or zones in which a large number of trades took place, and that one can expect important action to take place at important S/R ("important" defined earlier), he can then avoid wasting his time on relatively trivial trades and prepare himself to take advantage of more potentially profitable opportunities. As always, it's best to put a face on principles so that one has a deeper understanding of what's going on (i.e., what traders are thinking) rather than just busy himself with only lines and calculations.

Below is a monthly Naz chart with S/R zones and levels drawn in.

The first step for a trader is to determine the current trend of the market. The second step is to determine one's place in the current trend. The third step is to determine the proper timing of one's entry into whatever it is he's trading. -- Richard Wyckoff

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Note at "1" that price, for whatever reason, who cares, bases for at least six months. That's a lot of trades. Thus, when price finally begins to move, then corrects in July '96, it finds "support" at that base. Why? Because a hell of a lot of people are holding shares at those prices and aren't willing to be rattled out of their shares. At least not yet . . . One then winds up with a zone between 1 and 2 in which a lot of trades have taken place. In this timeframe, with this bar interval, that becomes potential support that may become important on the way down. Between 3 and 4, there's another base, this from six to seven months. When price moves out of it, it doesn't come back just to 4, but all the way back to 3 in August '98. This will make the area between 3 and 5 a formidable block on the way back down, particularly since 5 had its own 4+ month base. 6 and 7 represent another zone, though not as long as the others. However, it's long enough to retard the decline in December '00 and January '01. Note also the volume ("A") that accompanies this temporary halt. As for the rest of it, I probably don't need to go into detail as to why prices have behaved the way they have. There is an assumption, of course, that "holds" do expire, and that trades that were made years ago are perhaps irrelevant. However, as can be seen, these zones continue to affect current trading. One can, for example, formulate a number of hypotheses regarding why we are levelling off at this particular point.

Next is a weekly chart of the Naz, easier to understand within the context of this monthly chart.

Here now it may be easier to see why, in the context of the monthly chart, the descent began to slow at 1560 and 1192 (noted also on the monthly chart, though the numbers themselves are not as important as the zones in which they are found) in preparation for a bottom. The increase in volume can also be seen on the weekly, whereas it's buried on the monthly. But, again, as briefly as possible, we reach a bottom, make a higher low (which occurs because of demand), then draw a tentative demand line. The ascent accelerates, rests at previous R at 1500, then takes off again, pausing at fairly predictable levels. The "supply" line, dotted, is drawn parallel to the demand line. It has a number of uses apart from helping the trader to predict those levels or points at which he can expect to find supply. For one thing, if price fails to reach it, there is an indication that the dynamic is changing (ditto if price penetrates it). In Oct '03, in fact, price does regularly fail to reach this line, and one can rotate it downward to reflect the change in momentum, the first clue of a potential top.

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All of which is at least in part to explain why 2000 is such an important zone and to help understand the current decline. The levels at which buyers are encountering supply have been falling. However, they haven't been trying too hard, either, as evidenced by the slackening of volume. Yes, we could bounce here and, yes, we could make a new high. However, momentum has slowed, the uptrendline has been broken, and there is a hell of a lot to work through. If nothing else, this ought to serve to temper one's enthusiasm and approach the daily charts more objectively. In reference to Wyckoff's three steps offered above, the first is that the trend is sideways, the second is that we are in the big middle of it, and the proper timing of an entry -- the third step -- may be trumped by the wisdom of standing aside until these issues resolve themselves. In other words, the proper timing of an entry may be not to make one at all.

By "supply line", do you mean volume, and "demand line", price? Sorry, no. In an uptrend, the "demand line" can serve as a trendline, i.e., that line at which one might expect, as a result of previous price action, demand -- or buying pressure -- to show itself. The demand line, however, is not always a trendline, as explained below. The "supply line" is drawn above the demand line, across those points at which supply, or selling pressure, again as a result of previous price action, can be expected to appear. This line is often parallel to the demand line forming what looks like a channel. But before one thinks "oh, yeah, channel", the "channel" itself is largely irrelevant. What matters is the supply line and what it represents, again, selling pressure. If and when it no longer represents those points or levels at which selling pressure manifests itself, then it no longer has any use. If possible, a new one must be drawn. If, for example, selling pressure begins entering the market at earlier stages, the supply line can be drawn at an acute angle, suggesting a loss of momentum. The demand and supply lines differ from trendlines in that they can be horizontal, e.g., marking the boundaries of a trading range. Using these terms rather than "support" and "resistance" helps one to be clear about just what it is he's looking at and for and referring to with regard to these trading ranges. In a downtrend, the "supply line" can serve as a trendline, just as the demand line can in an uptrend. The demand line, then, is drawn below the supply line and represents those points or levels at which one can expect to see buying appear and is generally parallel to the supply line. Everything else said earlier applies here. Just change up to down. All of this may seem nit-pickey, but "support", "resistance", "demand line", "supply line", "trend", and "trendline" all have specific meanings, though they may also overlap and even coincide. What this specificity does for the trader is help him to think differently about what he's seeing, particularly within the context of price and volume behavior. For example, one doesn't expect price to bounce at $ because there's a line there, but because demand has repeatedly appeared there. If the quality or nature of that demand changes, the line may be irrelevant. Many traders, however, have a lot of trouble letting go of that line, and that leads to problems.

A Note About Color, and an apology: you'll note that up lines and down lines are not always consistent when it comes to color. This is largely because all this began as a casual exercise, and when it was done, I couldn't face doing all of them over to make them consistent. So don't get too attached to the idea of "blue" being "up" or "down". The line's the thing, not the color of it.

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We're used to the idea of strong volume being "good" if it's on the upside and "bad" if it's on the downside (assuming we're long). But volume in and of itself has no good or bad connotations. All volume signifies is number of shares (or contracts or whatever) traded. Only by relating the volume to the bar does the volume carry any implications. Here, for example, there's a nice, strong volume bar at 10:05, and if we were using "color-coded" volume, it would be green. But all is not well in VolumeVille. Notice that the price bar closes well below the high, signifying a shift in balance between buying pressure and selling pressure, and the news ain't good for the buyers. Hence, the volume bar is not "good"; it just signifies a lot of activity. You have to look at the price bar to figure out the nature of that activity. Similarly, that long, strong volume bar at 11:00 would seem to give heart to sellers. But that much activity often points to a "selling climax" (SC), which results in either consolidation or reversal (the same is true for the "buying climax", BC; for further information on buying and selling climaxes, see the Demand/Supply pdf). Note that after the SC, trading activity -- as recorded by the volume bar -- trails off rapidly and dramatically, and so does the downward progress of price. It waffles around for a half hour, but then buying pressure gains the upper hand, and trading activity increases. For a while. Shortly the activity trails off, but the selling is pretty much done, so price can drift higher without a lot of "volume". You're going to have to look at a lot of charts before this becomes clear to you, much less second nature. But if you remember the first time you looked at a chart and had no idea what all those lines meant, you'll have some idea of what it means to learn a particular way of seeing, or of perceiving reality, much less of creating and developing a concept of it. Incidentally, PD means Previous Day, so PDC/H/L means Previous Day's Close/High/Low. OH/L means Opening High/Low. NH/L means New High/Low. FT means Follow-Through. BO means BreakOut. TL means TrendLine. (You already know what S/R mean.)

Figuratively speaking, . . . the small trader should imagine himself as a hitch-hiker in the market. For the ordinary hitch-hiker, someone else supplies the car, chauffeur, oil and gas. When he thinks the car is about to go in his direction, he jumps aboard and rides as far as he thinks the car will go. When he notices the machine has been stopped by a red light, or is about to turn a corner and go in some other direction, or that the car is running out of gas, or the brakes failing to work properly, he steps off and figures he has secured about as long a ride as he may expect. All he has supplied in this transaction is a modest commission and whatever brains were necessary to observe and recognize the opportunity when to get on and off. --Richard Wyckoff

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The PDH is, of course, the Previous Day's High, which you can see for yourself by scrolling up to the previous chart. Price finds R there, fails to make a New High, volume trails off indicating a lack of interest in the whole thing, each attempt at a high is lower than the last, it doesn't look good for the buyers. Finally, Wham! and we have a potential SC* already, forming a hammer at Support from the Previous Day (the Opening High, tested at 14:00). And the downward momentum is retarded, though not ended. Price takes an hour to decline just a few points. Sellers aren't desperate to unload, but buyers aren't exactly on fire, either. So though we end the day six points lower, it's all mostly a sideways drift. So how was one to profit from all this? Focus on the balance between buying and selling pressures. Note first the successively lower highs mentioned earlier. Note also that the bars get shorter and shorter as the buy/sell balance reaches equilibrium during the first 2+ hours. Then, at 11:55, it all lets go, to the downside, as if price had eaten a bad taco. Where to sell? Up to you. Price continues to make lower swing highs until late afternoon.
*The "climax bar", in and of itself, in isolation, may be only a warning of a change in momentum (a "yellow light"). Which is where S/R come in. Hitting S/R is like running into the park and scattering the pigeons. Do traders scramble or don't they? What looks like a climax bar in real time may just be an "indicator" of an overbought or oversold condition. (And by "overbought" and "oversold", I don't mean indicator settings. I'm referring to the original meaning, i.e., buying or selling exhaustion, at which point there are no more buyers or sellers, whichever the case may be.) But unless that bar occurs at some important level, such as S/R of some sort, it's less likely to ignite the greed or fear that is required for a decent bounce, not to mention a sustained reversal. Therefore, assuming you've found all your S/R levels before the open, look to what you think is a climax bar as a clue. Monitor the buying and selling pressure, i.e., the pace of trades, or, if nothing else, the pace of shifts between the bid and the ask, even if price just sits there. Collect the evidence you need to determine whether this is just a pause, a continuation of the previous move, or a reversal. What looks like a climax may just be a preliminary "climax", or brake (I realize that, literally, a climax is either a climax or it isn't, but you get my drift). And don't hurry. The market's here, open for business every day, and for every missed opportunity, there are several waiting in the wings, and a lesson learned.

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How are we to know in advance why and to what extent someone else is prompted to buy or sell? We cannot know; it is impossible for us to foretell what actuates all of those whose orders are poured into the vast intake of the Stock Exchange machinery during the day's session. But if we study the action of prices; the responses; the speed of the ticker, indicating urgency or the contrary; the intensity of the buying or selling, as indicated by the volumes; and the intervals when the volume is heavy or light -- all these in relation to each other -then we gain insight or the design and the purposes of those who are dominant in the market situation for the time being. All the varying phases of stock market technique may thus be studied and interpreted from the buying and selling waves as they appear on the tape. From these we form a conclusion as to the balance of the probabilities. On this we base our commitments. -- Richard D. Wyckoff

We're not into "hinges" yet, but notice how the buy/sell balance begins to see-saw toward equilibrium from around 11:20 to 13:00, the bars getting shorter and shorter, working their way toward 1462 mas o menos? The longer this buildup takes, IF there's very little trading activity, the more energy it stores. The more energy it stores, the more energy it releases (if a lot of trading activity occurs during this balancing act, then a lot of that energy is dissipated, meaning that it's not available for the push). This is only 90m long. Even so, trading activity has been extremely light. Therefore, there's enough energy there for maybe 8 or 10 points if you know what to look for and recognize it in real time, but that's about it. It's not 20 points. It's not 30 points. But 8 points is 8 points. Don't be greedy.

Trading with confidence has to do with having a method which you have proved yourself, and which you know will win over time if you follow it consistently. That means being able to recognize the conditions which allow you to trade, and only trading when they are all present. This is comparatively easy with hindsight: when we're actually there, we can see when all the pieces fit. But beforehand, we don't know that all the pieces are going to fit: so we trade because we're impatient and fear that this maybe is the best we'll get. Well, somehow we just have to get to be patient. Let's face it, it calls for great discipline. --John Percival

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Wyckoff considers TL (TrendLine) breaks to be warnings more than anything else. It's not the break; it's what happens at the break. Does the price just slide through, or does all hell break loose? Many people consider a TL break to be a sign from God, a harbinger of impending calamity. However, if price reverses back through the TL, that recovery reinforces the strength of the trend, which is one more reason why TLs shouldn't be considered as sources of S/R. They have enough to do just pointing the way. In this case, after price tests the Opening Low and begins an uptrend, the first TL is broken at 11:35, but only marginally, and the direction of price is still up. The angle is less muscular, but the direction is the same. Only when price reaches the swing high made by the first effort (to 1474) does it stall, then consolidate. If this TL were extended, it would not be broken decisively until after 15:00. Exceeding the Last Swing Low (or High) is a similar issue. You have to be alert to more than just crossing this or that line. Wyckoff would more likely be out at a lower high (such as around 14:30) since he was so good at detecting trouble in advance. I doubt that he'd wait for a break of the last swing low from around 13:55 (though we haven't had coffee lately or anything). He was real good at standing aside if the picture was the least bit muddy. Therefore, it's extremely important for a trader to know exactly what he's going to do, ahead of time, when faced with each of these scenarios. Is he going to exit at a specific price target? Is he going to exit at a TL break? Is he going to exit on a lower high? A drop below the last swing low? If he wants to be discretionary, that's fine. But he better have a very clear idea about just what it is he's going to be discretionary about. (If you have a burning curiosity about trendlines, you may be interested in the Trendlines file; for any other sort of burning, you'll want to consult your physician . . . )

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The concept of "air" (or the climax run, ramp, death spike, etc.) is difficult for a lot of people to grasp, much less trade, though the "aggressive" will try.

And here a note about "aggression". You've read that such and such is for "aggressive traders (investors) only", or that such and such a tactic or strategy or approach is "aggressive". What the hell does that mean? Usually you're told that if you're going to be "aggressive", you should risk only money that you can afford to lose. This ranks among the dumbest advice you'll ever receive. There is no such thing as "money you can afford to lose". To entertain the notion that there is such a thing diminishes the respect that you damn well better have for every dime if you're going to become involved in the stock market (if you have no respect for money, go to Vegas). "Aggressive" ought to mean that you are at least experienced, profitable, disciplined, quick, well-prepared, and that you manage your trades exceptionally well (and if daytrading, a great broker, an exceptionally dependable trading platform, and a rock-solid internet connection). "Aggressive" is not a test of manhood. It is not swimming in raw sewage or eating slugs or shoving scorpions down your pants. "Aggressive" requires an extraordinary amount of work. It is not ignorant bravado. If you don't want to put in the hours, stick to the safer course. Odds are that you'll end up with more money in the bank anyway.

Now back to "air". Yes, there's a lot of effort being displayed here: just look at those volume bars. And, yes, there is an impressive result: price is going through the roof. What a terrific illustration of the dynamics of demand and supply. Gotta have me summa dat. So why is it so hard to trade in real time? Because there's "too much". Too much volume (i.e., too many trades), too much movement in price, too much excitement, too much amateur trading. When you get that much trading activity and that much price movement, the pros are done, or very near to it. They didn't become professionals by being stupid. And they know that a lot of amateurs are being sucked into this cyclone and that those amateurs will be the first to dump their shares when things turn sour (though not all of them, of course; some will hold until price falls all the way back to where it was to begin with and probably lower). The extent of the price move also creates big problems with regard to support and resistance, i.e., there isn't any (a sort of "'toon physics" problem in which you find yourself running off the cliff, pausing in midair while you ponder the situation, then plummet, flailing, to earth). Price has moved so far so fast that even though there have been a lot of trades, there aren't very many at any given price level. Therefore, when price makes a U-turn, there's very little to impede its retreat. If there was even a tiny consolidation on the way up, there might be a brief pause on the way down. But if price looks like the TransAmerica building or the Eiffel Tower, the way down is probably going to be just as slick and slippery as it looks.

Now about that pre-market hammer . . .

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Is there a rule of thumb, as to how long a tail is in relation to the body, for a candle to be considered a " Hammer" or a "Shooting Star"? I don't really care about all the hammer/doji/butterfly/spinning top blah blah jargon because none of that really matters. What does matter is that (a) the hammer -- or a hammer-like candle -- forms in the first place. That alone tells you something. What matters further is (b) HOW it forms. Price was at one point, plunged, then recovered dramatically to get back at, near, or even higher than it was in the first place. How far it gets and where it ends up (below the open, at the open, above the open) tells you something about demand. How far price dropped before it was driven back also tells you something about the players and how passionate they are. WHERE price bounced is also important, which is where support and resistance come in. Therefore, to say that if price makes it back higher than the midpoint of the candle, it's a hammer, and if it doesn't, it's not, is beside the point. Or to say that it has to get back within a certain percentage of the high. Or that there can't be an upper tail. Etc. Etc. "Hammer" is just shorthand for a certain sequence of behaviors. You're being told a story about a struggle. The story is continuous, even though you may segment it with bar intervals and timeframes. Your task is to learn the language in which the story is being told, which is largely the language of greed (or its first cousin once-removed, hope) and fear. If you imagine the effort that it takes on both sides to create that hammer, you'll have a better idea of what to do with it. Not every hammer has cosmic significance. Most don't amount to a hill of beans. If price falls out of a range, forms several down bars, then hits support and forms a hammer with a long tail, that carries more significance than a hammer which begins in the range, falls just barely out of the range, then closes right back in the range again as if nothing had happened. The hammer/shooting star (one is the opposite of the other) shown in the chart for 032604 (far below) is pretty and is the type most likely to be used as an illustration of what this sort of candle looks like. But the hammer in the chart above (at 09:10) is more typical of what you'll be dealing with since it comes up much more often. This hammer starts in the range, forms after several downbars, has a hell of a long tail, and is accompanied by pretty decent volume. But it hardly leaves the range. So why the subsequent move of 30pts? The hammer mentioned earlier in the 030204 chart (at 12:05) falls out of its range and forms after two downbars, and the accompanying volume is even stronger. Yet it fails immediately. And decisively. How come? Part of the answer, again, may lie in where the hammers form. Note that the first one -030204 -- forms at 1483. There are several swing highs at this level from 02/26, 02/27, and 03/01, the day before. Are these important? Or at least important enough? The hammer in the above chart forms at 1460. What's that all about? Note that 1460 represents the lows of 0226 and 0227. And on 03/03, while price does drop just below that level, it quickly pulls back above it and stays above it. Something's up with 1460. What? Who knows? But it doesn't cost anything to draw a horizontal line across the lows during those few days. So did price bounce so violently off 1460 because it represented a more important S level than did 1483? Is it worth going long off both hammers with a stop just under each? Compare these to the "hammer" at 11:45 in the above chart. If that looks like as good a bet as either of the other two, you probably shouldn't trade hammers for the time being. And what about the hammer at 10:55 (also the above chart)? It forms after two downbars, even though there's a little tweenie in there. And the bottom tail is decent, even though it isn't terribly long. And the volume is nothing to get excited about. But it is, after all, a hammer. Sort of. Depending on how stupid you feel for having missed the move in the first place and on how much revenge you want to take on yourself for not having had the guts to take the trade you should have taken. So you ignore the fact that price made more than thirty points in no time at all and that the only people who are going to be suckered into this "pullback" are those who were too cowardly or too ignorant or too sleepy or too unprepared to have taken the trade they were supposed to take, which of course are the same people who are going to be the first to panic when things go wrong, which is what happens two bars later. But you've already bought it and made yet another tuition payment. And it isn't even lunch yet . . . So you take that hour to sit back and ruminate on the meaning of life, or at least the meaning of your life, and you try to decide whether or not you ought just to say the hell with it and get a real job. And eventually you decide to stick with it for at least a little while longer. However, you also decide to punish yourself in future, not by jumping into trades that you have absolutely no business jumping in to, but by sitting on your hands when you've failed to act appropriately and "in a timely fashion". You decide to call it The Preclusion Rule: you don't take any trade that you wouldn't be taking if you had taken the trade you should have taken in the first place (you may add something like "you stupid idiot", if you like.)

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To achieve a state of objectivity you need to operate out of beliefs that allow for anything to happen, as opposed to beliefs that allow only for the market to express itself in a limited fashion. If you operate out of a belief that anything can happen, then whatever does happen won't be threatening to you in any way . . . However, you do have to have some belief or expectation about the future or you wouldn't ever put on a trade in the first place. To be objective, you [must] have no commitment to any particular outcome. You just observe what is happening in each moment as an indication of what will probably happen next. -- Mark Douglas

Never be in a hurry to do something stupid. -- Lee Richartz

The fact that the TLs can be "fanned" tells you that momentum is slowing. No momentum indicator is needed. A lot of people, of course, would try to "catch the bottom" at several places, mostly because they trade what they think, not what they see, what they believe should be, not what is.

The action of the whole market tells you when the selling is better than the buying and vice versa. You do not care why insiders are buying or selling, but you should care a lot about the action of their stock on the tape, for that is what tells you the truth. -- Richard Wyckoff

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In the market environment, the decisions that confront you are as endless as the price movements you intend to take advantage of. You don't just have to decide to participate, you also have to decide when to enter, how long to stay in, and under what conditions to get out. There is no beginning, middle, or end -- only what you create in your own mind. -- Jesse Livermore

As Livermore says, above, you don't "just" have to decide to participate. But you do have to decide to participate before making all the other decisions he lists. And far more often than not, deciding not to participate is exactly the right decision to make (you don't have to be "in" to "win"; more often than not, being "in" may mean losing your shirt). The chart above provides a good example of what it means to "get real". The previous day was about as perfect a trend day as one could want in this life: opened at the high, closed at the low, and nary a bump along the way. And it also provided a "range expansion"; in fact, the range for that day was nearly double the average daily range (there won't be another one of these until the middle of the next month). Therefore, while a continuation on the following day was certainly within the realm of possibility, to expect one would be "hopeful" in the extreme. In other words, "get real". An opening at the Previous Day's Low would encourage the hopeful to hope for a continuation. The "rally" to that brief congestion zone around 1445 and the stall there might strengthen that hope. And if one were to short that little "triple top", he might actually pick up a few points. But unless he had some specific, near target in mind (which he wouldn't if he were looking for a continuation to the downside) and kept tight stops, he would more likely have his head handed to him on a platter. The fact of those wide bars on both the downside and the upside, accompanied by heavy volume, screams a warning that you probably have no business being here whatsoever. Price then forms a doji at 11:05 and a bear spike (a shooting star but not outside the range) at 11:10, suggesting that selling pressure is still very much a factor. When the subsequent attempt at a new high fails rapidly, the downside looks good. But what about all that heavy buying pressure that sent price up to the opening high in the first place? The "downside" ends quickly, in a hammer, and here you are in "chop".

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Beginners often want to know how to determine in advance whether or not they are going to be in chop, or at least to be able to detect the chop before it grabs them by the neck and drags them into the barn. First, show Hope the door and tell it to find someplace else to hang out. Second, expect nothing. Assume nothing. If you are not yet at the point where you can engage the market without expectations, then assume that the day after a trend day is going to be choppy. They nearly always are. And look instead for signs that it won't be. Third, if you do not yet have specific criteria for detecting and trading continuations and reversals, then go to the zoo. Or the library. Or the movies. Don't even watch it, much less paper-trade it, because you'll be tempted to do something with it. Or about it. And you're not ready for this yet. Fourth, if you do have the aforementioned criteria, take great care not to sink too deeply into the micro. If the downside has been rejected by the buyers, and the upside has been rejected by the sellers, a bell should ring, or a light flash. After all, if both the upside and downside have been rejected, that puts you back into the range with a bunch of traders who have lost their way and don't have the power to push price either one way or the other out of that range. If you're going to hitchhike, you don't want to thumb a ride with somebody who's lost. And if you start making lower highs and higher lows, as you do here (at least until late afternoon, and even that is rejected), then you're in even bigger trouble. It's easier than this. Take some time off. Get a good night's sleep. Try again tomorrow.

As traders, we cannot afford the luxury of wishing and hoping because it puts us in a passive relationship with the markets. When we wish and hope, we are shifting responsibility on to the markets for making something happen instead of confronting the conditions and doing something about it ourselves. If we find ourselves wishing and hoping, it is an excellent indication that we don't know what is going on and as a result need to get out of the markets until we do. -- Mark Douglas

And here it is tomorrow already, and see how your maturity and self-control and patience have been rewarded. This one opens just above the Previous Day's Low, bumps its head against R at the Previous Day's High, and try as it might for more than a half hour, it can't break through. The "bozo" (short for marubozu, a longish bar with little or no tails) suggests serious selling pressure since volume is high and the bar closes at the low. This hypothesis is strengthened a couple of bars later, when buyers attempt to push price higher, also on strong volume, but either the buying pressure is insufficient, or the selling pressure is just too much. Or both. In any case, a long upper tail forms, indicating failure on the part of buyers, and we drift for more than an hour. Given that volume is drying up, one needs to be prepared for either an upside or a downside breakout. At 13:05, selling interest is tested, but buyers push price back to the base. Unfortunately, they don't have the necessary muscle. Selling interest is tested again in the next bar with much the same result. Buyers don't got it. So, another bozo to the downside.

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Note that sellers aren't particularly aggressive. After each of these two bozos, price drifts, first for 90m, then for nearly two hours. The problem is that buyers just don't have the numbers to push price higher. All they can do is keep it from falling, albeit temporarily. When they try to do more than that, they get "slapped", and price either falls back into the base or another bozo is formed. The pressure is clearly on the sell side, but sellers aren't panicked or desperate (if they were, they'd be offering substantially lower prices). But they're strong enough to prevent buyers from getting anywhere.

This day starts off well, apparently finding S at the PDL and launching itself from there. There's a nice almost-bozo at 09:50 with good volume, and trading volume increases a bit in the next few minutes resulting in a "doji" (the tug-of-war is swinging back toward sellers). However, trading drops off dramatically in the next bar (10:00), suggesting enough continuing selling pressure to push price down, but not so much that price drops below the low of the almost-bozo. Trading volume is even less in the next bar, which one might think is a "bad thing". But the fact that sellers aren't pressing their advantage is instead a "good thing". This lack of selling pressure results in a higher price and a white bozo at 10:05. Trading volume then increases again, but price stalls, suggesting that selling pressure is once more rearing its ugly head, and a downbar follows. Then another attempt on lesser volume and no progress. Why? Perhaps that long base at 1430 from the previous afternoon. Do we hear the sound of chop? Sellers aren't especially aggressive past 11:00, apparently content with their 15pts. And they offer little resistance to buyers when the latter impose a higher low (whack?) and push price back to R. However, when the time comes, there's no "real" demand, i.e., not enough to break through R, so price drops back (and there's that whacking sound again, chop chop). Buyers give it the old college try one more time and sellers wake up (note the higher volume) and toss buyers back into the moat. Volume increases to the downside, suggesting that buyers have said the hell with it, confirmed when volume declines, but price continues to fall. But if you feel like a real schmuck for not shorting that triple top shortly after 14:00, thinking that chop was going to be the order of the day and deciding to run errands rather than waste your time sitting in front of your computer, consider the following quote:

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What was the last thing you traded? Look at its 1 year, 6 month, 1 month, and 3-5 day charts. Can you see all the opportunities where you could have made a profit? Should have gone long there, shorted here . . .. You're assessing "opportunity" based on price activity subsequent to the point at which you believe the opportunity existed, which means that you're working backward to identify that point of opportunity. This type of thinking will cause a trader to make trades when no real opportunity exists. Looking at the charts again, try to identify forward-looking opportunities, where you consider only each price point and the price patterns before it. You'll find that it's now far more difficult to spot the winners, but those are the opportunities that you need to identify and then appropriately act on in order to be a successful trader. -- Innerworth

In other words, everyone's a genius in hindsight. Beating yourself up for missing an opportunity that you didn't plan for is not productive, though if it prompts you to look for similar opportunities and commonalities among them that might result in a new setup, then the opportunity you didn't take advantage of turns out to be an opportunity that you're taking advantage of after all.

Which is probably as good a place as any to get into finding and profiting from these opportunities. Books have been written on this subject (many books), and the subject has been addressed by me in several other places, such as Rectangles and Bottom Fishing, so I'm going to try my best to avoid repeating what's already been said (otherwise, this would get way out of hand real quick). What I'm going to do instead is cut to the chase and make this as simple as I possibly can. If you are sabotaging your own progress due to obsessive-compulsiveness or night terrors or uncontrollable rages, I'm afraid you're going to have to take care of that somewhere else, some other time. The easiest way to make money in the market is to trade in whatever direction the market is going, i.e., buying if the market is going up and selling - or shorting - if the market is going down. Simple? One would think so. But an extraordinary number of people have an extraordinary amount of difficulty following these two basic guidelines, perhaps because they cannot believe it is so simple, or perhaps because they are congenitally disposed to being clever, and in their efforts to avoid being part of the herd, they end up wandering, lost, in the weeds. (There is also the problem of all sorts of advisers with their own agendas trying to convince you that you cant tell the difference between up and down without their help.) And here we come to a Guiding Principle: contrary to what youe heard, read, been told, the herd is always right. Except at turning points. Yes. Always. Their buying drives the price higher. Their selling drives the price lower. The professionals may nudge the buying or selling in some way (see Demand/Supply), but its the herd that drives price (ever wonder who the big money really is? Its you). If the professionals attempt to stand in the herds way, they will be trampled. Only when the herd exhausts itself, at turning points (see Tops n Bottoms), can and will the professionals make their influence felt in its most effective way, turning the tide, trapping the stupid and the greedy, igniting the herd's fear, and reversing prices direction. Therefore, if you want to make money the easy way, youll first want to figure out whether price is going up, down, or sideways (see Trendlines). Once youve completed that step, its time to start thinking about what strategy youll select to take advantage of these price movements, and there are three: breakouts, retracements, and reversals. These are covered most succinctly in Rectangles but are also addressed in Demand/Supply, Bottom Fishing, The Big W, Trendlines, and Tops n Bottoms. And once youve decided what strategy youre going to employ in a given situation, the rubber meets the road: you have to determine exactly what tactics youre going to use to put this strategy in play. Now you may have heard or read that there are many different strategies to choose from. Truckloads of them. Mountains of them. But just as there are only a handful of basic plots from which all movies, plays, books and so on are derived, so there are only the three basic strategies listed above. Knowing that, and remembering it, will enable you to go a long way toward maintaining your focus and raking in those profits that everybody so glibly promises. Eventually, youll want to create at least one set of tactics for each strategy and be able to employ whichever of the three is most appropriate to whatever situation youre faced with. But rather than work on all three simultaneously, choose one, become familiar with it, develop the enabling tactics for it, get comfortable with the process. Then youll be able to earn as you learn.

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One could argue that your three choices are really only two - or two and a half -- since a retracement has to be preceded by a breakout. After all, in order for a retracement to take place, there has to be something to be retraced, and that something is a directional move, and that directional move occurs subsequent to a period of non-directional - or sideways - movement. So one can trade breakouts without necessarily concerning himself with retracements, but he cant trade retracements without at least being aware of the fact of breakouts since retracements cant exist without them (breakouts, that is). Having become the student of market behavior that you are now, you understand that whether or not a retracement caterpillar becomes a continuation butterfly depends entirely on (a) whether or not traders are interested in it and (b) if so, how interested. After all, if traders arent interested in this retracement, its going to turn into a reversal rout, a failed breakout, a return to the womb of whatever sideways non-directional limbo from which it came. On the other hand, if they are interested, then the retracement becomes nothing more than a pause, after which the price continues on its merry, directional way, making the retracement a successful entry opportunity.

There are several other elements which will influence the success or non-success of whatever tactics you develop to stage your strategy. Effort and result, for example, is a concept worth storing in your frontal lobe, where it is always hovering, maybe not the center of your focus, but present and available (if you're still having trouble translating my shorthand, the first notation says "A little effort on the demand side leads to big results, suggesting little selling interest; this was confirmed by the lack of follow-through on each downmove"). Nothing happens unless either buyers or sellers make some sort of effort. If the effort is half-assed on both sides, then there won't be much happening as a result of it. On the other hand, if a great deal of effort is being made (lots of volume), one has a right to expect quite a result. If there isn't any, or if the result is barely noticeable, then one can conclude -- at least for the time being -- that buyers and sellers are pretty evenly matched. Notice here that volume after the test of the opening low is not all that impressive, yet price rises like a birthday balloon. Not much effort, substantial results. This suggests that there's little or no selling interest. Yet. (If there were, then either volume would be higher or price would have more trouble rising.) But when price finally gets to a point where sellers are irritated, trading activity increases (volume rises), and you get a big, honking bear spike (long bar with price closing at or near the low). This spike, however, is the extent of the "result", suggesting that sellers, while annoyed, are primarily interested in keeping buyers at bay, and not so much in rallying the troops for an all-out offensive. After that, efforts decline, and the result is drift. After 14:00, effort picks up again, but results aren't impressive, suggesting yet again that sellers are in charge of this little puppet play and that buying into this "strength" is likely to be a long row to hoe.

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Wide Range Bars are a nice illustration of the dynamics of effort and result. Lots of energy is being expended on creating these bars, i.e., lots of disagreement between buyers and sellers as to what price ought to be, but the net result is zip. There are people who love these bars and love playing them, but doing so is not what one would call a "conservative" tactic. A more worthwhile tactic is to allow this energy to be stored, as in a lengthy base, then enter the eventual breakout. If the bars in the base are short and the effort to move them has been minimal (i.e., as little energy as possible has been expended in the base), then one can reasonably expect the breakout, when it comes, to bring about a very nice result. On the other hand, if the bars are long and there's lots of volume, i.e., all the energy is being crapped away in the base, then the result after the breakout is more likely to be what one might call disappointing (but, again, never assume; being trapped in a WRB cage may further rile one side or the other to the point where an eventual breakout is more than satisfactory, like poking a tiger in a cage with a stick, through the bars).

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The "bams" refer to the efforts of sellers to push price through that congestion zone that was created the previous afternoon between 1412-13 and 1406-08. Here it hits 1412 again and again and again. Bam. Bam. Bam. Buyers try at 11:20 to pull themselves out of this, but they're wearing ankle weights. They just don't have it, and sellers finally break through with a bozo. It's impossible to predict what might have happened here if it hadn't been for the FOMC meeting that day. In fact, more than a few people don't trade on FOMC days simply because there's too much going on that has little or nothing to do with normal buyer/seller balances. As for trading the news, some people love it and some people avoid it like the plague. I don't recommend the tactic for beginners, simply because it's not necessary. Whether one pursues this course or not has less to do with "guts" and more to do with whether or not one can come up with a tactic that's definable and can be tested to determine the probability of success. Giving in to an urge to gamble is not productive.

This day starts off well. Lots of effort, nice result. And when the price declines, so does volume ("V"), i.e., trading activity. However, price appears to find R at the highs from the 11th and 12th, i.e., the previous Thursday and Friday. The "why" doesn't matter so much as the fact of it. Ordinarily, one would expect a pretty nice "result" from whatever breakout might occur out of this base, even though it's a titch wide. Unfortunately, as noted on the chart, this is the sort of pattern that's noted by every trader on the planet, and the breakout is nipped quickly. Does this mean that a BreakOut from this sort of base should not be taken? Not necessarily. But one should at least be prepared for the failure and keep a tight stop, particularly since it's so very late in the day. Incidentally, "Nice effort, str result" means "nice effort, star result" as in shooting star or bear spike. In other words, all that effort resulted in a failure on the buyers' part, so a substantial portion of that effort was on the part of sellers.

Trigger-happy traders are prone to shooting themselves in the foot. -- Brad Barber and Terrance Odean

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Hindsight trendlines can be a bit confusing. The first was drawn when the first "swing point" was created at 10:25/30. When that trendline was broken an hour later, no new line could be drawn until price either made some noticeable upward progress or made a new low. When it made that new low at 12:05, the next, longer trendline could be drawn (across the 11:35 swing point). This in turn was broken at 12:50, and no new low was made thereafter. This isnt the first example of an intrarange trend thats been provided, nor is it the first example of a breach or "break" of such a trend. But now that you have effort and result on the brain, the difficulties encountered when considering something like this to be a breakout should be more apparent. Yes, some effort is required to halt the trend. Yes, further effort is required to break the trend. And even more effort is required to reverse the trend. The result of all this effort, however, can be problematic when swimming against what had been the current, which is why thinking of these as breakouts can be befuddling when the end result is that you're still trapped within the day's range. What you have instead is a series of reversals. A breakout emerges from congestion and the back-and-forth and the wranglng therein and runs for daylight. If price can squirm out of its shackles, any retracement is an excellent second opportunity to enter. However, a reversal turns back toward that same congestion and tries to power its way through. The dynamics and the challenges are completely different. Therefore, keep breakouts (and their companion retracements) and reversals separate, including the amounts of effort required for each to achieve what is for you a result that makes the trade worth taking in the first place.

031904 The 19th was a quadruple-witching expiration and I have nothing wise to say about it. Therefore, I'm instead providing a "guest analysis" which illustrates reversals. Unfortunately, I don't recall where I got this and I neglected to jot down the author. Note that this is not a schematic for buying here, selling there. There are no cutesy names for setups. It's just an observation of and study of price behavior, the first step in the choice of strategy and in the development of tactics.

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The story plays out on the 3-minute chart. The open . . . dropped down to the low of yesterday afternoon. The first down arrow on the chart shows a wide range bar closing on its low on very increased volume (compared to the prior bar). Selling was clearly swamping the buying. Volume increased on the drop, but fell off on the retest of yesterday afternoon's low, signaling a potential bottom. Look at that bar on the low. It closes well off the bottom. And the volume has shrunk. Selling is no longer dominant (though confirmation is still needed). The next bar has a nice range up and closes on its high. Volume has dropped off, and that is good for the bulls. That and the next bar -- also an up bar with increased volume -- confirms the change in direction. Note that the volume falls off on the pullbacks. This is decidedly bullish. Volume expands with price as the market moves higher and contracts on pullbacks. Also, look at the price bars on the pullbacks. Their range also contracts. So, you have price bar range expansion with up closes on expanding volume and price range contraction coupled with volume contraction on the pullbacks. Note also where the closes are on the pullback bars -midrange, for the most part, rather than on their lows. Selling is weak on the pullbacks. All this action is bullish behavior. Look at the first down arrow in this up trend. It occurs around 10:30. It closes on its low and volume increases! This is the first hint that selling is coming into the picture. The next bar is up and volume increases, but then look what happens. Volume is heavy but the price action is showing weakness. With that increased volume, if this was still going higher, you would expect the bars to expand in range and close on the highs. But you get just the opposite. Range is contracting, the close is poor, and it occurs on increased volume. It can mean only one thing: selling is swamping the bulls' boat. Next, we move up to the high of the day. This is right into the 935 resistance area from the daily chart. Look at the volume and price action here. Volume expands for several bars, but the price won't go higher. That weakness we saw earlier starting with that first down bar on increased volume at 10:30 is now coming into play. Also, the average volume is lower as we make a new high. So, background weakness in the form of (1) the 10:30 - 11:00 price/vol action and (2) the overall volume/price divergence is seen clearly in the details of the individual bars. Note where I labeled the "No Demand" bar and its accompanying volume. We get a higher close on low volume. There is no demand or buying to drive prices higher. The no-demand event occurs again later.

The noontime countermove starts right on time [NB: the lunchtime reversal is not as reliable as it used to be; stay tuned]. Look at the bar and volume at the turnaround. Like the waves, monotony is good. The market moves up a bit, but then goes into a lot of chop. Although there is an upside bias, volume is very low and the price bars are contracted and few close on their highs. All bearish action.

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Look at the last 3 bars in that area occurring around 1:00. They try to push it higher (probably gunning for stops), but volume isn't with them, and the buyers get swamped. Another no-demand event. Just before 2:00 there is another attempt to rally. But you can see the price and volume action shows weakness. The first bar highlighted by a down arrow shows a midrange close on increased volume. If they were going to take it up, that increased volume should have resulted in an up close. Compare this attempt with the rally that occured in the AM. As the market falls, the average volume increases. On the bars where price expands to the downside, volume expands, showing a consistant relationship. Note the two pullback areas in the downtrend (highlighted by the down arrows). Both the price action and the volume contract. This is nice bearish action. The bottom of this move is reached at the AM low. The price action and volume is a repeat of what we have been seeing, as is the push into the resistance at the 925 area ...

Meanwhile, back at the ranch . . . The next three days provided an interesting interlude to the market action, screwing traders on both the short and long sides. By the time quadruple-witching occurred on Friday the 19th, price had been drifting sideways for more than a week. So when traders awoke on Monday and discovered that price had gapped down, they were expecting big things.

But what the hell? Price drops only a lousy 14pts before screeching to a halt. This is much less than the Average Daily Range during this period (the average of the daily ranges from high to low during normal trading hours over the previous 10 days). Not only that, it mounts a substantial rally. Granted, it eventually makes 20pts (which is still less than the ADR), but it takes all day to do it, plus it rallies back to the midpoint of the days range by the close.

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So, next day, it gaps up, bulls justifiably emboldened by what seemed to be a show of strength the previous day. But this time, price never even gets out of the gate, failing almost immediately and sliding instead into an unterrupted downtrend that reaches the ADR by lunchtime (which is also, by the way, the level of the PDL). Bulls mount an offensive and stage a very nice rally. But they run out of steam after 20pts, create a little double top at 1390, then get tossed by sellers into the moat. Buyers and sellers appear to be making all this up as they go along. As previously noted, sellers expected big things from the drop down on the 22nd, but S asserted itself, apparently, at 1372. Why? Who knows? Play the hand youre dealt. Then, on the 23rd, S at 1372 was confirmed, and a rally seemed to be in the cards. But the rally failed, and price dropped back to 1372 again. Given the lack of predeterminable S, traders seemed to be trying to find it as they went.

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This effort continued on Wednesday. Price opened at 1372 and would you look at the WRBs! But S, wherever its coming from, is confirmed again and again and again. So price takes off from there, stalls at the reaction high (or "swing high") from the Previous Day, and reaches the ADR on the upside, again at lunchtime. It eventually forms a double top and retraces some, but this time from the upside, and this suggests a certain strength on the bull side, at least for the time being.

Focusing on price and volume doesn't mean analyzing every single bar pair. Nor does it mean obsessing over the volume trend. A lot of people, for example, think that volume has to be consistently rising in an uptrend, but as I pointed out in Demand/Supply, that's not the case. As long as price is rising, the demand/supply equation is working in your favor, regardless of what the volume is doing. It's only when you begin to see shorter bars and longer tails and little TL breaks that you need to become concerned. And if volume doesn't come in accompanied by a higher price, then you may have a problem. If volume does come in and price just sits there, then you're looking at distribution, and you may want to beat a hasty yet dignified retreat. Therefore, volume was, in a sense, today irrelevant. What mattered was where we began, at the PDH. Then that we stayed there. If it were going to fail, it would probably fail fairly quickly, at least testing the PDC. Instead, it steps aboard the escalator and embarks on a trend day, and very elegantly, I might add. And not only a trend day, but a range expansion day, leaving behind this peculiar little 3-day nipple. The only potential stumble in this stairway to the stars occurs at 09:50/:55. The first candle is very bullish, and would ordinarily encourage the buyer to press on. However, its immediately followed by what most would consider to be a very bearish candle, which would discourage the buyer from pressing on. And if you were to blend them (i.e., merge the two candles into one, as shown, just as theyd look on a 10m chart), theyd look even more discouraging. But this is a nice example of The Dog That Didnt Bark, i.e., awful things are supposed to happen because of whats going on between buyers and sellers. Or, at least, what seems to be going on between buyers and sellers. And price does in fact drop a couple of points in the next bar. But look at how that bar winds up, closing very near the high, and well into the previous bar, and on good volume, too. Instead of a plummet into the PDR, you have a nice rally, and that sets the tone for the day (if you still haven't figured out "what's this?", it's a bozo). Given where we are, this is the charting equivalent of a cannon. When price comes back on light volume, stays in the upper half of the bozo, and no selling pressure is to be found anywhere, there should be no equivocating about what to do. Anything else is really just distraction.

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Unfortunately, a lot of people -- i.e., those who have trouble determining the existence of trend, much less its direction, which is a hell of a lot more people that you'd imagine -would try to short this all the way up ("it's too high"). They'd note, perhaps, that volume tapers off after the first hour, suggesting that buyers aren't as enthusiastic as they should be. However, these traders ignore the obvious, that price is rising. The declining volume suggests nothing more than that sellers are allowing price to rise rather than make buyers fight for it (if buyers had to fight for it, volume would be higher; if buyers weren't interested, the price wouldn't be rising). These same traders, if price were going in the opposite direction, would try again and again to "catch the bottom".

The market always tells you what to do. It tells you: Get in. Get out. Move your stop. Close out. Stay neutral. Wait for a better chance. All these things the market is continually impressing upon you, and you must get into the frame of mind where you are in reality taking your orders from the action of the market itself from the tape. Your judgment will become poorer from the very time when you decide that you know more about the market than the market is telling you. From that moment your results will be unsatisfactory, for in this trading business the tape is the boss. You must learn to obey its orders, doing exactly what it tells you. When you can accomplish this, you are on the high road to success in your stock trading. -- Richard Wyckoff

Therefore, in order to avoid becoming one of these pitiful creatures, learn how to determine (1) whether or not there is a trend (do you have higher highs and higher lows, or lower highs and lower lows, or is there no discernible pattern?) (2) if so, the direction of the trend (up or down) (3) the strength of the trend (what is the angle of the ascent or decline; is it becoming more or less severe: note the examples of "fanning" here and in Trendlines) (4) a change of trend (i.e., from up/down to sideways) (5) a trend reversal (a move above the Last Swing High or below the Last Swing Low: see Trendlines; note here that price breaks the TL shortly after 14:00, but doesn't drop below the LSL) Think about buyers and sellers and the prices they're paying and the pressures they're putting on each other. If price begins to advance, then pulls back to what had been the old high without falling back into the range, then resumes its advance, then there is serious intent here.

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If you don't have that "stairstep" look where each pullback comes back only to the last swing high before resuming the advance, then you may be looking at a slowing of momentum or even a trend change, if not a complete reversal. The trend can continue upward, but it will be a much slower "grind", and it will be increasingly difficult to place stops (sometimes this grind establishes itself from the very beginning and one finds himself faced with what is called "creep", difficult to play without wide stops and all the additional risk they entail). Therefore, don't get trapped into looking at all of this as lines and angles. Think of the traders involved and what they paid and when they'll be profitable and when they'll be underwater and where they might be trapped into taking the wrong side of the trade. That is, after all, where all these movements come from. Gauging their strength by their movement will tell you who's got the upper hand and where the intent is likely to lie.

Never forget that markets are made up of people. Think constantly about what others are doing, what they might do in the current circumstances, or what they might do when those circumstances change. Remember that whenever you buy and hope to sell higher, the person you sell to will have to see some opportunity at that higher price in order to be induced to buy. -- J. Peter Steidlmayer

This is not an unusual chart for a post-trend day. Price opens at the PDC, drifts until the Consumer Sentiment report comes out (re the note, V=Volume and P=Price). Then, after everybody bounces off the walls, they fall asleep for three hours. After a wimpy attempt by bulls to push price into a new high which instead results in a double top, there is a substantial selloff, much more substantial than one might expect given the length of the base underneath that double top, but an excellent reminder that electing not to take a trade due to expectations, even though the setup may be included in ones trading plan, is never a good idea: you never know whats going to happen. And wouldnt you be ticked if you hadnt taken this?

After studying enough charts, one begins to feel the weight of dj vu. There are only so many twists and turns that price can take, after all, and, eventually, one asks: Now what?

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Youve studied price action, you know what support and resistance are and where theyre most likely to be found, you know that there are three primary strategies to explore, and youre beginning to play with a few ideas on tactics that might be employed to profit from these price movements. And I sincerely hope you love a challenge, because testing these tactics can be frustrating to the point where you want to run into the street, screaming.

To begin, keep the following five elements in mind at all times in order to avoid getting lost: Demand/Supply Price/Volume Support/Resistance Trend Breakouts/Retracements/Reversals

But first, drive out any notion that the point of all this is to find some pattern somewhere that no one else has found and that is going to provide you with the riches that youve always felt that you deserved. Youd have an easier time finding the leprechauns pot of gold. Nope, if youre going to make money at this, youll do it by working harder, being more focused, being more disciplned. Youd be surprised how many traders trade with no plan at all. By developing one, testing it, and following it to the letter, remembering all the while that losses are inevitable and accepting them as an inescapable fact, youll be in a far better posiiton than most to profit from your efforts and reach your goals. To get you started, lets look at retracements, which many consider to be the easiest strategy since they are by definition preceded by breakouts, and breakouts prompt the kind of excitement that moves price. In order for a breakout to be a breakout, however, it has to break out of something, and while there are many spots that price can break out of (e.g., the high of the previous bar), the more significant the breakout, the more excited traders will get over it, and the greater number of excited traders there will be. Which is why rectangles are so popular. There are several examples in Rectangles, along with examples of retracements, some of which work and some of which dont. One can enter these retracements in real time and hope for the best, but the trader who likes to stack the deck in his favor will ask himself some questions first, such as how forceful does the breakout have to be, how far above R does price have to get, what should the retracement look like (e.g., how wide or narrow should the bars be, how many of them should there be, does it matter if the retracement forms a nice cup or not, does it matter how shallow it is, etc.), how long can it go on, how deep is too deep (and what are the chances that it will attempt to advance then drop back a second time before resuming the breakout move), does it matter whether volume contracts during the retracment, and, if so, does it? To answer these questions, or at least begin to find answers to these questions, go back six months or so and work your way backwards, finding at least twenty examples of rectangles. Come up with some preliminary answers and put together a few setups. Then, beginning at the point at which you started looking for those rectangles, work your way forwards and find new rectangles. Apply your setups and see if they work, and, if so, how well. What sort of profit targets are reasonable? How wide do your stops have to be? Does being more precise on your entry enable you to keep your stop tighter? Are there certain movements that you are going to look for that will tell you that your trade is correct? Or are you going to set your stop and do nothing more, waiting for the market to prove you wrong? Once you have all of that and youve made whatever modifications were necessary, continue your forward-testing, only this time scroll through your charts bar by bar rather than study the timeframe in its entirety. This is not the worlds best substitute for real-time trading since youre in control of time, i.e., you dont have to sit there for seven hours to get through a day; you can scroll through a day in a half hour or less. However, its a good intermediate step if you dont lose touch with just how close - or distant - this is from the reality of trading in real time (and if youre wondering where to get scrolling charts, look at TC2000, which offers a free data disk with its software; you neednt update it or subscribe to the data service, just play with it in order to experience scrolling through charts rather than seeing them presented whole on a platter).

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Next, move on to paper trading. This does not necessarily involve the use of a simulator, nor does using a simulator mean that youre paper trading. Using a simulator to get used to the pace and to the feel of whatever platform youre using is certainly a plus, but its not paper trading. The purpose of paper trading is not only to find out if the results that your testing suggested do in fact pan out in real time, but also to record your thoughts and the feelings that occur at the time of the setup, execution, and throughout the management of the trade. Therefore, write down what you see and why you think it does or doesnt fit the criteria youve established for your setup (they look very different in real time than they do in hindsight, even if youve scrolled through the charts; you may have to make decisions based on only a few bars, and the pace may throw you well off your game). Write down the doubts when price doesnt immediately do what you expected it to do (and none of this Oh, yeah, I would have taken that thirty seconds after the trade proves itself to be a success but you didnt act). Remind yourself of whatever rule applies (if no rule applies, jot down a reminder to investigate one). If youre following a rule exactly, note that. If youre breaking one, note that, and why. If you have what you think is a good reason for doing something out of system, note that. If you cant write all this down at the time, consider using a longer bar interval to give yourself time to do so (5m ought to be enough). If thats not practical, use a tape recorder (though the likelihood that youll transcribe all that is slim). But it is essential that you have these notes, since all of this will be a fog soon after. At the end of the day, go through all of it again. Think about what helped you make the right decisions and what was of little or no help at all. If instead you made bad decisions, what were the enablers? And if they're enablers, why do you have them? Be very clear, however, that the purpose of paper trading is not to determine that your system does work but only that it might work. It is all the emotions that rise to the top when youre trading real money real time - the fears, doubts, anxieties, the hopes, the desperation, the panic - that will in large part determine the success or failure of your system, no matter how outrageously successful it may be on paper. Its normal for your heart to beat faster and for your respiration to change, even for you to get dizzy, when you begin trading for real. The notes that youve made while paper trading, the post-trade analyses that you've done, and the adjustments that youve made as a result of all this will make it possible for you to get through this stage and move on to a more relaxed and productive state. If you ever show a consistent profit via paper trading, try it for real with small amounts of money. If you cant show a consistent profit paper trading, you sure arent going to do so trading for real. So redefine your setups and start again.

Trading with confidence has to do with having a method which you have proved yourself, and which you know will win over time if you follow it consistently. That means being able to recognize the conditions which allow you to trade, and only trading when they are all present. This is comparatively easy with hindsight: when we're actually there, we can see when all the pieces fit. But beforehand, we don't know that all the pieces are going to fit: so we trade because we're impatient and fear that this maybe is the best we'll get. Well, somehow we just have to get to be patient. Let's face it, it calls for great discipline. --John Percival

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There wlll be losses, of course. You do know that, dont you? No matter how wonderful your system might be, no system can guarantee a win every time out of the gate, and if you allow those losses to immobilize you, you may as well hang it up right now. Losses should not destroy you, if youve done the work. A loss, after all, is really just a tap on the shoulder, a reminder that not every trade can be a winner, no matter what. On the other hand, that tap on the shoulder is also a reminder to analyze the trade and determine whether or not something went wrong that might have been prevented, e.g., you interpreted the setup incorrectly, or you didnt place your stop correctly, or you freaked when price didnt do what you expected it to do, and you didnt trust the results of all that work you did, or you neglected to check the schedule of reports, one of which threw the market for a loop. If you made an error, make a note to avoid making that error again. In a very real way (not a rah rah you can do it way), the failure helps to move you closer to success, unless youre completely screwed up and making every effort to sabotage yourself by making the same mistakes over and over again.

In this business, you never stop learning. Let me put it another way. If you stop learning, you're on your way to going out of business. Wall Street is a tough teacher but also a good teacher. If you have any weakness -- arrogance, laziness, stinginess, cowardice, procrastination -- the market will zero in on that weakness and make you pay dearly. -- Richard Russell

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And again . . .

In order to profit from trading price and volume alone, one must forget nearly all of which he thought was true, and that presents an insurmountable obstacle to a great many people. If, for example, one insists on focusing on how he can make it "work" with mathematically-derived indicators (stochastics, MACD, CCI, OBV, blah blah blah), then he blocks the process through which he would otherwise understand it and profit from it. If he focuses on where and how to make mechanical entries and exits rather than understand the dynamics of demand and supply, then he blocks the process through which he would otherwise understand it and profit from it. If he focuses on setups and patterns as gimmicks rather than as manifestations of changes in the balance of buying and selling pressure, then he blocks the process through which he would otherwise understand it and profit from it.

Hire yourself to do a job. The job is just to sit there and watch the bars form, to watch the buying and selling waves, the pokes and prods and feelers cast by buyers and sellers looking for a trade, not to create or test a strategy, not to make money, not to learn the "secrets" or the "tricks", just to develop a sensitivity to buying and selling pressure. No indicators, no MAs, no nothing but price bars/points and volume bars. Make notes of what you see and what you think you see. Don't rush to draw conclusions. Throw away your crutches and focus on what the auction market is really all about. The market is not out to get you. The market is not out to trick you. Buying pressure is buying pressure. It lasts as long as it lasts according to who wants what. Ditto for selling pressure. Rather than focusing on avoiding getting screwed, focus on the pressures and the imbalances between them. Don't trade. Don't conclude. Just watch. When you get tired, stop. Come back. Begin again. When you're done, review your notes. Look for those areas in which change took place. Formulate some hypotheses as to why those changes took place in those areas and not others. Don't force the Ah-Ha. Just let it come.

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Begin with what appears to apply to whatever market you're trading. If it's in a trend, focus on retracements and continuations (a continuation being the logical result of a successful retracement). If it's in a trading range, focus on reversals. And so on. Develop the strategy thoroughly, with all the accompanying tactics. Test it. Learn it. Get comfortable with it. Trade it. But understand always that whatever you're doing may not apply to every trading day. If you decide to focus on breakouts, for example, and the entire day is range-bound, then you're very likely going to have nothing to do. This is not your problem. Use the time for something else. But don't force trades. Don't see what isn't there (many novices fall into this trap when they've been working on reversals and insist on seeing reversal setups where none exist, e.g., on trend days). In time, you'll have a variety of strategies to cover most situations. But the key words here are "in time".

There is no inconsistency between tuning in to the buying/selling dynamic and defining setups with specific entry and exit points. A lower high, for example, says something about the balance of buying and selling pressure. Now at what point does the probability of a reversal become sufficiently higher than that of a continuation that the trader will go short instead of long (or vice-versa)? A drop of so many ticks? A break of a TL? A break of an MA of some sort? And once one has determined that, how far does he allow the price to go against him -- if it does -- before he bails? How wide does the stop have to be in order to avoid repeated entries yet not be shaken out unnecessarily? Is there any point at which a pre-emptive stop is justified (demanding to be proven right) or does one just hold to the original stoploss stop no matter what until either it is hit (waiting to be proven wrong) or the target is reached? And what is a reasonable target? And where is my pastrami on rye? Changes in the balance between buying and selling pressure manifest themselves in recognizable and repeated ways, e.g., double bottoms, lower highs, bull/bear spikes (hammers et al), but whether any of these are worth taking will depend on the context, what one wants, what one is willing to settle for, how much risk he's willing to assume, whether or not he's willing and ready to fade himself, etc. Sometimes the changes in balance are so rapid and so violent that the trader might think that only a loon would get involved. And sometimes the changes are so subtle and so quiet that waiting for the trade to resolve itself would put most people to sleep. Therefore, the trader has to decide under what conditions he's going to trade and during what portions of the day (or year) -- if not the entire day (or year) -- he's going to trade. Which may be why so many beginners prefer just to buy when the green line crosses the red line and sell when the red line crosses the green line.

The degree to which one experiences anxiety before and during the trade is in direct inverse proportion to the amount of preparation he has done; in other words, the less prepared you are, the more anxious you will be (many people start the day anxious and stay that way until the final bell). Trading according to buying and selling pressure entails looking for those areas which are most likely to attract attention and activity, which is why understanding the nature of support and resistance is important. Those areas where the most people traded the most shares/whatever in the past are most likely to ignite activity because all those people have something to gain or lose at those levels. Again, there are several levels or areas or zones to look at, the most obvious of which are the previous day's (week's, month's, year's) high and low, and if one does nothing but sit idly by until those areas are tested, he will likely save himself a lot of money. The opening high and low can also be a rich source of opportunity. I say "can" because one must also consider volume: if there's lots of activity, there's likely to be lots of opportunity. Targeting these opportunities in advance is simple. Sitting on your hands until the opportunities actually present themselves is considerably more difficult. But if one knows well in advance what he's going to do and where he's going to do it, and has some understanding of the nature of probability, he has nothing to be anxious about.

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A good friend of mine, Julian Snyder, wrote a book for traders called The Way of the Hunter Warrior. Recently I asked him about the use of such a metaphor for trading, and he conceded that it's total nonsense in the light of what he now knows. "You have to trade without ego, and any contest elevates ego," he said. I like to think of trading as sailing. Here you harness the forces that are there. You take into account the wind direction and velocity, the currents, and your destination. You've got your charts to guide you and you constantly adjust to nature's forces, sometimes pointing into the wind, sometimes running before the wind, sometimes tacking, but always in partnership with your boat, your crew, the wind, and the currents. Sure, storms can come up, but you can always let down the sail and anchor and wait out the storm. You work with the forces that are there, the forces that are much bigger than you, but you enjoy the journey, the day, the sport, and you're confident you can get to your destination, your port, your safe harbor. --Ruth Barrons Roosevelt

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