Link: Anticipation vs Reaction revisited – TraderMike

Apr 12, 2007: 9:08 AM CST

Michelle, guest author at Trader Mike’s site, contributed a summary post of an earlier article (anticipation vs reaction) and also listed four more links to previous posts that are very helpful to newer and experienced traders.

She also discusses an interesting paradox in thinking:

“Beginner traders are often anxious to do the right thing. They want to be firm and disciplined. However, an experienced trader will be able to combined flexibility with a firm hand in order to enhance her/his edge”

Brett Steenbarger recently exemplified this exact sentiment in a post of trades he took on April 11th.  After ‘being flexible’ and switching his perception and trade, Dr. Steenbarger concludes:

“Years ago, I wouldn’t have made that second trade. I would have stuck with my initial long and then watched a small profit turn into a loss before covering. I would have had a good idea, but not the ability to flexibly modify or overturn that idea.”

Take the time to read through these insightful posts from market professionals.

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Chart Analysis – Apr 11

Apr 12, 2007: 8:58 AM CST

Yesterday was a wonderful day for trading, as the market signaled a daily short-sell set-up and the intraday action unfolded beautifully with pure price swings and clear resistance/support levels.

Rather than muddy up a chart, I thought I would indicate the pure action using the 15-minute chart with nothing but price and moving averages. Moving averages are not magical – when they work, it is because other traders were watching them and sentiment shifted when the market reached these levels.

Nevertheless, using moving averages in a trending environment can give pure price entry/exit signals as well as define your risk (stop loss placement) to a very small and acceptable level as compared to the possible reward of the trade.

dia-apr-11-15min.jpg

This is a 15 minute chart of the DIA – Dow Jones ETF. With the exception of the choppy counter-rally from 10:00am until noon, the price smoothly trended with few ‘hiccups’ along the way – something many traders wait a long time to see but rarely do with consistency.

Another point I am making is that simple ideas, rather than complex technical analysis, can work just as easily with less effort and mental anguish (or confusion, particularly if technical indicators are conflicting at times).

Best of luck throughout the week.

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Know Why You Trade the Signals You Do

Apr 11, 2007: 1:47 AM CST

Do you know the “whys” of how you trade?

What I mean is, when you take a signal, do you consider why you are taking that signal? When you exit, do you know why you do so?

On the surface, you might say “I enter when I perceive prices moving a certain direction, and I want to flow in that direction” and “I exit when I feel the move will no longer continue, or the move did not unfold as I expected.”

That is exactly what you should say. But do your trade entry and exit signals say this at a deep level?

Let’s assume you use an oscillator to enter trades. When the oscillator reaches a certain value (oversold/bought), then you will enter. But what does that oscillator value really mean?

If the RSI is reading 20, it may mean that the market is “oversold” and due to rebound back up – but you cannot take this (or any) signal in isolation.

Ask: “Does this signal tell me information about the most likely price movement?”

In fact, a better question might be: “Will this new information cause traders to alter their perception of the current environment and switch their positions as I expect them to?”

In other words, if you are expecting a price reversal to the upside, think a minute about what is likely to CAUSE that price reversal.

Is it because an indicator hit a certain value? Probably not.
Is it because a market hit a certain level, be it a previous support zone or moving average? Probably not.

Prices move because traders – in aggregate – reach certain conclusions at different times. Where one is buying, another is using the exact same price for selling. What matters is the aggregate decisions of all participants at a specific price level or zone. If a signal works, it is because enough traders perceived it and acted on it to cause the movement, and disturbed the market balance of supply and demand.

When price reaches resistance, some may sell their position, others may enter a short trade, others may hold because they have not identified potential resistance, some will buy because a fundamental or news reason has occurred (which has nothing to do with technicals), some may buy early, anticipating a breakout, others may buy because they cannot take the pain any longer of mounting losses in a short position, and various other esoteric reasons.

Each person – or groups of traders of like-mindset – will put buying or selling pressure on the market at a given price, and the true “battle” between seller and buyer will move prices. Some will enter and the market will move against them and be proven wrong and exit. Some will enter, be proven right, and enter a larger position.

Conclusion:

Price movement occurs as a result of a complex interaction between buyers and sellers for reasons that are often unknown. It does NOT occur because an indicator said price would move a certain way. It does not move because the ADX is low, the Stochastic is oversold, the MACD is crossing, or the market has pulled back to a moving average.

The next time you take your trade, identify possible forces that will work to support your trade idea and forces that will work against it. See if you can anticipate the winner of the “battle” between buyers and sellers at a given price and if you think and analyze deeply enough – and capitalize on the side that is losing – then you should improve the accuracy of your signals. Always think of others.

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For Those Who Like Prediction… a Link

Apr 10, 2007: 11:18 PM CST

If you like newsletters or market predictions, a great site I discovered recently is Carl Futia’s site. Carl Futia obtained a PhD in Mathematical Economics.

He uses the Theory of Contrary Opinion and Box Theory (which he describes on his site). He frequently updates futures, including the Nasdaq and S&P.

Today, he posted price targets and support for a few major stocks, including Google (GOOG), IBM, and CME.

If you like outside opinions on price, the site is worth a look. Especially check out his warning post entitled “Should You Speculate” (his answer might surprise you).

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For Fibonacci Lovers: Recent Dow Action

Apr 10, 2007: 10:08 PM CST

Hey Fibonacci Enthusiasts: An interesting pattern occured in the Dow Jones Index that I thought was worth showing.

Since March 19th, we have had (in order):

  • A 5 day rally
  • A 3 day decline (counter-rally)
  • An 8 day rally

These not only constitute perfect Fibonacci sequence numbers, but evidence of greater (recent) buying pressure in the short-term.

dow-apr10.png

When people think of Fibonacci numbers, they often think of retracements/support/resistance/price projections. Also recognize that – at times – Fibonacci patterns are evident in daily price action and in trends (up days vs. down days). This would be a difficult way to trade, but it is worth analyzing and seeing if there is a possible edge. If for nothing else, it provides good market trivia.

Another interesting bit of trivia:

According to a Wall Street Journal Article, the Dow rising eight days in a row has set a record not achieved in the last four years!

This is further evidence of the lack of “trendiness” in the last few years of market action (and higher odds for mean reversion, than sequential price continuation on subsequent days).

If Fibonacci is correct, and if our Stochastic sell signal is correct, and if prior resistance is correct (two days of failure at 12,600), and if the prior gap serving as resistance is correct, then we should see short-term lower prices (a counter-wave or corrective price wave).

If not, then the market just did more than set a record – it beat high odds of a temporary (but brief) decline.

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