In Price Action Trading Strategy

Many traders that are good at gauging market sentiment, global reactions, etc., are poor market timers, and it might be true that a lot of them never crawl their way out of this bubble.They get caught up in the fundamental inputs, economic data analysis, volume ratios, and eventually seem like better analysts than traders. They can talk their way through a conversation about Fed monetary policy but have a terrible time getting into the market when it counts the most. Conversely, you have technicians that can mark up every level imaginable on a chart, show strengths and weaknesses of underlying trends, demonstrate cyclical analysis, etc., yet get blown out because they are poor at gauging global responses to rumors, data, or any other factor driving the market.

But every once and a while, you find a trader that is a deadly combination of the two.They go on to become legendary traders – spoken to be the perfect balance between He-Man and corporate finance.Finding this balance is a complex subject, however, and those that “have it” never gain it overnight.Phases attack us over our careers, and many people end up getting stuck in “trader purgatory”, at least for some time.

In The Beginning….

In the world of day trading, we have a problem, and it starts at the beginning of our careers.As far as we can tell, the only purpose of technical analysis is to accurately time the market, but not take over an entire means of perceiving it.I made an attempt to gauge industry input by doing a quick book search for the term “daytrading”, and came up with the following results:

7 of the top 10 book results focused on technical analysis as the primary or only weapon to use in order to trade.Out of the other 3, 2 of them covered it in about half of the book, the other one was solely based on fundamentals centric to a specific market.And of course, included in the titles of these books were some of the following terms: “Guaranteed Income”, “Big Profits”, “How to Profit”, “Make Money”.It’s a greed machine, I assume driven by primarily the publishers because admittedly money is a lot more attractive than a chart of the dollar index.

Groupthink And Technical Guides

I have always been critical of longer-term technical analysis, simply because the landscape of ideas, opinion and data injected into this market can change so rapidly.Using these past few weeks and events tied to EUR/USD as an example:

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….this list could keep going but simply stated: none of these items have anything to do with technical analysis.They are all based solely on traders reacting to news releases or data events, providing an outline or premise of the direction of any particular trading period.They are the catalysts that lead to changing prices, the same ones dissected on charts in terms of technicals.

Technical analysis, in this sense, should be used as a reference only.It helps us to define entry point

s, stop losses and profit taking opportunities.Undoubtedly, it is hardly ignored in this or any other major market.One glance at a chart and it is quite easy to see the number of responses on support or resistance levels, derived by many different means, happening over and over again.They serve as the entry and exit points for traders throughout sessions…..they are a guide, or a shell, to all preexisting data mentioned above.They “build the house” but don’t control the people within it.

The “crowd” or major market participants that have the ability to move these markets are monitoring these levels in order to assess the possibility of price turning or following through.Major breaks on trendlines or key highs and lows can undoubtedly build momentum, as participants across the globe notice these shifts and in all essence, go with the flow.At the same time, a single news release of substantial impact can reverse these flows, as they are indeed the primary drivers of any market.

Blowout Forecasting

Forecasting through technical analysis typically takes advantage of loopholes or common “efficiencies” in the way price moves based on what has occurred in the past.When we rely on exponentially calculated indicators to tell us where price will pivot we are simply ignoring the primary drivers of the market.By using support and resistance levels we monitor that which everyone can see, exploiting opportunity in order flows based on underlying crowd psychology, underpinned by these events.

Fundamental vs Technical Analysis Cause and Effect Currencies

A while back we discussed automated trading, and I explained that one of the Quants at the hedge fund I was working for got plastered during the early days of the recession.With a sharp peak on the world equity markets, it apparently mistook an entire collapse of the stock market for a correction, buying and dumping all along the way until the strings finally got pulled and “Uncle” was cried.Including employee salaries, this is a system that cost millions of dollars to build and quite literally did about the same quality job as simply coded automated trading strategy built by an amateur in a dark room.

Not to sound like a complete random walk theorist, most of my work as a writer has been about technical analysis, but only surrounding the basics of support or resistance.For my general purpose and sense, levels are to be used only as a guide, nothing more and nothing less.They provide us with a visual reference from which to work and responses from them can provide us with more precise means of execution.

TMI – Too Many Interpretations

A lot of inexperienced traders want to know how the “big boys” trade.Well, some of them trade like idiots.Others, quite the opposite.No matter what level you are on or how much capital you have, keep in mind that we all have the equal ability to make mistakes, follow the wrong paths or do illogical things.Humans are humans.But by simply understanding the basics of what moves this or any other market we have our framework from which to build.

I try to keep things easy.Really, I do.If there is one thing I don’t like it is staring at a slew of mind-numbing data that serves me little purpose in the outcome of my bottom line.As I scour the internet every day looking for pieces of information that might help me or guide me, I almost always fall back on worldly interpretations on news articles, primary economic data and basic/globally visual technicals to enter or exit the market.

There is only so much information out there, but theories, interpretations, etc., of it can be thousands of time greater than the original.Typically, you will find most of the flows going in line with the most simplified interpretation.And if it’s not, make sure you didn’t miss something, because there is a good chance you did. People only have so much time to digest information, and they want to be able to react quickly enough to ensure they’re making a profit. And in times of uncertainty/doubt or confusion never forget risk management rule #1: don’t do anything at all.

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Showing 13 comments
  • David
    Reply

    Very good article and so much value. Hope you'ill keep posting articles on this site.

  • David
    Reply

    This sentence confused me:

    "levels are to be used only as a guide", does this mean that the levels that are drawn with nbt criteria shouldn't be used as zones to trade?

  • Viv
    Reply

    "…..they are a guide, or a shell, to all preexisting data mentioned above. They “build the house” but don’t control the people within it." – Very well said, yet another great work. Thanks for your time and effort Steve.

  • Lee Paulison Jr
    Reply

    Excellent article as always. As one of those beginners you mentioned. I always seem to be late to the party as those 'levels…to be used only as a guide' come and go. One hopes that in my future time will offer insight to allow me to judge with greater efficiency what levels will hold or fall.

  • nobrainertrades
    Reply

    Hi David, I was basically referring to going in tandem with overall direction based on the above. Any level is going to serve value as long as the outcome is of course positive ;); trading in line with the shifts / flows is essentially all I was referring to.

  • Shirley
    Reply

    Steve,
    Thank you for sharing your knowledge, every article you write is a gem. I'm going to start building a collection of your articles.
    The following is to be taken in consideration every day in every trade
    And in times of uncertainty/doubt or confusion never forget risk management rule #1: don’t do anything at all.
    Shirley

  • Ironmanfx
    Reply

    Great article , Steve. Clearly you did the research. When I read about automatic trading quite honestly, I cringe, to think anyone would commit their hard earned money to an unintelligent machine. Perhaps if the hedge fund you mentioned had considered programming in a test for lower lows as a safeguard to reverse capital positions, they might be rock stars today, rather than licking their wounds. (or maybe a few interns on the mid night shift) The whole concept of buy and hold, adding to losers and dollar cost averaging are fancy terms for giving your money away. Of course there are times these strategies can work to some degree but never as a "set it and forget it " approach. In the last year there have been some great buy opportunities in stocks. Just know when to let them go.

    I agree with your observation of book publishers targeting greed. They know what sells. Stand on the street corner and promise people consistent 40% returns month on month, and watch people stuff money in your pockets, (was that Bernie Madoff slipping out the back?) but let's not talk about the draw down.
    I have often said that the charts tell it all and they do. My approach to fundamentals has always been a macro-economic approach. (Hey it worked for George Soros) I consider the overall sentiment but I enter and exit on what the charts say. Not really sexy, rather boring really but then I consider a conversation Larry Hite once had with a friend. The friend asked him how he could stand to trade that way,wasn't it boring, afterall? Larry Hite responded, "I don't trade for excitement, I trade to win." and so should we all. After all there is only one side to the markets, the right side.

  • nobrainertrades
    Reply

    Thanks Dave, Great to see you stopping by and yes just going with the flow while emphasizing the use of levels all along the way — daily stuff, micro trends developed by the less significant, lower impact, alternate for high. Hope all is well and see you soon.

  • Pair Me up
    Reply

    I am still trying to learn.. I like your idea about major support and resistance. Sometimes I get confused with how to draw them.. If I zoom in on the chart I can see a few hills and valleys.. If I zoom out the hills or valleys might be farther from the current price. So how can I make sure I am drawing them correctly. And also know that they are the ones that the majority is looking at, if I drew them myself?

  • Finally Getting It
    Reply

    I am about a year into trading and discovered no brainer S&R about 8 months ago.

    It's finally sinking in that's all there is.

    Is that all there is?

    Yes.

    That's all there is my friend.

  • Wayne
    Reply

    Steve

    Your interpretation of the markets has changed my trading in measures I cannot express. I have been at this going on 6 years now. Throughout that time I have experienced success streaks occasionally between the constant account decay. About 6 months ago I stumbled on your content and it resonated with me so clearly it almost felt unreal. I have enjoyed a growing account now for 4 straight months. Usually a success streak lasted an average of 2 weeks. Something has certainly changed.

    I am still dealing with the burden of past failure and find myself seeking stunning trades only to miss them due to inner doubt in my abilities. I estimate at least 10 trades that I was about to open,but didn't, turned out to be monster winners. Nevertheless, my success is still in a different leave now and I am sure my confidence will come with time.

    Thanks again for all your bits and pieces here and there that has certainly changed my trading around.

    Regards
    Wayne

  • nobrainertrades
    Reply

    Thank you Wayne….Needless to say these are perhaps among the most welcome comments on this site. Your efforts are #1 and everything that might get posted here, interpreted as a guide. It's about focusing in on the appropriate / relevant things and I am very happy to hear that you have made considerable progress. Again, thank you very much and I am just as certainly glad to have you around.

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