It's easy to get distracted by jargon. As I said in an earlier post, I rarely trade anything but retracements. I'll trade a reversal only in a trading range. Be that as it may, what you've got here are two trading ranges (very loosely-defined in these cases), one from the open to around 0855 and the second from there to the time you decide to stop trading. The first reversal is at 0835. Since one can't know at the time that a TR is in the offing, he takes the first retracement after this reversal. This retracement takes place at 0837, and the long is entered one point above that. Unfortunately, this doesn't last long and there's another reversal at 0841, then another at 0843 (your higher low), then another at 0845/6 (your lower high). In other words, not only no trend but a sloppy and untradeable TR. Finally there's a reversal at 0850 that sends price out of this TR with a retracement shortly thereafter at 0856 with an entry a point below. But this doesn't go anywhere either, and we end up in another TR. One can't know this ahead of time, of course, or he probably wouldn't have bothered trading at all. But that's the way some days are. So even though I was entering on retracements, these retracements took place after reversals. If I had known a TR was in the offing, I would have entered on the reversals and not waited on retracements, particularly since there weren't more than a couple of retracements to trade anyway (unless one dropped down to a smaller interval). But you don't know in advance whether you're going to have a TR or a trend (and, in this case, we had neither, since price made a higher low and a lower high). And while I'm not suggesting cherry-picking, don't try so hard to learn something from this day that you end up learning the wrong things. This was a crummy day. Learn from it what you can or need to, but don't try so hard to make something better out of it that you end up curve-fitting. Incidentally, you're not the first person to become confused by this retracement/reversal business. That's one reason why I came up with these lines. If price is in a downtrend and pulls back a bit without breaking the resistance line, one can be assured that the pullback is no more than that: a retracement in a downtrend (\/\). However, if what was thought to be a retracement breaks the resistance line and makes a higher low before continuing upward, then you've got a retracement after a reversal (/\/). And if that gives you a headache, remember that it doesn't matter what you call it as long as you understand what traders are trying to accomplish. Do that and you'll remain on the right side.
And this lesson tonight can be capped off by "You must be able to imitate nature before you have the right to interpret it" Antoine Bourdelle Thank you.
You're welcome. But providing hindsight examples makes things appear a lot easier and more certain than they really are. Which is why gurus and vendors always use hindsight charts. Everything is crystal clear in hindsight. Real time, however, is another matter. Let's say you have something moving south from 100 and it's all the way to 60. Then it stops and starts moving north. Is this a reversal? Or is it only a brief retracement in an ongoing downmove? You can be mechanical about it and bring in indicators and formulas and statistics and so forth like so many people do these days, or you can be a trader, recognizing that it's not just a dot floating in space but the print of transactions between buyers and sellers. There are many reasons why price may have stopped and turned, even if the "turn" was only a brief one, and without becoming immobilized by the "why?", you can apply what you know to the situation in order to make real-time sense of it. For example, if you have the experience, you'll know that parabolic moves come to an abrupt and often terminal end. To do nothing in anticipation of a continuation is merely hopeful. A move in the opposite direction here is much more often a reason for an exit, particularly since one always has the option of re-entering if that is called for later. But, in the case above, let's say it's not this obvious. So we look at just how strong this maybe-reversal is, which is where the resistance line comes in handy. Does it break it or not? If it does, there's some evidence that this is a reversal and not just a retracement. But it's not enough. Is it forceful or is it wimpy? Does it run out of steam at the crest of the move with shorter waves or does it move ahead as if the way were free and clear, like a cork bobbing to the surface? And this is where you have to keep your wits about you and not only interpret what traders are doing but anticipate and possibly second-guess them. Let's say you've been short all the way from 100 and you don't know whether to exit or hang on in hopes that there will be a continuation. The easy answer is that if you're hoping for anything you should get out immediately. Or maybe you're afraid that there won't be a continuation. Same answer. Exit and watch. Whichever way it turns out, there will be a later opportunity to rejoin the move. But even if hope and fear are not part of the landscape, you still have to decide what to do. If the move north has been strong and broken the resistance line, you still want to wait for a slight pullback -- or retracement -- in this supposed reversal in order to go long. If you were short and exited that short, you're free to do whatever you want. You may think that this "reversal" was weak and that whatever pause may occur here is not a retracement in what will be an ongoing move upward but a retracement in an ongoing move downward. At the moment, without any regard for support or resistance, the only clue you have is that your resistance line was broken. Perhaps the best way of dealing with this rather than indulging in a lot of useful hand-wringing is to place your buystop above what looks like it will turn out to be a retracement in a new upmove and just wait. If this is a retracement in what will be a new upmove, price will resume its upward course, stop you in, and you're long. If it doesn't, then wait for a lower low, which means that price will drop below your resistance line again (it happens). If it does make a lower low, then the odds have shifted back in favor of a continuation downward, and you have three choices: jump in when the lower low is made, wait for the hesitation which often happens in these cases and place your sellstop just below it, or wait for a pullback or retracement after this lower low is made, placing your sellstop inside the crest of it but far enough away from it so that you don't get trapped into a trade that doesn't go anywhere after all. Paradoxically, if the downmove is a good one, the last option will not likely come up because there won't be the necessary indecisiveness, which is to some extent what retracements are all about. You'll just have to be ready to jump in, if you're ready, but be ready as well to exit immediately if things don't go your way. And to add another ingredient to the mix, if what you thought was a retracement doesn't work out and you exited your short thinking that it would and even went long, price may shrug all this aside and head south again anyway, only in this scenario it makes a double bottom. In this case, you may have an even clearer sign of a reversal since everybody has by now had plenty of time to think about it, and since you now have a more definite line in the sand, you can either plant your flag and place a buystop above this or bracket the trade in the event that the "double bottom" is after all a ploy (unlikely but possible) and be in position for a new short trade. As a further help, of course, there are the macro support and resistance, such as in this chart: http://cdn3.traderslaboratory.com/f...-markets-wyckoff-way-making-bazillions-d1.png Resistance may have been of more definite help in these trades than support, but knowing in advance where to look for "reversal behavior" helped to take advantage of the two reversals at the January trading range, one in early April and one two weeks later (which we're still enjoying). This is an ongoing process and you learn something new every day. The "schematics" and "templates" that vendors are so fond of may be helpful, but they more often encourage the trader to start thinking in terms of patterns rather than behavior, and the odds that he will make the wrong call at the wrong time increase that much more.
5/1/13 Overnight R 2886 2nd R 2884 Overnight S 2879 2nd S 2881 Open 2879 Focus on: 1) Wait for compelling trades 2) Observe behavior during retracements 3) Watch left of chart for changing S/R 4) Experiment with stop orders 5) Use If/then Trade 1: +1.00 Trade 2: +2.25 Trade 3: -0.50 Trade 4: -1.25 Trade 5: -0.50 Net: 1.00 Start 8:30 a.m. 8:33 Uptrend since open. But price retraces in the first down wave of the day on 1 min. Canât tell if there is any definite S that the retracement is crossing at this point. Price moves back up North and there is a chance to experiment with setting a sell stop below. Set sell stop at 2881.75. This point is above LSL of 2881.50 but below my defined R line. 8:34 Price hesitates for 10 secs and then drops and hits sell stop. Now to see if crosses the final S made by LSL. If price fails, give it till 2882.50 8:36 Price goes down till 2879. This is the open and there is likely to be strong S here. Do I exit the trade based on likely upcoming strong S. Or do I use the SL to stay in the trade? 8:38 Exit Buy at 2880.75. S throws price back up and it crosses SL. Could have exited at S and used a retracement with sell stop to get back into the downtrend if it persisted below S. 8:42 Price bounces against R and drops back all the way to S zone again. Now based on the last performance, S seems strong. So I could place a buy stop to play the bounce back into range. Risk would be limited to S boundary. Set Buy stop at 2879 8:42 Buy stop is hit. If price fails, watch for it to break 2878.25 8:43 Exit sell at 2881.25 Was about to draw DL and manage trade, but then price spiked fast all the way to R at top of range. Likely to bounce back here, so sold. 8:44 Price overruns R easy and goes to previous high zone. 8:45 Price bouncing against R at 2883.75. Could try a sell stop again for the bounce back into range. There is no dominant trend yet, but a good 6 point TR is being formed. 8:45 Set Sell stop at 2882.75 Price breaks free of R and travels up with strength. This could have been a good opp for a bracket trade with setting a buy stop above R. The speed of the last upwave meant there was a good possibility of R not holding and all that pressure flowing north. Now, wait for a retracement. 8:47 Price drops to S. This S is likely to hold. Place a Buy stop above it. Buy stop at 2884.50. 8:48 S does not hold at all. Cancel Buy stop. Back in TR. 8:52 TR turning into hinge - chop zone. Wait. 8:55 R keeps pushing down showing a number for LHâs on both min and tick. Lets see if S can hold, otherwise it will be a trend south. 8:56 Price breaks S and makes new low of day. Then it retraces back to prior S (and now R). Chance to set a sell stop here. Sell stop at 2877.50. The stop is below dayâs low as setting it at the low is setting it as S point and I want price to break all further support to confirm down trend. 8:56 Sell stop hit. If price fails, give it room till 2879. Just realised that I made an entry error - the sell stop was above dayâs low so I am closing the trade. 8: 56 Exit buy at 2878.25 8:56 Reset Sell stop at 2877.50 8:58 Sell stop hit. Exit But at 2878.75. Price was hesitating too long and went back up past my R level. 9:06 Now we finally have a legit downtrend. Look for retracements. 9:08 Tick showing a lower double top.Price crossed R a while earlier so there is a boundary line condition here. Buy stop at 2875.50 9:09 Buy stop hit. The S below seeming to hold. If price fails, give it room till 2874.50 9:10 Exit Sell at 2875. Price just stalled and anxiety level rose high. 9:15 Price has been grinding down. However, donât see any low risk entries because even the downtrend is full of too much chop. Buyers are buying every low and not letting a clean break form for more than 2 points. In this scenario, even if buy/sell stops are set, the price that propels me into the trade is going to very shortly meet another zone of R/S and the point risk is not worth it. 9:25 1 min chart finds some S at 2869. Selling waves have been getting weaker and the bottom may have been reached. Double bottom on 1 min. Watch to set buy stop. Nope - still too choppy. Price goes back down so that buy stop would have been hit and failed. Summary: Trade 2: Since trade 1 resulted in giving up some gains due to a bounce from S, I got biased and thought same thing would happen on trade 2 and it would get bounced off R. So I sold and it was too early. Using the DL exit method would have kept me in for another 3.5 points. Opportunity Missed: The upswing from 9:00 to 9:03 reversed and there was a chance for setting a sell stop here once it crossed the S. But the action had been choppy and there were too many levels of S for me to have conviction to take the trade. Intro to retracement entries today. Need to continue observing action inside these zones to understand where the stop orders should be set and the clues that indicate trade is not working inside these zones. But the important thing is to understand S/R. Long ways to go there.
I have attached a hand drawing here to understand this. I am labeling the points here to ensure that I am following your terminology of crests and troughs correctly. First down wave: A: Swing Low B: Swing High C: Retracement Peak D: Potential Buy Stop E: Potential Buy Stop F: Potential Buy Stop Of these 3 buy stops: F has least information risk but highest price risk E has medium price and information risk D has highest information but lowest price risk D has the highest expected value. In this hand drawing, the distance from B to C is greater than 50% of the distance from A to B. Although in this drawing the price reversed, most retracements that cross 50% of the preceding wave do not reverse. Second Down wave: A: Swing Low B: Swing High C,D,E: Sell stops In this case, C has highest information but lowest price risk. C has highest exp value. Is this understanding correct?
I agree that these things don't generally lend themselves to rules - set up rules run against the very premise of dynamic price action. I set up the example just to make sure there were no major conceptual errors and I am glad to have learnt that the R you were talking about earlier is not what I was thinking. Makes things simpler now to see it in terms of losing momentum instead of this lateral R that I visualizing. My asking about the best entry points was based on already making the assumption that S would hold. I was trying to reduce the moving parts and focus on the best Risk/Reward entry. In real time this would be subject to all that you stated - in terms of being aware about the nature of the current price movement and S/R - so as to first determine whether one should be short, long or neutral. I get that. But rigid set up rules aside, there are certain tendencies that are based on principles. Being on the right side of these principles increases the edge. 1) Getting into trades at boundary conditions - because equilibrium is most likely to shift here. Additionally, the boundary zone provides a good reference point to indicate when a trade is not working. 2) Following the trend 3) Letting the market come to you - a subset of following the trend principle. This improve the Reward/Risk of a trade as well. All three of these principles are intertwined. Edit: Is my understanding of these principles so far on the right side? Would you say there are other equally important general principles that one can use to narrow the search to investigate the edge?
That's pretty much it. Support and resistance aren't always a help because there may not be much. Or any. Currently, for example, in the NQ, we've broken through R from September and seem to be on our way to the top of the trend channel at 2960. There may be stalls and retreats on the way, but the eye appears to be on the prize. Otherwise, supply/demand (or buying pressure and selling pressure) and trend/trendlessness (or ranging). Volume can be helpful if you understand it, but, if you don't, deal with everything else first. FYI, here's a chart of the current NQ long trade, though it's several days old (NQ reached 2910 today). http://cdn3.traderslaboratory.com/f...-markets-wyckoff-way-making-bazillions-d1.png