Trend Day It's been a while since I've provided one of these examples, so add this to your collection.
Preparing for the day If you still read the "what's going to happen" stuff, either on message boards or on "news" sites, you'll be poorly prepared to face the day. Like everything else, what's going to happen is a question of probabilities. There have been eight range expansion days in the last two months, not counting yesterday. Only five of them were trend days, again not counting yesterday. Therefore, if you want to approach the day in a business-like way, study those days and try to determine why they turned out the way they did. For example, were there any gaps after the range expansion days? If so, were they above the PDH, below the PDL, or into the PDR? If they were into the PDR, did they reach all the way to the opposite end of the PDR, or just slip back a ways? Did any of this take place at the top of the trading range? The bottom? Did that matter? What if it took place in the middle of the range? Did that affect the nature of the following day? If so, how? What was the likelihood of a doji day? Trendless chop? What were the conditions and possible signals? And so on.
For the traders who have learned to think in probabilities, there is no dilemma. Predefining the risk doesn't pose a problem for these traders because they don't trade from a right or wrong perspective. They have learned that trading doesn't have anything to do with being right or wrong on any individual trade. As a result, they don't perceive the risks of trading in the same way the typical trader does. Any of the best traders (the probability thinkers) could have just as much negative energy surrounding what it means to be wrong as the typical trader. But as long as they legitimately define trading as a probability game, their emotional responses to the outcome of any particular trade are equivalent to how the typical trader would feel about flipping a coin, calling heads, and seeing the coin come up tails. A wrong call, but for most people being wrong about predicting the flip of a coin would not tap them into the accumulated pain of every other time in their lives they had been wrong. Why? Most people know that the outcome of a coin toss is random. If you believe the outcome is random, then you naturally expect a random outcome. Randomness implies at least some degree of uncertainty. So when we believe in a random outcome, there is an implied acceptance that we don't know how it will turn out, that acceptance has the effect of keeping our expectations neutral and open-ended. Now we're getting down to the very core of what ails the typical trader. Any expectation about the market's behavior that is specific, well-defined, or rigid -- instead of being neutral and open-ended -- is unrealistic and potentially damaging. I define an unrealistic expectation as one that does not correspond with the possibilities available from the market's perspective. If each moment in the market is unique, and anything is possible, then any expectation that does not reflect these boundary-less characteristics is unrealistic. -- Mark Douglas
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.
I suppose the most concise explanation is in the Demand/Supply file, though I wouldn't call it "my" method. There are also a number of examples to illustrate the method in most of the files, as well as all the examples posted here.
At dbphoenix's request this thread is closed. It has been a tremendous draw, most enjoyable, and a great eye-opener for many. We all thank him for his efforts and look forward to future threads building upon the "base" created here. Later edit: dbphoenix has started a new thread entitled Price and Volume: Strategy http://www.elitetrader.com/vb/showthread.php?s=&threadid=33766