Reading Price Action - The Analytical Approach

In the chart above, one can figure out that price will collapse after candle B, for the following reasons:

1. Prior to candle B, price showed weak attempts to rally above the upper channel line (red). Previous bull candles all have relatively long upper wicks.
2. Imagine how candle B looks like when price is at the high of the candle… At that moment, price probably looked very bullish… Unsuspecting bulls may jump onto the trade, believing that price is due to rally.
3. In fact, candle B is a nice bull trap… Its high is slightly above the high of candle A, and will thus trap bulls who buy on breakout.
4. Candle C is another confirmation that price is weak. A nice price to sell will be one pip below the low of candle C.

The Zigzag Pattern

The chart above shows a common pattern that leads to a trend continuation. I don’t know what is the actual name for this pattern, so I’ll just call it the zigzag pattern. This pattern starts with a strong uptrend, followed by a reversal that is significantly less steep. When the green downtrend line is breached, the previous uptrend resumes.

The pattern is stronger when it is combined with other price action. If we zoom into the chart above, we can see that a cup-with-handle pattern formed before the downtrend line is breached (refer to chart below). The shallow handle is further proof that bears were not strong enough to push the price down.

Cup with Handle

• If previous trend is too strong, never trade counter trend.
• Watch out for magnets nearby.
• If a candle largely overlaps with prior candles, it is not a valid signal.

• Failed breakout of trendlines, coupled with
• outside candles, or
  double high lower close/double low higher close, or
  matching lows/high.

He argued that everybody can be a successful trader, as long as they find the correct niche for themselves… Some traders are suitable for discretionary trading, others prefer a mechanical system… some need to day trade, others prefer to do lots of fundamental research and only trade once or twice a month…

This is not a new concept to me… It’s something that I always believed in… But he mentioned something else that struck me.. He said that if we have problems being disciplined in our trading, it may be because that trading style is not suitable for us… He gave an example of an army officer who had problems with spread trading, because deep down, he considers hedging to be a coward’s behavior…  Thus, he argued that if we find ourselves repeatedly breaking our rules when trading, working on our self-discipline may not be the solution… Instead, we should consider if the strategy is suitable for our personality…. He argued that there’s lots of trading strategies available… and any of them can be profitable as long as it suits you…

That was kind of an ‘aha’ moment for me… I realize I was wasting my time all along trying to figure out which trading strategy is more profitable… I wrote lots of EAs to compare trend trading, breakout strategies, candlesticks, arbitrage strategies etc… Maybe all of them are equally profitable… Come on, for every trading strategy out there, there are people who make a fortune from it, while others bust their accounts using the exact same strategy…

So, it is not about the strategy at all… It is about a match between the trader and the strategy… If the strategy is suitable for you… you’ll ‘resonate’ when trading it… You wouldn’t have problems following the rules.. because you are just being yourself… That’s when you know it’s the right one for you…

http://www.tharptradertest.com/default.aspx?question=1

My result: Independent Trader

You are an Independent Trader!

If the markets interest you, you’ll probably work to develop a logical explanation for how they work. This is because you love theoretical ideas and abstract concepts (in fact, much more so than people interactions). This can be great for trading success, if you don’t get too theoretical. This type of trader profile suggests that you value knowledge above all else. As a result, you’ll be constantly generating new ideas about the market or trying to disprove the ideas that you learn from others…

One of your Trading Strengths

You can quickly determine if a new style of trading or system will fit well with your personality.

One of your Trading Challenges
Your trading could dominate your time and you could become socially isolated, which in turn could upset others, particularly if you have a spouse.

Van Tharp identified three core qualities that are essential to being a great trader:

1. The ability to see the big picture, new possibilities and connections between things.
2. Make decisions based on logic and analysis
3. Decisive, orderly and do things sequentially

Independent traders posses the first two, so need to work on the third. This is really quite true for me… I definitely need to be more orderly.. I need to work on developing a business plan for trading… but how do I do that???

I thought I am a person that needs stability… even though I am self-employed, can’t stand the routine of a 9 to 5 job, and was very miserable when I was bonded for 5 years in my previous job….

I thought I am good at following rules and a mechanical system suits me best… even though when I was a Math student, I never focused on the “How”, but focused more on the “Why”s… I always tried to memorize as few formulae as possible… but rather seeked to understand the concept behind the formulae and derived them myself….

Anyway, I’ve come to some conclusions about myself:

1. Analytical but emotional at times
2. Seeks stimulation
3. Extremely risk averse
4. Likes the challenge and mental stimulation of solving a problem
5. Strong need for freedom

I am not sure what trading style suits me best… though I have a vague idea… well, at least I know what does not suit me…

1. Reading Price Charts Bar by Bar (by AL Brooks), and
2. Trade What You See (by Larry Pesavento and Leslie Jouflas)

Received them yesterday morning… The postman came when I was still sleeping… Luckily he knocked loud and long enough to wake me up… Managed to catch him before he went off…

Anyway, I’ve started reading the first book… It is really a difficult book to read… there’s loads of information in it… The author is obviously an experienced trader who’s passionate about sharing his knowledge… However, because there’s so much information presented on each page, it makes it hard to digest and retain the information… it would be better if the author added more headings, sub-headings, bullet points and charts…

Initially, I gave myself two days to complete the first chapter… Now I’ve decided to give myself a month to complete and MASTER the chapter… It’s easy to finish reading the chapter, but to fully absorb what’s taught will require much more effort… I’ve decided to read and re-read multiple times and make my own notes to fully master the book… This is a good book… and the author definitely deserves such effort from his readers….