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Trading Primer

The illustrated elements of trading

Index

  • Intro
  • Trading vehicles
  • Balance and Imbalance
  • Innovation and Response
  • Candlesticks & Ranges
  • Sections to Come
  • Ranges & Gaps
  • Thinking Probabalisitcally
  • Chart patterns
  • Price & Volume
  • Indicators
  • Trading Psychology
  • Volume Profile
  • Seeing THROUGH charts
  • Whales & minnows
  • Fibonacci and Fractals
  • AI and Algos
  • Morality
  • Market history
  • failure rate
  • Lifestyle & health
  • Prop shops
  • Social Hedge fund dream
  • Services Scams Hype
  • Investment Banks
  • traditional brokers
  • Twitter and chat
  • Ocean of Capital
  • News and Stats
  • Total size of markets
  • How money works
This page will have a series of informational posts, outlining the elements of the investing and trading universe, as I understand them to date.

Vehicles and Styles

Of the Investing and Trading Universe

This will just be a list for now, and not necessarily a comprehensive one.  Later we’ll have a discussion of the items in this list.

The point for now is that there are a lot of choices for how and what to trade.  I remember early on hearing that trading was “creative.”  At first I scoffed at that idea.  Trading seemed to me totally responsive, the opposite of creative.

But the comment went on to say that there are innumerable “options” for expressing your ideas.  (It was probably pitching options trading.)  But even aside from trading options, there are simply a lot of choices.

Most people come to trading thinking only of stocks, only “buying low and selling high.”  That is barely scratching the surface.


Trading vehicles

  1. Stocks/equities
    1.  Common stock
    2. Options
  1. Futures
    1. Commodities
    2. Forex
    3. Indices

Trading modalities

  1. Long term investing (Warren Buffet style)
    1. Dividend investing
  2. Investor’s Business Daily style/trend investing
  3. Swing trading
  4. Day trading
    1. Penny stocks
    2. Large caps
    3. Options scalping
    4. Futures

Trading styles

  1. Directional trading
    1. Breakout/trend
    2. Impulse/continuation
  2. Non-directional trading
    1. Options spreads
    2. Selling premium
  3. Pump and dump
  4. Dumpster diving

How to trade directionally

Initiative and response

There are two conditions in any market: balance and imbalance.  Initiative and response.  Like binary code, the entire language, or music, of markets is built out of this duality.

All possible directional trades can be planned in the context of these two conditions.  You could say there are only 2 types of trades, although there may be a lot of nuance, perhaps infinite variation.

Markets and trading tend to lend themselves well to metaphors.  They reflect nature and life.  And duality is a common theme in reality.

In one quasi mythical origin story I recall, the I Ching , arguably the prototypical book, was written when the progenitor scratched one solid line and another broken line.  That’s all he wrote.  The rest of the I Ching was implicit.  Man and woman.  Yin and yang.  Self and other.  Everything that will or can happen.

Reality can be seen to be fabricated on a foundation of duality.

It may seem like hyperbole, an overstatement, to attribute to markets and trading such profound characteristics.  But in my opinion, it is accurate and fair to suggest that markets mirror the fundamental characteristics found in nature.  We’ll see.

Imbalance and Balance

In trading, it is commonly said, that balance leads to imbalance, and vice versa. Balance on a bar chart is seen as a sideways consolidation, or a range.  Imbalance is seen as an initiative thrust.  Movement back and forth within balance is “responsive.” Movement out of balance is “initiative.” balance and imballance

The yellow circles are imbalance.  The grey boxes are balance.  This is taken from current action in the SP500.

How to trade balance

Trading balance is a responsive trade.  It is traded from the outside in.  The 80% rule says that whenever price goes outside of a range, and comes quickly back in, 80% of the time, it retraces to the other side of the range.

In this chart of the US dollar index, the light green circle was a buy, because price fell out of the range, then entered back in. DX 80% rule buy There was the additional confirmation of the bounce off the channel line.  It’s always nice to have some additional back up, or support of some kind, to add confidence to an idea for taking a position.  The primary targets on this type of trade would be the middle of the range, and the other side of the range.

How to trade imbalance

Trading imbalance is a go with the flow sort of thing.  Buy pullbacks, or short pops, depending if the initiative is up or down.  The expectation is that as long as price sticks in the top 50% of an initiative up thrust, it is likely to continue and test further.

Sometimes price may pull back 50% of the initiative impulse, providing an entry. gold 50% pullback Other times, if the impulse is particularly big, price may not pull as far back.  In that case, the consolidation for continuation creates the phenomena known as a flag. TSLA flags These flag consolidations on the TSLA run up did not pull back to 50% of the impulses that drove them there.

And by the way, while these are cherry picked examples, they are by no means rare.  I did not have to look hard to find them.  These phenomena happen all the time.  And in fact, all market (auction) action can be seen as composed of these principles, and variations on them.

On the topic of variations, in the TSLA chart, notice the first flag actually looks like its flying off a flag pole.  The second version looks different, but it’s the same thing: impulse, consolidation, continuation.

There are various conditions which support each type of entry.  I’ll try to outline the conditions.  But getting to know them is like learning any skill, it’s partly a study of examples, and partly experience.

One rule of thumb is, measure 1 standard deviation, on the time frame you are looking at.  Anything bigger than that can be considered an initiative move.  A standard deviation is the average wave length for that time frame.  It is also how volatility is measured in options.

You can eyeball this, or measure it mathematically.  If you trade the same instrument routinely, you will get to know the standard wave lengths on your time frame.

If the initiative movement is slightly more than 1 standard deviation, the 50% pullback may happen.  If the move is considerably more than 1 standard wave length, the flagging phenomena may be more likely.

As we dig deeper, we’ll explore ways to fine tune entries, targets and stops.

Time frames and fractals

I have provided examples of these phenomena on large time frames, many days, weeks or years.  But it’s often said that auctions are fractals.  (And markets are btw auctions.)  These same phenomena happen over the course of minutes in a day, days, weeks, and years.

Here was TSLA today, with 5 minute candles:

TSLA intraday flag

After the initial drop, we can see that the up move became a new initiative, because it took back more than 50%, and then more than 61.8% of the early morning down move.

So the down initiative was canceled, the up initiative flagged, and then made the expected continuation move. Zooming in even further on this chart, using 1 minute candles, we can see that the down move was composed of two tiny bear flags (balance areas), which led to continuation.

TSLA 1 minute waterfall

This is a chart I chose at random.  TSLA is not an instrument I trade.  And in fact, I have seldom even been trading stocks.  I’ve been training on and trading futures.  But these phenomena happen in all instruments.

It’s often recommended that new traders pick one or two instruments, and trade them regularly, to get to know their behavior.  I trade mainly oil futures (/CL) and SP500 futures (/ES).

Once you understand that these principles of behavior, initiative and response, balance and imbalance, constantly occur on all time frames, there is a reasonable argument that day trading offers the best training environment.  Because you get several trades a day, where you can learn to observe, and play these actions.

The skills gained can later be applied on various time frames, and to various instruments.

Innovation vs Responsiveness

How to guess (when price is breaking out of a range) if it’s an impulse or a flush
And self psychoanalysis, my bad trade

When price breaks out of a range, there are two things that can happen next, which set up opposite trades.  Either price re-enters the range, and triggers the 80% rule, or the auction takes price away from the range, in a new initiative.

How do you tell which is which?  I have paid for this lesson.  I’ve learned this by being on the wrong side of this trade.

The traders that begin an initiative are called “innovators.”  It’s tricky to get in on the ground floor of innovation.  Usually, we wait to see the initiative impulse, and look for a pullback to get on.

Likewise, it’s hard to catch the absolute bottom, or top, when range exits a range, and then goes back in to it, to trigger the 80% rule.  It’s hard to precisely catch that responsive move.

We can try to catch the exact entry.  And we can keep a tight stop if we are wrong, perhaps not even losing anything, by observing that the auction is not behaving as it “should.”

Should is a word that always needs quotes in trading.  Like Nabokov said of the word “reality.”  Should is sort of a dirty word.  But if used properly, it can give us valuable clues.

When price leaves a range, there is no “should.”  It can go either way.  We can take a position right there, based on some additional rationale from our homework.  It would be foolish to take a position otherwise.

If price behaves as it “should” according to our position, we are right.  And we are precisely positioned.   If it behaves the opposite, we “should” not stick to our guns.  We “should” either stop out or reverse.

If price is going to re-enter a range, it should do it quickly.  Not much volume or time should be traded outside of the range.  If this is the beginning of an impulse away from the range, price should do exactly the opposite, hang outside of the range, and build volume there.

The edge of a range is likely a critical level. A lot of traders are looking at this exact location.  When price breaks through, it’s called a breakout.  Newbie breakout traders try to get on board right at this moment, to ride with the innovators from the ground floor.  They are trying to catch the beginning of a trend.

The rule is, a breakout usually re-tests the breakout level.  This could take seconds, or days, or years, depending on your time frame.  The sharpest entry is on the re-test.  If you got on board any sooner, you should scale out of some of your position, expecting the re-test.

If price suddenly goes back in range, all the innovators, and all the early bird breakout traders are wrong.  If this happens at the bottom of a range, it’s a flush.  If it happens at the top, it’s a blow off.

How do you know which is which?

Here’s a trade I recently got wrong, and lost money, and mental capital.  Now I’m trying to turn the trade to profit, by writing this.

(When we are wrong in trading, a good attitude is that we are buying information.  We should profit from the experience, even if we lose money in the short term.  We can look at trading losses, in this context, like a business expense.  As long as we actually learn something from mistakes, this is fair and honest to ourselves.)

Anyway, here’s my bad trade.

Oil broke down below a critical level on a large time frame.  It was 50% of a 6 month long up move.  There was all kinds of stuff going on at this level.  I chronicled the details in the Oil Bellwether entry.  But I didn’t dig in to how I should have known I was wrong, and saved myself some money, or even profited.

Here we are approaching that critical level of $41.77 several days before.  I’m already planning my long trade.

CL 7-23-16

There was all sorts of stuff going on there.  Not just 50% of the up move.  It was the bottom of a channel.  There was support from several months earlier, where days had opened and closed (the bodies of candles on a daily bar chart.)  Lots of stuff.

This was a natural bounce point, and oil flushed through it.  I guessed it was a shake out of weak hands.  I have watched oil long enough to know that a bounce “should” wash through the critical level, if it’s going to bounce there.  Oil is messy.

Then on the day time frame, it “should” surge back through that level, and end the day by making a hammer candle, with a tail poking beyond the key level.  In that tail, we see all the wrong innovators, and early bird breakout traders, trapped.

A friend of mine, Tim Parker, calls this “emptying the trade.”  After a year and more of practice, I’m still learning what this means.  He says his favorite trade is the “empty trade.”  It’s catching a knife.  The adrenaline rush, big swinging dick, bingo, perfect-entry trade!

“Emptying” means, in that flush, it washes out all the weak hands.  All the longs throw in the towel and stop out.  A bunch of early bird breakout traders get short.  Then there is no one left to get short.  The trade is empty.  And price reverses.

For this to be right, it SHOULD happen quickly.  It did not.  I held my position.  I was determined not to be a weak hand getting shaken out (also a wrong trade I’ve made many a time…some of us are slow learners.)

I spent the day with a negative P&L, and worked on a story to justify my idea.  I was thinking, “all these guys are getting short down here, then late in the day, buyers will take it back up through that level.  The shorts will all be wrong, and their short covering will fuel the surge up.”  That did not happen.

It’s a famously known psychological mistake to keep coming up with arguments and explanations to justify your idea, even while you are being presented with data that contradicts it.  This is the definition of cognitive dissonance (an often incorrectly used term.)

If it sounds like I’m psychoanalyzing myself, that’s because I am.  It’s widely agreed that learning “how to trade” is at most half the equation. Understanding our own individual psychology, why we do what we do, decide what we decide, is a significant component to successful trading, for most people.

Here’s how the day ended

oil 7-28-16

Looking into that red candle, with no tail, and the close at the low, here is how the day looked on a 15 minute bar chart.

CL macro mid breakdown day

Price broke down through the critical level and never looked back.  The first hour of trade is often considered especially important.  Various types of players are involved in various time slices throughout a day.

You can see that price opened above the important level, (after the greyed out section on the left, which is the over-night session) then after about 30 minutes, plunged through, and could not regain it by the end of the first hour.  That could have, should have, been enough to abandon the long idea.

Aside: Bar Charts vs Volume profile

I keep saying “bar” chart, because there are other ways to look at the auction.  One of the best is a volume profile chart.  I’ll later make a complete entry devoted to volume profiling.

But in brief, we can see not only where the price was at what time, but how much volume traded at each price level.

This way of looking at auctions was developed by Jim Dalton, and his book, Markets in Profile, is a classic.  He looked at both volume and time spent at each price.  Morad Askar (Futures Trader 71), has offered an enormous amount of free training on this sophisticated way of charting, which he has further developed and simplified, to just show volume at price.

There are various tools that can be used to view this.  In Think Or Swim (TOS) which I’m using to show the bar charts, you can view this data in two ways.

Here is a regular bar chart, showing the amount of volume that traded at each price as horizontal blue bars.

CL macro mid breakdown day in TOS bar + vol profile

TOS also has a feature called “Monkey Bars,” which represents all the data that Jim Dalton uses in market profile.  But TOS had to rename it, because market profile is trade-marked.  This is how that day looked viewed in Monkey bars.

CL macro mid breakdown day in Monkey Bars

In Dalton’s idea of market profile, we have both volume at price and time at price.  On the left side is the volume that traded at each price, and on the right side, the time slices that traded at each price are represented by letters.

But don’t get bogged down in all this.  You can trade without any of this.  This is all fine tuning.  These are all just different ways to look at the same market data.

In all cases, obviously there is a big blob of volume at the lows.  For my idea to work, there should have been a thin little tail of volume below the critical level of $41.77.  The longer and skinnier the tail the better.  And then a big blob of volume on top of the level, with a close up above it.

You can pretty much divine that a bunch of volume traded below that critical level, since it fell through there, never came back, and traded the rest of the day near the lows.  You can help confirm that volume traded down there by looking at the more common volume-at-time read-out, which I highlighted with a grey oval.

Or you can just use any breakdown of the day.  15 minute candles.  Hours.  Whatever.  Any way you slice it, all the trading happened down there.

Breakdown/retest

What happened next?

Not only did price not rebound above the breakdown level that day, and start moving up from $41.77, but that price became resistance on a retest.  A revisit of the level was a short, which I mentioned to Brendan.  And he made the most money of his career playing the level short.  But it happened at midnight.  I was profiting from sleep!

CL macro mid breakdown retest

Things don’t always work out exactly like this, or exactly like anything.  This is another way in which markets are fractal.  Patterns and phenomena repeat, but not in exactly the same way.  And sometimes an idea doesn’t work at all.  And then later, it becomes clear that the smaller idea was wrong because it was subsumed in a bigger fractal.

One way this situation could have worked differently, and still been correct, is that the retest might not have worked perfectly.  Price might have started to grind up through the $41.77 level.  But once all that volume had traded below it, it would become like a magnet, dragging price down again.  So price might have wandered up higher, and found a different resistance level, then fallen back through $41.77 and continued down.

That may be happening in the ES right now.

Candlesticks

Ranges and day trading

Candlesticks give us five basic bits of information.  Where price opened, where it closed, the high and low of the range, and if the close was higher or lower than the open.

If the candle is green, price closed the time frame higher than it opened, if it’s red it closed below the open.

hammer candle

This example candle also shows us the expected relationship to the candles around it.  The hour before this was a big green candle that closed way above it’s open, and didn’t explore much higher.  Our example candle therefore did explore higher, as expected.

However, before it did that, it took back the entire range of the hour before it, then rapidly rejected back up.  If you looked at this as a mini range trade, you would say, when it left the range of the hour before, then quickly re-entered, you could go long, expecting the 80% rule, to retrace the entire range of the previous hour, which it did.

The quick rejection of the low left and long “tail.”  The tail, combined with a close higher than it opened, makes a very nice hammer candle, which is a bullish sign.  Sure enough, in the next hour, it did explore higher than the high of this hour.

And actually, we can see that it even gave almost exactly a 50% pullback on the next hour, before it proceeded to complete the impulse wave, which a hammer represents.  So once again, we happen to have a micro fractal of the phenomenon discussed “Initiative and Response.”

50% of hammer candle

In fact, in this two hour period, we had both types of trade, both an initiative and a response trade.

First, when our example candle came back in to the range of the hour before it, it completed the 80% rule, by retracing the range of the hour before it.

Second, our example candle was an initiative move, by completely engulfing the range of the hour before it, and ending up well on top.  So in the next hour, the pullback to 50% of our hammer candle, provided an entry for a completion of the initiative wave.

Time frames

Candles can be used on any time frame, minutes, hours, days, weeks, months, even years.

Basically reading candle sticks is super simple.  They give us an indication of the sentiment of that time frame, and where the next candle stick is likely to explore, on the same time frame.

There are plenty of books or info sites about the meaning of candles, and a series of candles.  It’s very simple at its most basic, but can become very nuanced to a skilled reader.

Candlesticks were supposedly invented by a Japanese rice trader in the 1500s.  So lots of them have Japanese names.  It doesn’t matter what they are called.

Candlesticks are just part of the puzzle. “Man” does not trade by candlesticks alone.  But as a starting point, I’ll explain candles in a nutshell.

Here is a basic reading from a single string of hourly candles.

series of hour candles

  1. Starting with the first big red candle I highlighted with the grey oval. We can see price was still coming down hard, continuing from the hour before that.  Price did not explore much higher above where this hour opened, and then moved far down, and did not explore much below where it closed.  Therefore we expect it to continue lower.
  2. In the next hour, that I did not highlight, we can see the pace slowed. The range got smaller, and price did go lower.  But it was a red hammer candle, the reverse of the green one in the example above.  So again, we expect lower levels.
  3. Sure enough, in the next candle, price got a little lower. The second highlighted candle is slightly a hammer candle.  So it’s slightly bullish. (But the tails are almost the same length.  When they are exactly the same length, and price opens and closes at exactly the same level, it’s a perfect doji.  That is often said to indicate indecision.  It’s an equal power of buyers and seller, or equal lack of power, or interest.  If often occurs at the end of a big impulse, before price corrects in the other direction. )

In this case, both the hammer candle aspect of it, and the indecision played as expected, and price began to wander up in the next two hours.

  1. The next candle I highlighted is a lot like a doji. The tails on either side are give it a bigger range than the four hours before it.  That shows us interest is picking up in both buyers and sellers.  And sure enough, the recent uptrend starts to reverse.  The sellers start to gain control.
  2. The next candle I highlighted is a doji in the sense that open and close are at exactly the same level. But the tail on top is bigger than the one on the bottom.  And sure enough, from there price rolls over to the down side, over the next few hours.
  3. The second to last candle I highlighted is like a bull candle, in the sense that price tried lower, and rejected, leaving a tail. So that shows the buyers are starting to assert themselves.  But they couldn’t get it higher than the open of the hour.  So it ends up needing to explore lower.
  4. The next candle leaves and long tail, and closes exactly at it’s open, so again, it acts like a hammer candle, and so on.

Btw, at the end of the sequence, I just happened to capture a candle with very long tails.  That was a dramatic moment.  I was there, and traded it.  So I happen to know the guts of that candle intimately.

Can you guess what happened in that candle, and what happened next?  It’s detailed in my post, Crude, In the Zone.

Would you have had the concept and confidence to take and hold a position based on that big tail, while your account value wildly fluctuated?

In my case, it’s taken a long time.  It’s one thing to look at charts historically.  It’s another thing to trade them on the “hard right edge,” as the candle is forming, burning.

I have needed to live though it many times, before I could begin to believe that I can make predictions that come out right more often than not, as well as how to put my money on the line, and set targets and stops based on those predictions.

Daily candles

A candle stick is a range of a time frame.  A day is by definition a range.  A daily candle graphically represents that range.  But not all ranges are created equal.

Some of the most important information in day trading are the five elements of a day, defined in a candlestick.

The opening and closing of a day, and the high and the low, and if the day closed above or below it’s open.

Everyone knows, or can learn in a minute, that this is the information a candle stick conveys.  But, for me at least, the significance of this data, and how to use it profitably, has been a slowly unfurling realization that continues to flower over years.

The candle stick, in fact, conveys more than 5 pieces of information.   It tells us how far above the closing and opening range (body of the candle) price explored.  And it tells us how this time frame reacted to the same time frame before it.

I randomly selected the day 8-1-16, in oil futures, as an example.

CL 8-1-16 daily candle

Days are also broken in to a day session, and an overnight session.  The chart above is a candle that represents just the day session.

If you include the overnight session in your chart, the day will appear to open at the beginning of the overnight session the day before, and may give different highs or lows.

Leaving the same lines on the chart, but including the overnight session, the candle looks different.

CL 8-1-16 daily candle with overnight session

All of this information can seem confusing, but is valuable and useful, once you get to know your product.

How price behaves in response to previous levels, highs, lows, closes, opens, and ranges within the day or night, gives us clues about what it will do next.  Who is in control.

Different participants in different time slices of the day and night have different characteristics.  As we train, we get to know them, and the anatomy of our product.  The various participants are like organs, and we get to know how they each tend to behave.

Later, we see signs of how the organs are functioning, at a glance, in the simple daily candle.

But as we learn, we need to look deeper.  And in fact, we will always look deeper.  The candle is only short hand.  It is like the finger pointing at the moon.  We don’t want to focus on the finger, but on the object it’s indicating.  Then we get out our telescope, or microscope, stethoscope, metronom…whatever we find useful.

Looking at this this candle, including the overnight session, this is what the information is actually telling us.

CL 8-1-16 daily candle with overnight session levels marked

If we then zoom in to an hourly candle, look into the candle, and see how the overnight action took place, this is how it played out.

CL 8-1-16 hourly candles with overnight session

The main thing I want to convey, is that price reacts to the day before it, the range before it.

The earlier simplistic explanation of the hour long candle sticks gives us a rudimentary idea of how one time frame might behave relative to the one before it.

In this daily Crude example, we had a big red daily candle, and price closed near the low of the day.  So from our hourly candle study, we know it is likely to explore lower the next day, which indeed it did.

So if we had this idea, this was our hypothesis, that it would somehow take out Monday’s low on Tuesday, how could we have tried to find an entry?

Let’s look at the Tuesday open, in relationship to the Monday action.  Also, we should consider any history before Monday, where it was recently in this range.

The easiest thing for me to do is measure half of the entire Monday move, from high to low, including the overnight session.  As we can see, price topped out 4 cents above that level.  (I used Think-or-Swim’s handy dandy fib tool to get this measurement.  Probably my single most used tool.)

cl Tuesday in relation to Monday

So clearly, $40.86 was a great short entry.

We can also see that there was some back up above this level.  Places where price goes sideways and forms a range,  volume consolidates, and acts like a wall.  Price tends to move quick where it moved quick before, and slow where it moved slow before.

There is a reason for this.  Price is a reflection of market participants.  Where price went back and forth, it indicates that there were a lot of buyers and seller in that area.  When price comes back to that area, the same two-way interest tends to reappear, and slow price down.

Relationships to the day before

Where price opens in relation to the previous range gives us clues about how it might act next.

Price can open inside of the previous range or outside of it.  If it’s inside, it can be right in the middle, or near the top or the bottom.  If it’s outside of the previous range, it can be far outside, or very close.

If it is outside of the previous range, that is called a gap in day trading.  It only exists due to the overnight session.  There are no gaps in a series of 1 hour candles.  However, price moving very quickly is similar to a gap.  It moves quickly through an area where there are few buyers or sellers, auctioning higher or lower, to find a range the market values.

There are rules of thumb for how price is likely to behave, depending on it’s relationship to the former range.

  1. If it gaps far away from a range, or moves quickly away, it’s likely to go father in that direction. That is like an initiative move.  In a gap situation, Peter the Shadow trader calls this “gap and go.”  The rule for how to play this is similar to how to play an initiative move.  It might come back to 50% of the overnight range, but not back to the former day’s range, then continue away from it.
  1. If it moves slightly outside of a former range, it’s more likely to come back in to the former range. Then there are two choices, it either completely retraces the former day’s range, or it comes back to somewhere in the middle, then continues back out of it, in the direction it started outside.
    These two situations are subdivided like so:

    a. If price spends more time outside of the former day range before re-entering, it’s more likely to only move back to the middle of the former range, then reject away. b. If price is only slightly outside of the former range, and quickly re-enters, it’s more likely to either retrace the former day range, or get stuck inside it all day.

    3. If price opens inside the former day range, it’s likely to be choppy. That means it’s still tangled up with the same set of buyers and sellers who batted it around in this area before.  In this case, we have to either try to scalp tiny moves, or wait to see if one side takes control, and pushes it with conviction.  This is called an “inside day.”  The choppy action is also called an open auction.

As we can see from the oil example above, price did indeed, in this case, open inside the former day range.  But it did not act very choppy.  It only moved up 18 cents from the open, then sellers firmly took hold, and it trended down all day, right through the former day range, and through the bottom.  Why?

In this case, the former day range was not back and forth.  It was not an open auction.  It was one continuous down impulse.  So this is an example of how “not all ranges are created equal.”  Even though Monday was by definition a range, it was the range of an impulse.

If Monday had been a sloppy, two way day, that went back and forth, covered the same ground over and over….then Tuesday had opened inside of that noise, Tuesday would have been more likely to be similar.  Instead, Tuesday was simply a continuation of Monday.

In a nutshell, the next day is most likely to complete whatever action the day before it appeared to telegraph.

Time slices, and the messiness of actual trading

Lastly, we’ll take a brief look at time slices within a 24 hour period.  This is an area of nuance that, for me at least, required a not only theory, but some life experience, before I started to get the hang of it.

Additionally, various products have slightly different time slices.  Oil opens a half hour before the US stock market, and closes an hour and a half before stocks close.

In oil, like many products, the opening and closing hour trades are often seen as important.  Bigger players trade during those times, and the smaller players that follow tend to follow through with the directions the bigger players initiated.

The first hour tells us a lot about how the rest of the day will play out.  And the last hour gives us clues what the over-night session will do, and what will happen the next day.

The high and low of the first hour are called the Initial Balance.  It’s the first hour candle of the day.

So on our Tuesday chart, which we’re trying to trade, based on the Monday candle, range and action, I’ll mark the initial balance with IBH and IBL.

Tuesday IBH and IBL

In this case, we don’t get an easy read.  It looks like a bull candle, right?  If I had cherry picked this day, to show how the first hour can give you a lot of confidence, this would not have been the day.

The only way you could have held a short, from that exact top, was by keeping a much bigger picture in mind (the mid of Monday, including the overnight session.)  That is, you would have entered short at the 50% level, and said to yourself, “I will hold this hell or high water, unless it gets x cents above that level, in which case I’ll stop out.”

If we zoom in further, we see, on this day, the sellers did not appear until 7:10am PST.  10 minutes after the first hour ended.  So the only way you got this trade was, shorting the big picture idea, or on a break down below initial balance mid, 1.5 hours in to trade.  That gave a perfect 50% pullback of the down move off the high of day, which then of course continued down the rest of the day.

Tues 710am selloff

$40.60 was the open.  The first move was down, to $40.30.  Over the next 45 minutes, price moved up to $40.94.  That was an impulsive move.  It is defined as impulsive if it is more than one standard wave length (standard deviation) in that product for the time frame.  We are looking at the smallest time frame, and the smallest standard wave size in oil is 30 cents.  Anything smaller than that is noise.

So the up move was impulsive, and the mid of that move was right at the open, $40.60.

And if we look closely at the impulsive up move, it paused briefly at $40.83, pulled back, then continued.  That little pullback, and continuation, technically “finished” the move.

The next expected move was corrective.  The corrective wave should have two parts.  We see it pulled back from $40.94, then bounced.  Then the second part of the correction came.

If that second part had stopped at $40.60, it would have been expected to continue up.  In fact, $40.60 was a reasonable long entry.  If taken, it was obviously a loser.

But $40.60 broke, the down move had become the new impulse.  So a quick witted trader would have stopped out, and begun looking for a short, to continue the down move.  The perfect entry came at 7:30 am, when price touched 50% of the down move, continued down, and never looked back.

All this could easily confuse a trader.  And mis-interpreting this kind of action leads to “getting chopped up.”  Thinking, “It’s a long.  No.  It’s a short.  No.   Etc.”  Repeatedly stopping out and losing.  That’s why it’s said, “trading is simple, but it’s not easy.”

One of the things that is not easy is to process all this in real time.  There is information on various time frames.  Why did this confusing action make sense, and not?

Price opened inside of yesterday’s range, so chop is common.  We often go back through the open, and back through mids of impulses, while in range.  However, there was the bigger impulse of Monday to lean against.

On the other hand, the actual trade of the day contradicted the first hour traders, who are usually relatively big, compared to the rest of the day.  But on this day, they were smaller, compared to the scale of Monday.  Plus, since price went through the mid of the first hour up impulse, what reason could we have to think it would hold the mid of the down impulse?

We couldn’t know for sure, and might have lost twice, if we’d gone long on the first mid, then short on the second mid, and the second mid didn’t work.  But it did, so if we didn’t take the second trade, because we were sulking about the first miss, we’d have lost money on the day, rather than vice versa.

Which is one reason that some people discipline themselves to take every trade that fits their plan, on principle.

And one thing the second mid trade had going for it was, that the down impulse had been one wave, it hadn’t completed yet.

This discussion took us in an unexpected direction from the time slice idea.  A cherry picked chart would have showed how the first hour traders set the tone of the day, rather than end up getting run over.

So, let me briefly outline the time slices.  The first hour and last hour, bigger traders tend to come in.  The middle of the day tends to get slow.  After close, the Asian session starts, in oil or Indices.  The Asians often complete the action the day suggested.  At midnight Pacific Time the European session starts.  Sometimes news in Europe will reverse the Asian action….or accelerate it.  Often there is an abrupt move at midnight.

And of course, news days trump all these phenomena, and often spur trends.  In oil, inventories almost always do.

The main point of the time slice discussion is that time slices exist, and it’s helpful to get to know them for products you trade.

And it’s also the conclusion of looking in to the guts of a candles.  Like human bodies, candles on charts have internal organs.  Sometimes they fart, or their hearts race, or a mood moves them.  Sometimes bigger candles eat smaller candles.

I’m going to fill out the following sections as time permits.
 Discussion to come 
 Discussion to come 
 Discussion to come 
 Discussion to come 
 Discussion to come 
 Discussion to come 
 Discussion to come 
Anatomy of flags.  Reading the participants of the auction 
 Discussion of various scale and time frame participants.
Not indicators.  Not price and volume.  Another animals.  As above so below.  Nature through trading 
 Discussion to come 
 Discussion to come 
 History and purpose of stocks, bonds, options, futures
 Discussion to come 
Meditation, diet, exercise, relationships, etc. 
 Discussion to come 
 Discussion to come 
 Make it your own. 
 Discussion to come 
Mutual funds, DIY trading and investing 
 Discussion to come 
The world’s money sloshes between bonds (3x the size of the stock market) commodities, equities, currencies.  Funds are constantly moving capital based based on risk. 
economic indicators vis a vis trading and markets
measuring the ocean, for fun and profit 
 banks, central banks, and you

Curated Resources

The trading world is full of services and sites.
I will build a short list here of resources that have been useful to me.
This list is likely to grow.  But I will try to keep it concise.
For a smogasbord, try the first link, Investimonials

Pages
Investimonials
FuturesTrader71

Forums
FuturesIO (formerly Big Mike)

Services
free (amazingly, some of the most helpful services I’ve found are free)
Shadow Trader
S5
paid
Investors Underground

books
Market Wizards, Jack Schwagger
Markets in Profile, Jim Dalton
How to Make Money in Stocks, William ONeil

Tools I use
Think or Swim
Bookmap
IRT

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