More insight, building on my previous forum posts on context
Posted by MC on Aug 30, 2008
First see http://www.tradersbase.com/forum/technical-analysis/743-some-thoughts-volume-taken-context.html
Trendlines work the same as structure support in their use to see which side is winning the tug-o-war. A candle with a long wick bouncing off support with big volume could give insight that the bulls defended that level with vigor and probably ran stops to cause a spike they used to buy cheap. That same candle with no support causing the bounce would mean alot less in terms of a traders odds. This is why context is so important, the market 9/10 times won’t reverse in the middle of nowhere.
Now small/tight candles at support/resistance shows rotation and balance which I find as important as wicky candles. The more volume, the more rotation came in at that level. Everyone loves BIG candles, but super small candles with big volume are at least as important. If you see a big volume on a tight balanced candle get ready cause bets have been placed by both sides and only 1 can win that move in the end. 
Generally it’s a fade situation because if you’re at support and bears can’t drive it lower bulls stepped in to defend or vice versa at resistance.
Final thoughts for now…
BIG candles regardless of volume = momentum
Go with the flow till it retraces or balances/rotates.
Tight, high volume candles = balance nearing an end
Balance will give way to momentum soon, let the direction show itself then hop on the momo train.
How to use MACD? What can it tell us?
Posted by MC on Aug 7, 2008
When it comes to MACD…12,26,9 is the stock and most widely used setting. Often stock settings have the most eyes and are the most valuable when it comes to indicators. In my example…12 is the slow EMA, 26 is the longer EMA and 9 is the smoothing line. The moving lines you see on plotted MACD are 12 (slow EMA) and 9 (smoothing line), the 0 horizontal level represents the 26 (longer EMA). In the background on MACD you’ll often see a histogram, this measures the difference between the slow EMA and smoothing lines and plots this data in an easy way to watch momentum change incrementally. Both pieces of MACD are useful for spotting momentum shifts and divergence.
With 3 lines of interest plotted you can have 2 major crossovers.
1)Slow EMA crossing the fast EMA (0 line) (red circle & arrows)
2)Slow EMA crossing the smoothing line (black circles & arrows)
Most use the slow EMA crossing the smoothing line as indication of a momentum change. Sometimes on longer time frames like the above weekly there is no divergence needed for a mid term reversal and when slow and smoothing cross its a big move. See the below link for an article I wrote on divergence.
http://www.tradersbase.com/forum/technical-analysis/469-whats-divergence-diverging-indicators.html
Note: The most recent down move has built bullish divergence (green lines) where price tested lows yet the MACD as well as the MACD histogram failed to even come close to their prior lows. This was a VERY bullish indicator. I would have preferred the volume had been lower on the 2nd test giving a 2nd and more important diverging indication though. That would have told me there were less sellers at a prior key level and we didn’t get that so I’m not a total believer of this rally yet. I will become more bullish if/when the same level (or lower) has very low volume aka: brings out very few sellers. I will become full bull when the red downtrend and structure resistance are cleared and legitimately defeated.
DOW is near the point of control…will she hold tight?
Posted by MC on Jul 12, 2008
I’ve added some more volume by price support lines and updated the chart.
To me this shows the volume and where the majority entered the market after the Y2K bear. Almost 2 years of consolidation setting up the bear to bull transition. No doubt about it…this is [B]THE [/B]key price pocket. Volume = market sentiment and it’s staring us in the face. Now the question is do the big money players have chips on the table still, if so they support that line…if not they let it tank through and get in MUCH below that pocket of support.
The above I posted on the web on Jan. 23rd.
The levels I posted back then are coming up. 10,700 remains the most important level I can see. If we stay above that, the point of control is upheld and long term investors will hold albeit with a load of steamy crap in their pants at this point. If we break below there with conviction (especially close below) I’d look for massive bloodshed to accompany the crap in the pants.
I’m looking at that volume pocket as a fault line, if we break that open it’s going to be like an earthquake when we have plate shifting at the earths core.
Here’s an updated chart. In bell curve terms this is a chance to revert and test the MEAN. This testing is something the market does all the time on different timeframes. It’s how value is probed in a 2 way auction. Goes higher, no interest…revert to the mean and see if there’s interest. If there’s no interest there it goes lower till there is no interest and then back to the mean. From the mean any direction could be tested FWIW, including chopping around and coiling at that section of price. My signature sums up how I feel about market movements. 
Basketballs and The Market?
Posted by MC on Jun 26, 2008
You start with a basketball from Walmart bought at the reasonable retail price of $10. At some point the owner signs the ball Michael Jordan and claims to be selling a MJ signed ball. The bidding goes up because what was worth nothing and was common, is now all the sudden deemed a rare piece of memorabilia triggering peoples emotions and greed. As the bid goes higher so does the interest in this item, it must be worth even more otherwise why would people be so interested right? The advertised price is now extreme and the original seller, knowing it was a fake, prances away with $990 in profit. Now the new owner only bought it based on his greed, so he turns around to try and sell it for $2000. Only now there is no COA (certificate of authenticity) and people are questioning the validity of the signature. Now his offers are now in the $500 range, because there’s still a slight chance it’s legit and greed tells bidders they could still resell for profit. Fast forward…it’s been exposed a phony signature. The bid collapses and now is back to being worth $10. The owner tucks it away for a few years till he has a garage sale. There someone buys it for $20 despite being told it’s a fake. The seller is just happy to get some money back, and the shady buyer knows the signature is passable. The new owner opens an auction with new naive customers who know nothing of the prior auction. What do ya know, he sells the ball for $1000 again, and the cycle repeats over and over.
Of course there’s allot more in the markets movement than a clear cut point A to point B. This is a simplistic look at things to say the least. One thing to take from this may be that what transpires in the middle is essentially noise and greed driven. The greed portion can linger on for quite some time, as long as the hope of selling for profit is around. Now on the other hand, the extremes of the range often have quick reactions thanks to fear being the stronger of the emotions.
Another reason I feel this is a fair depiction of the market is the fact that the ball holder creates the bag holder. This market is not a fair game, there is deception at work. The “smart money” in the market preys on “dumb monies” greed and fear. “Not fair” some would say, well no, but what in life is fair? LOL
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The 2 Chains of Supply and Demand in Speculative Vehicles
Posted by MC on Jun 25, 2008
The market doesn’t sell goods nor services. It runs on hopes and dreams of profit
We’re trading/investing in a pretend slice of a company or contract with the hope that enough people will be joining us on our side of the see saw to profit.
The issue with this see saw theory though, is there really are 2 supply & demand chains at work in these non tangible markets. Since there are no hard goods, the scales can be tipped or manipulated by those with deep pockets. Maybe to a lesser extent on futures with no real limitations on open interest. But certainly heavily with stocks where there’s a set amount of shares to soak up before you’re in relative control.
So instead of this…
We have this…
I’m not saying it’s a must we over complicate things as a daytrader or even short term swing trader. But in general it’s very beneficial to learn to read the accumulation and distribution patterns of big smart money. I’m sure since this dual S&D chain is nothing I’ve seen talked about, many will think I’m a bit crazy. I won’t argue that, but I will argue that there is absolutely 2 chains at work in the speculative markets. 
Chain 1 (Smart Money)…
1) Smart/big money accumulates low (Chain 2, step 2), in gradual increments in the downtrend (once they start to see a value imbalance and the dumb money begin to throw in the towel).
2) A large portion of the float is now in strong hands and an uptrend ensues with the occasional balancing period or correction.
3) Once they’re done with the uptrend, they then distribute (Chain 2, step 1) at the top. This causes a lack of significant, sizable interest which is needed to keep the ship afloat.
Chain 2 (Dumb Money)…
1) Retail/Dumb money accumulates high (Chain 1, step 2) often all at once due to the emotion of the newly advertised high prices which appears to be a big bullish push.
2) Some realize the gig is up quickly and promptly head for the exits causing a sharp move down, setting off a new downtrend.
3) The remainder become bag holders and will gradually exit until their individual pain threshold is hit and they finally begin selling to smart money (Chain 1, step 1).
Rinse N’ Repeat.
All JMHO, but this is how I look at the market at this stage of my learning.
To me thinking there is only one S&D chain is like thinking the markets operate in a vacuum and that they are tamper free and pure.
I feel the better I get at reading the volume based disparities the closer I am to riding the trends on the coattails of smart money.
Disclaimers:
There are many additional nuances, like deep corrections with no distribution or where a breakaway gap is used to turn weak hands into strong hands, to name a few.
I’m not saying all retail is “dumb money”. There clearly are many smaller traders that know how to read the writing on the wall.
What are gaps, why do they occur, and how can you profit from them?
Posted by MC on Jun 12, 2008
What is a gap?
A gap is shown on the charts any time you have price open outside the prior time period’s high or low.
The below section will go into details on why gaps on big volume are significant and how you can take what I’m teaching and use it to recognize the psychology behind those moves. There will be small gaps or gaps on low to normal volume. These are events of no interest to us. It’s the gaps on abnormal volume that should catch your eye and make you want to know what they did that for. Bottom line…large volume is the pros at work, our job is to realize why they are moving that many shares and follow their lead.
Bigger notable Gaps are used for 2 purposes…
1) A breakaway gap moves fast and is used to eliminate concerns of supply slowing the run. The breakaway gap is used so they can accomplish 2 things. One is to lock OUT new shareholders from playing along because it’s “too high”. The 2nd thing is to lock IN people that are in the red, which avoids weak hands selling into their rally. This elimination of supply ensures a continued powerful move. This is generally done on a beat up play once big money have their fill of cheap shares. They could however use this to panic people into selling, using peoples greed against them on all time highs. The latter is a way the pros could buy high knowing they will soak up the float and sell higher. This is very rare in my experience however, pros don’t like to pay a premium.
(HINT) Look for any pullbacks to be UBER light volume if it’s a legit breakaway gap. This could be played by trying to get in as close to the low of the gap as possible to ensure a tight stop.
2) Any other gap would be used by pros to hide their own supply trail. These gaps would create early excitement as well, but in this case to sucker unsuspecting traders in.
(HINT) This type of gap tends to have the next day close lower on fairly big volume. Often you will see a retracement and then a test of the prior highs on UBER light volume showing the professional money has no interest at paying the current price. A downtrend commences till the pro money buys back in. This could be played waiting for that test of highs and then fading the move once volume ticks up showing emotional trading.
Here’s a good example of a short I called using a weak gap. It was a HUGE gap so “how could that be weakness”. I was told I was crazy for thinking of shorting, despite telling people to wait for the breakdown. Sometimes you need to be cautious no matter how bullish it may seem.
Enjoy, good trading.
A few thoughts on the lifetime $DJI
Posted by MC on Jun 11, 2008
Kind of an interesting view. On a lifetime yearly chart the last monster bull run didn’t even flinch, nor did it retrace even to 50% on the Y2K “crash”. I guess the question is how do fundamentals make this exponential market rise look? IS the market overbought up here, or is there still room for growth after such a big long run? We did break the range and have tested the prior swing level, though we aren’t even half way through the year so the test means little till it’s closed.
Another thought that made me LOL was the consolidation from 1965 through about 1983. All this talk of the market returns x% per year. And the 401k hype that you put in x% of your check and you’ll retire a millionaire. Who the hell are they fooling…well how about most of working class America. 
I mean of course it all depends on where you began investing, and where you cash out, and everything in between. But the pipe dream of the market always giving gains is anything but a guarantee, there’s a 20 year span that might not have done much for your nest egg. Ask those that tried to retire after the Y2K started it’s down move. How many put off retirement cause they were down so far that the simply couldn’t afford to retire at that point.
How many ran and sold in ‘87? That looks like not even a blip on this view of the market. The market is bigger than most of us think about, myself included. All it takes is a gander at something like this chart to really make you think about your daytrades or even swing trades. We get excited on some of these 50 point gaps, but in the bigger picture its a tick. You can do this on ANY timeframe, and this is why it’s important to roll back and look at the bigger picture. All good traders seem to use multiple time frames, and this is partially why. This is the equivalent of living on the ground all your life, and you finally take a plane ride and see things from 10,000 feet. You realize how small a speck you and your house is, and how little your life means in the grand scheme.
Enough of my ramblings, just wanted to provoke some thoughts and discussions.
Come chat with us in the FORUM.
Lightbulb moment
Posted by MC on May 18, 2008
Well folks…I had a light bulb moment on Friday. For the first 9 months I had a horrible “mentor” that had no clue, though I still respect that he helped me the best he could. From then it has been mainly allot of self learning (with help from some TB members of course ) and I’m finally getting to see things properly now. Thursday and Friday I wasn’t at work and was able to devote 100% attention to the markets movement which proved to be what I needed.
Looking at the market as a slighted auction driven by the big money and chopping it into waves is crucial IMO. So the lightbulb went on when my mind saw volume and price action in the proper fashion, much clearer than I had before using volume and trends alone, kind of a mixup of what all I’ve seen in probably 10-12 hours of screen time daily.
Another thought that clicked is that trending moves are emotional, and congestion is a balancing/thinking slice in time. Of course the consolidation is needed for a breather and gives us supply and demand zones for entry and stop triggers. I also added the use of fibs to my arsenal as well, for retracement purposes of course. 
I had been trading in congestion zones for some time without really seeing the bigger picture or knowing it. Good traders prey on the emotions of others, in chop there isn’t enough emotion to exploit beside scalping. Let the congestion break and take the emotional slice of price action to the next level of congestion and so on. This defines trend trading at its core, and though I “knew” it, I didn’t quite see it properly.
Anyhow…enough rambling. Thanks Chan, Cire, Simon and others that have helped me, sometimes without even knowing you were doing so.
Good week for myself and TB guys, let’s keep up the great work.
What Technical Analysis will NOT do for you
Posted by MC on Apr 17, 2008
Technical Analysis or TA for short is a tool used by most traders to some extent. It’s the artistic science of using charts, volume and/or indicators to try and pick trades that will be high probability winners.
Newer traders (myself included) often waste a ton of time early on, learning 20 indicators thinking they’ll gain the answer to profit. I think it’s important to address what TA will NOT do for you. TA is NOT the holy grail and never will be. There will never be an indicator that will eliminate the mental edge required to profit from trading. This is why I think it’s best to read some market psychology books before anything else to get the proper core mindset. The true holy grail is your mind, and the better your psychological conditioning the better you are at controlling money management/position sizing. Risk management and controlling emotion are also traits that proper TA training can help foster and develop in a trader.
Lets dig in a bit further…
TA helps us formulate an educated guess about what’s most likely to happen next based on how the chart depicts supply and demand. Also formations and indicator levels that the majority of people use can help. There is a ton of interpretation which should improve as we become more educated through screen time and experience. The better your mentor and the more time you invest in screen time the faster your learning curve. For many, TA is the easy part of the puzzle and the mental side is what takes more effort and time to overcome. This is because our very upbringing and how society revolves is the opposite of how you profit in the market.
Why do I use the term “guess”? Well what a chart cannot tell us is who’s on the sidelines waiting for a certain trigger to jump into the market and buy or sell short. There are millions if not billions of minds at work in the market determining what fair value means to them. The market is an auction and someone’s thought about perceived value changes on every tick. This makes the market ever changing and what HAS worked is not guaranteed to work going forward. Chop days show a balanced market, other than that the market is making waves to try and find that balance between buyers and sellers.
So in closing, a good rule of thumb in the market is look at why you should NOT take the trade and TA can help out.
Focus on mastering a few select indicators and use them consistently since it’s consistency that will lead you to profit in the markets.
Good trading, hope this helps. Stop in the forums and check all our great content that keeps growing.
www.tradersbase.com/forum
Do you choose pain, pleasure or both?
Posted by MC on Mar 23, 2008
http://tradersbase.com/forum/showthread.php?t=460
I just watched a video and something clicked on the issue of taking profits early. 
First let’s look at why I (and many others) have this psychological issue of taking profit early…
1) Fear of being wrong and to end the pain of not knowing what will happen next.
2) Feeding the greed with quick profit to gain temporary pleasure.
I have known of and clearly defined my above issues some time ago, but breaking down your psyche and rebuilding is a difficult task to do by yourself. I still have some work to do myself, but I am getting better as I practice and focus on the below facts. Maybe they can help you also?
1) Focus on remembering that we can’t possibly know whats coming next and just to use your edge and execute.
We have back tested and clearly defined the edge to prove it valid and profitable, now it’s time to use the edge to make money through consistent execution. Fully embracing the risk and truly believing we don’t need to know what’s next should remove the fear and pain we create from issue 1.
2) Then think back to all the times we have taken $30 early to feed the greed, only to realize when it’s too late that the move was worth exponentially more. Had we just executed the edge those few runner trades would have more than made up for the stop outs and we would be making great money. It’s not small profit often that will make us net positive, rather just one good move caught and executed on could make a traders week, month or even make the year. The short term pleasure turns to negativity when you realize you are not executing and leaving $$$ on the table, costing you net profitability!
There’s a cycle in place stemming back to the values we were raised to believe in. In the market these values are incorrect and they need to be broken in order to succeed. I will continue to work this out and I will become a successful trader. ;D
To my point about the speaker in the video, something he said made me think…
Don’t look at profit as something that causes emotions, look at it as a risk free trade. A trade in the green is a risk free trade, all you have to do is manage it.
Good trading and Happy Easter,
MC
