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Where can I learn more about Price Action like those in James16 charts? 9 replies

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james16 Chart Thread

  • #42,641
  • Aug 31, 2009 4:25am Aug 31, 2009 4:25am
Quoting joelcf

Anyways, I will address divergence in another post, because I think it needs to be talked about
Now that I am looking forward to.

Whenever Jim mentions divergence in his webinars he says the same thing. Divergence will kill you in a trending market. Rac also says that divergence is the account killer because it can simply go on and on and on as price rises higher.

It's most useful for me as a confluence at double and triple tops. But if I use it to take less than stellar PA then what happens is that I get stopped out, a few days later a pitbull pinbar appears and I wonder why I didn't wait.

Confluence really is magic. Taking a few simple things that individually have people scratching their heads and wondering why they don't work, and just looking for the places where they all line up..... this alone saved my ass trading. Now I am beginning to have an instinct for when a trade isn't "confluenced enough"

I used to just look at how sweet the pinbar was. It was my primary focus. Then I went through a phase of focussing on location location location. I guess now these things are beginning to bed within my DNA I can see them quicker and don't throw my focus on them. Now, for me, it's all about "where is the first area of trouble?"

Seriously, if you can identify that first area of trouble where price might turn around, your win rate can go through the roof. Because that is where you go to break even, no matter what. If you get taken out and price continue to become a killer trade you end up standing and applauding. Because it wasn't a loss. Eventually, and I do mean eventually, you can start to see which price action bars are likely to smash through PPZs and which aren't. That also depends on the kind of market we're in.

My focus these days is to never post chart to a senior and have him say "you missed that PPZ. that's what turned price around".

The real beauty of this stuff and why it beats anything else out there is that it is a method that can be adapted into any number of amazing systems, or even used to enhance your existing systems. There isn't a system out there that wouldn't benefit from a little PA confirmation IMO.

(Riffing on your post Joel, not a reply to you as such. If anyone knows all this it's you... )
  • #42,642
  • Aug 31, 2009 4:31am Aug 31, 2009 4:31am
Re: That AUDCAD trade...there are plenty of clues as to why it failed.

On the 4hr there is a bullish double bottom off a nice big round number then when it does head up and show a bearish signal (OB) then the next bar gives a very clear signal that it doesn't want to go down and it continues up....fairly neutral bar...then a pin bar at the swing high at a round number PPZ. I certainly wouldn't want to be taking a PB at a swing high on this pair at the moment.

I have no doubt that this could break South...use the zoom on your platform over the higher timeframes....sometimes swings move in harmonics with the waves getting smaller and more contracted...when this is happening it's like a rubber band...that energy is looking for a release
  • #42,643
  • Aug 31, 2009 4:42am Aug 31, 2009 4:42am
Quoting joelcf
Let me help a little here. It isnt about divergence, or round numbers, or swing highs. You picked a nice looking bar at a swing high - it might not have had the perfect shape as it didnt poke out enough, but hindsight is 20/20, as they say. On it's own, I see no problem at all with taking this bar.

But you forgot the aqua line.

It is all about the aqua line.

Attachment

Now, look at the 4H. Ignoring that Sunday bar, 6 out of the last 8 bars stopped there (including the pin itself, which I forgot to mark). You think it...

Hey joelcf

Nice post.

Could you please clarify for the dummy (Me). What you are saying is that price hits the aqua line PPZ and finds it hard to work through. So when it did break it then becomes support and the same difficulty in breaking back down occurs? Additionally because it is with the trend it is even stronger?

Is this correct?

My apologies if this seems a silly question.

A51
  • #42,644
  • Aug 31, 2009 4:46am Aug 31, 2009 4:46am
So true

Quoting TiaForex
The real beauty of this stuff and why it beats anything else out there is that it is a method that can be adapted into any number of amazing systems, or even used to enhance your existing systems. There isn't a system out there that wouldn't benefit from a little PA confirmation IMO.
  • #42,645
  • Aug 31, 2009 4:48am Aug 31, 2009 4:48am
Quoting mbqb11
Hey Pips

That is a bad data feed spike. Oanda corrects those pretty fast. If a move like that occurred on a spike we would have some serious bigger issues to worry about

Mike
Thanks mike for the assurance. Sadly though the presence of the spike has messed my charts. Nice forum guys.
  • #42,646
  • Aug 31, 2009 4:52am Aug 31, 2009 4:52am
Quoting joelcf
Let me help a little here. It isnt about divergence, or round numbers, or swing highs. You picked a nice looking bar at a swing high - it might not have had the perfect shape as it didnt poke out enough, but hindsight is 20/20, as they say. On it's own, I see no problem at all with taking this bar.

But you forgot the aqua line.

It is all about the aqua line.

Attachment

Now, look at the 4H. Ignoring that Sunday bar, 6 out of the last 8 bars stopped there (including the pin itself, which I forgot to mark). You think it might...
Actually that was what I saw when I was stopped out... lolz

But it was on hindsight that I saw it

But I tend to agree that yes it was that line that it fell perfectly to. Should have taken the break below it if it did break below it .......
  • #42,647
  • Aug 31, 2009 4:57am Aug 31, 2009 4:57am
Quoting TiaForex
Now that I am looking forward to.

Whenever Jim mentions divergence in his webinars he says the same thing. Divergence will kill you in a trending market. Rac also says that divergence is the account killer because it can simply go on and on and on as price rises higher.

It's most useful for me as a confluence at double and triple tops. But if I use it to take less than stellar PA then what happens is that I get stopped out, a few days later a pitbull pinbar appears and I wonder why I didn't wait.

Confluence really is magic. Taking a few simple...
Whenever Jim mentions divergence in his webinars he says the same thing. Divergence will kill you in a trending market. Rac also says that divergence is the account killer because it can simply go on and on and on as price rises higher.

So can I assume that if I see higher highs and higher lows ie trending esp a strong trending market, divergences should not be included as a confluence factor?

Of course we can take that into account but its importances is greatly reduced as we do not know when market will start turning.
  • #42,648
  • Aug 31, 2009 4:58am Aug 31, 2009 4:58am
Regarding the "aqua line" that Joel is referring to ie: first target area;

It's another reason why the seniors here recommend cutting your teeth on stellar PA on higher timeframes at god locations. This kind of PA is more likely to bust through the first areas if you haven't noticed them and will build your confidence. It's the kind of PA that is much harder to lose on.

The more iffy PA can still work but it just needs a little finessing. And at the beginning of anyone's journey on this, we need to build confidence with winners. Shattered confidence can take a while to build up. And in the early days of trading habits will be imprinted. Give yourself the best chance by only taking the very best PA at the very best locations.

You'll learn patience too which is probably the most valuable wuality you can have in this business.
  • #42,649
  • Aug 31, 2009 5:00am Aug 31, 2009 5:00am
P.S. To all in the PF

Does it have lots of videos for me view hehe I am ready to join it! and study more indepth on this topic.
  • #42,650
  • Aug 31, 2009 5:04am Aug 31, 2009 5:04am
Quoting TiaForex
Regarding the "aqua line" that Joel is referring to ie: first target area;

It's another reason why the seniors here recommend cutting your teeth on stellar PA on higher timeframes at god locations. This kind of PA is more likely to bust through the first areas if you haven't noticed them and will build your confidence. It's the kind of PA that is much harder to lose on.

The more iffy PA can still work but it just needs a little finessing. And at the beginning of anyone's journey on this, we need to build confidence with winners. Shattered confidence...
Thank you for the advice. Though to me (maybe it is just my point of view) that PA still shows to me that price has gone up and is rejected strongly down by the huge tail. maybe I missed out on the fact that the tail is not protruding out from the previous bar high that much as I saw one video in the guest area by mike if I am not wrong. He mentioned on 1 pin bar that barely protruded out of the high.
  • #42,651
  • Aug 31, 2009 5:04am Aug 31, 2009 5:04am
Quoting tradertt

So can I assume that if I see higher highs and higher lows ie trending esp a strong trending market, divergences should not be included as a confluence factor?

Of course we can take that into account but its importances is greatly reduced as we do not know when market will start turning.
I think Jim just means don't take trades solely off divergence. It's greatest use is as a confluence factor, alongside fibs MAs and all the other confluences that we look for to line up alongside good PA at PPZs

I think it's a great confluence factor and one of my favourites. Just make sure that the PA signal is there too. A strong one. Don't ever let divergence talk you into taking lower grade PA.

What Jim means I think is simply that divergence has no defined end point (unlike solid price action). It can signal an imminent turnaround but it can just go on and on and on.

In a ranging market it's much handier. I prefer divergence at double/triple tops. In the kind of market conditions you described it can keep going, and that market can often splutter out weak pinbars that fail before the big one that signals the turn around.

I don't fully understand they whys and wherefores of divergence. Never felt I needed to. But I am looking forward to Joel's explanation because everyone one of his posts leaves me feeling more knowledgeable about the market.
  • #42,652
  • Edited 6:43am Aug 31, 2009 5:42am | Edited 6:43am
This is alot longer than I planned. So, here is the short version.

Behold, the power of the sports analogy:
I kick a football at a window. It doesnt break, and comes back to me.

Next, I kick it at the window again, but from a bit further back. The ball goes to the same point (ie, to the window) but by the time it gets there, it is already decelerating, because I kick like a girl. Either that or I kick it more softly. Because I kick like a girl.Therefore, it is travelling slower when it hits the window this time. If it didnt break the first time at 30kph, it probably wont break at 15kph either.


Congratulations, you now understand divergence.

Next time, I kick it a bunch harder. It goes to the same spot, but is travelling faster when it hits the window. The window has a greater chance of breaking. This is a lack of divergence. And being a destructive jerk.

------------------------
please feel free to stop here. you probably understand enough at this point to be happy
---------------------

Quoting tradertt
P.S.
1 more thing: Tell you the truth, I personally very rarely trade trend reversals if there is no divergence. But I still remember that it is a killer if I use it alone on trending markets.
Why do you not trade reversals without divergence? If you cant answer that question any better than 'x told me not to', then it isnt a very good rule.

People dont think about what they are trading, and that is just crazy (to me anyways).

As most people, they will tell you that divergence means that price is lying. Or that the trend is turning. Or that price is about to reverse. All variations on a theme.

Not really.

Broadly, the MACD measures the velocity of price increases. Or, more correctly, the difference in the velocity of two seperate measures of price movement. If you know calculus, think about it basically like a second derivative. If you dont, then congratulations on having a much more fun life than me in college

The MACD is constructed by taking the difference between the 26 day (slow) and 12 day (fast) EMAs. So when it has a high positive value, the difference between fast and slow averages is high (ie, fast - slow > 0), and so you can conclude that over the last 12 days, the moving average is higher than over the past 26 days.

So what does that mean? Broadly, it means that rate of change in price is increasing faster in the near term than it is over the longer term.

But people* werent happy. No. They wanted more. So they went and made the histogram. The histogram is the difference between the MACD line, above, and its own 9 day EMA. So when the histogram is large and positive, it means that the MACD line is increasing faster than it has been over the last 9 periods, and therefore we conclude that price might be rising faster than its immediate short term average.

CHART!

Attached Image (click to enlarge)
Click to Enlarge Name: macd.gif Size: 56 KB


Seriously. That is all the silly little picture means. If someone told you that up front, you would probably tell them to go away, and never use it again. But whatever.

So what is divergence? As anyone in this thread can tell you, it 'means' that price made higher highs, but the MACD histogram didnt.
Well, from the above, we can see that the MACD histogram is a broad measure of how fast price is rising/falling. So divergence really means that price is going up, but not as quickly as it did last time it got to these highs.

Does that mean that it has to reverse? On its own, hell no. That's why, by itself, it is a rubbish signal for entries and exits. Its like saying that if your car does 0-100kph in 5 seconds, but then takes another full 5 seconds to get to 120kph then it is going to stop.

The way Jim uses it, though, is different. Look for divergence at a PPZ. Since we are talking about a swing high, we are saying that we want to look for an area where price has already been rejected once, so there is probably a bunch of orders there. And then, on top of that, the divergence tells us that the rate of increase is slowing as price approaches that PPZ - so there is probably less power behind it.

This divergence doesnt mean that price will reverse. It means that there is a greater likelihood of it reversing, given the PPZ.

Likewise, hitting a PPZ without divergence simply means that price is increasing at the same rate or faster as it was last time it hit the PPZ.

See: football analogy.

But even then, we dont know that price is going to reverse. Fortunately for us, Jim is awesome and knows what he is talking about. So, not only do we look for a PPZ, but we look for PA at the PPZ.

A pinbar tells us that price may reverse.
A PPZ tells us that price may reverse.
Divergence tells us that price may reverse.

Put them together, bank pips, repeat.

This is the real power of confluence, and why it gets stressed so hard here. One sign on its own can fail. Two can fail, but are less likely to do so.

But put all three together, and you definitely have the odds in your favour. And that is all we want in this game.

Stuff you should now be able to answer:
1) Why is divergence a killer in a ranging market?
Because it is a dodgy signal that only means that price increases are slowing down compared to their moving average. In a ranging market, your moving average is naturally going to be lower, because you are in a range. Prices naturally bounce around in a range, because...uh...its a range.

So changes in the increase of that MA mean pretty much nothing ON THEIR OWN. If you trade this, you are essentially trading an MA cross system. Dont do that.

Combined with PA and a PPZ/round number, it is still useful, just less than with a trending market due to the tighter range.

2) Can we trade a swing high pinbar at a PPZ without divergence?
Hell yes, but keep in mind the lack of divergence tells us that price is moving faster than the last time it hit the PPZ, so it has more chance of breaking it. This doesnt mean it will break it. Go back through some bars and see for yourself. Or kick a football at a window.

3) Is divergence a useful tool, and should I use it?
Is it useful? Definitely. As seen earlier on our programme, it basically tells us that the rate of acceleration is slowing, and so either buyers are drying up, buyers are becoming sellers (ie, taking profit) or that sellers are starting to get back into the market, or all of the above. It doesnt mean that 'the bears are in charge', or anything like that. Why? Because price is still going up.

Should you use it? Only if you want to, and it suits your style. You dont have to use it.

4) Should I go kick a footy through my mum's window and blame it on a guy from the internet called joel?
No.


----------------------

Now, what is the bet that Mike or Jim have already done a video that explains this in about 3 minutes flat?

--------------------------
 Most people (including you, looking at your chart) use the MACD, so I've use that here. But it applies equally to RSI (perhaps moreso)... basically, almost all the oscilators you see are just some kind of moving average difference, a derivitive of an EMA, or a combination thereof. I should throw in that the RSI is a bounded oscillator - it moves between two points. So you always know when it is at the top/bottom of its range. The MACD, TRIX and CCI arent, so they can just keep going up and up and up.

* it was all one guy, Gerald Appel I believe. Maybe Apeal. Anyways, he wrote a pretty good book about it.
When you have to shoot, shoot. Dont talk.
  • #42,653
  • Aug 31, 2009 5:45am Aug 31, 2009 5:45am
Quoting supremeChaos
closing all your positions, Sir?
not leaving some for the 140's, for now? (u must be expecting a significant bounce at 150 perhaps, since it's the first revisit since July)
Cause price of something else is bouncing off of the support line and I hate giving away pips. It might not matter when you demo or trade micro, but It will eventually become important when your pip value increases.

GJ is not ready to hit 140 just yet, but it will eventually go there...

BTW: 1944 was a terrible year...
  • #42,654
  • Aug 31, 2009 5:52am Aug 31, 2009 5:52am
Quoting benji533
I guess I am guilty again

I will be glad to get a post on this from you.

Ben

PS - Joel, a part of trading against the trend is also naturally trading into "traffic"PPZs. So usually I automatically see this, but thank you for stressing it.
nah, you are all good Ben. You have an inquisitive, analytical mind and you seem to pick up things ridiculously quickly and - more importantly - the concepts behind them.

How many chart monkeys trading MA cross EAs understand what the lines on their chart mean, understand order flow? Like one in a thousand, maybe? But you do. Takes most of us a hell of alot longer than you to start seeing the light.

And yeah, the biggest problem with going countertrend is exactly that - you are against the trend. You are selling when everyone is buying. You pick a A+ pin at a PPZ with divergence and you are essentially saying 'I think that sellers are now in control*, at this point in time, at this exact bar'.

It's a big call. That's why we give ourselves the best possible chance to be right by getting as much confirmation as possible, and still being picky!

* because buyers ran out, because they turned into sellers (ie, took profit) or because more sellers have come into the market. doesnt really matter, results are pretty much the same.
When you have to shoot, shoot. Dont talk.
  • #42,655
  • Edited 6:15am Aug 31, 2009 6:04am | Edited 6:15am
Quoting Area51
Could you please clarify for the dummy (Me). What you are saying is that price hits the aqua line PPZ and finds it hard to work through. So when it did break it then becomes support and the same difficulty in breaking back down occurs? Additionally because it is with the trend it is even stronger?
Basically, yeah. Resistance becomes support. And because it is with the trend, there are going to naturally be more buyers than sellers. Absolutely right.

The quick version is that this happens because there were a bunch of sellers, they all sold their stuff and left. So now the buyers push the price through the PPZ, and the buy orders on the other side get filled (pushing price up more).

So, say you have sellers at .9995 and buyers at 1.005. Everytime price goes to .9995, the sellers are going to sell and go home. Selling pressure pushes the price back down, so you see a rejection. This is the resistance zone you see.

But each time, there are probably less and less sellers there. The rest already sold up, went home and made dinner. Eventually, price breaks through.

Now you have the jerks at 1.005, who all buy when price gets there. Pushing price up. And they probably dont all get filled, so there are a bunch of orders left there.

On top of that, everyone in the market sees 1.000 as a support zone, like you said. And so they put a bunch of buy orders right above it, because they expect a bounce. Price comes back down, buy orders get filled, price smashes back up.

(extra credit)
All those buyers at 1.005, where are their stops? Probably tucked below the round number/PPZ, at .9995... waiting to be triggered when we get a breakout back down
When you have to shoot, shoot. Dont talk.
  • #42,656
  • Aug 31, 2009 6:18am Aug 31, 2009 6:18am
Quoting joelcf
Basically, yeah. Resistance becomes support. And because it is with the trend, there are going to naturally be more buyers than sellers. Absolutely right.

The quick version is that this happens because there were a bunch of sellers, they all sold their stuff and left. So now the buyers push the price through the PPZ, and the buy orders on the other side get filled (pushing price up more).

So, say you have sellers at .9995 and buyers at 1.005. Everytime price goes to .9995, the sellers are going to sell and go home. Selling pressure pushes the...
Thanks Joel


You have just given me another Ah Ha moment.

This thread is GOLD, as is your input.

A51
  • #42,657
  • Aug 31, 2009 6:19am Aug 31, 2009 6:19am
Joel, you are the man! Really, thank you.

I was a dumber divergence man about 30min ago.
As I have said - If I have knowledge, logic and understanding of how things work, I can benefit from it and not do things as a robot. Till now I have used divergence as a robot.
That was a very great explanation.

I have read at several places how the histogram is calculated, difference between moving averages, etc. That is a very common subject you can find anywhere in the internet.

Thinking about price moving slower at the last period of time, AKA lack of momentum....that lines up perfectly with the thing I see and say all the time. The odds of trading against a very steep are lower than trading against a ranging trend that rises slowly. It's like the ball and the window. To me it makes sense.

Thank you man great to have you here.

Ben
  • #42,658
  • Aug 31, 2009 6:21am Aug 31, 2009 6:21am
Quoting benji533
I have read at several places how the histogram is calculated, difference between moving averages, etc. That is a very common subject you can find anywhere in the internet.
Exactly! So why dont people read it?!

I have to work like a hundred hours to build up a decent size trading account. Pretty sure I can spare a couple of hours to learn wtf I am doing and not lose all my money. That's why people here will always be better than the idiots out there losing all their money blindly gambling and not even trying to understand what they are doing.
When you have to shoot, shoot. Dont talk.
  • #42,659
  • Aug 31, 2009 6:42am Aug 31, 2009 6:42am
Quoting tradertt
P.S. To all in the PF
Does it have lots of videos for me view hehe I am ready to join it! and study more indepth on this topic.
A PF member told me that the PF has tons of videos, so much so that he aint finished viewing all of them yet.
  • #42,660
  • Aug 31, 2009 7:11am Aug 31, 2009 7:11am
Quoting joelcf
..... [size=1]Most people (including you, looking at your chart) use the MACD, so I've use that here. But it applies equally to RSI (perhaps moreso)... basically, almost all the oscilators you see are just some kind of moving average difference, a derivitive of an EMA, or a combination thereof. I should throw in that the RSI is a bounded oscillator - it moves between two points. So you always know when it is at the top/bottom of its range. The MACD, TRIX and CCI arent, so they can just keep going up and up and up.

* it was all one...
Yes Sir, it's Gerald Appel (from what i've read). & he probably does have "Appeal" too. LOL

RSI created by Welles Wilder
btw, RSI too, like Stochastics & other bound oscillator, can remain overbought/oversold for a long time, specially in trending markets.
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