Trade Anatomy - ramblings of an old-timer

Thank again HH

Maybe I should write a novel - haha.

Kind regards and keep up the great work,

O N D

You are very welcome here LasVahGoose - interesting user name!

I look forward to your contributions also.

Kind regards,

O N D

Hello Kiwi Trader - you are very welcome here and I look forward to your contributions

I was about to comment on your original post, to say that I personally did not make use of Fibs. Then I saw your more recent post (quoted below if I have the grasp of the technology!) and I felt I should highlight the first sentence of it in particular.

Pragmatism is one of the most valuable tools a trader can have. The highlighted sentence demonstrates you understand this.

In terms of Fibs, a great many of my former colleagues used them religiously and they too were long-term survivors in this line of work. I would therefore never disapprove of the user of them. However, for me, they add an unnecessary layer as a plain ole chart gives me all I need.

Kind regards,

O N D

Hello again Astellas

All of your scenarios are feasible. A few points I would like to make if I may:

 

1. Look at the hourly chart. What do you see? What I see is... swing low on 25th May (11am UK time on my chart), swing high (26th May, 3pm UK time), swing low (26th May, 10pm UK time), swing high... the structure of those swing points suggest (on the hourly at least) the general direction is UP. If we were trading the hourly, we'd be looking for the next swing low to get in long. Why? Because it's a trend we think we can still ride. All about those higher highs/higher lows, right? Well, no. And this is where taking what is in my head and what I do intuitively becomes more difficult. Don't get bogged down with wave structure or EW in any great detail but always be aware of how price moves. I'm sure you already know about impulse waves etc and, if you don't, you can find plenty of perfectly acceptable reading material around to understand the basics. A rudimentary knowledge is enough to alert us to the fact that a higher low has a reasonable chance of being made fairly soon and that a further impulse upwards may follow. We are waiting for 'point 4' of the sub-wave to be posted and will ride the 5th leg, if you want to use different language.
2. As Kiwi Trader mentions, any price action that suggests... is a very good mantra to bear in mind. I must admit, I asked you to think of more scenarious in the Aussie with no care about whether you would better understand the immediate price movement of that instrument. I asked for another 3 scenarios, if my memory serves me well. If I asked you to provide another 3 within the next 24 hours I am sure you could. The point? Potential scenarios are limitless. Never get too emotionally attached to them.
3. I am aware my last point will perhaps illicit frustration. Whilst I have no interest in becoming a mysterious sage, with a collection of acolytes who frantically attempt to read between the lines of my enigmatic musings; I will deliberately be vague if I feel it helps to improve the understanding of those who ask questions.
4. I'll deal with Dollar/Yen in my next post (you are keeping me busy, haha) but let's briefly get the question about fundamentals dealt with. When I was employed as a trader, I could have taken part in economic summits with the most learned economists and not felt out of place or intimidated. Did this depth of knowledge assist my trading career? In the very early years, I suppose it did. Why? Because it allowed me to spout the bullshit necessary to climb the greasy pole. It allowed me to have informed input in discussions with movers and shakers and to be known as more than just a floor monkey. Even when I became my own boss, the habit remained. I'd keep up to date on the fiscal state of affairs of all the leading countries and spend time not only absorbing information but writing opinion pieces for use within my company. It'd be untruthful of me to state that I no longer have any fundamental appreciation as I am geniunely interested in the world economic picture. This is partly due to my business interests and partly due to my interest in the subject. It does however have very little to do with my trading positions.
5. Trade what you see. Such a cliche perhaps but follow it and you'll do fine. The chart tells me what I need to know about how each country is viewed internationally on any given day/week/month/year. I make sure I am aware of when news releases are and which are the potential market movers etc but this is to give me a deeper understanding of price action rather than to suddenly allow me to form a fundamental view of a currency. As I trade longer term charts usually, a price spiking up or down temporarily because of a news release is my signal to ignore that little segment of the chart. I appreciate this cannot be the case for shorter-term traders however.

Another long ramble from me. I may post some thoughts on USDJPY soon or I may have to wait a few days. I'll see how my energy and free-time balance themselves out.

I wish you all a great remainder of the weekend.

Kind regards,

O N D

OND,

In the interests of another scenario and a question I attach this picture.

http://charts.dacharts.net/2010-05-29/kw5.gif

You suggest the possibility of this wave being impulsive and thus likely to have 3 or more thrusts before it runs out of steam at this level.

I wonder if another scenario is that it is the retracement of a larger impulse down and thus might simply be an ABC. In that case the termination of the 3LIs around the point where AB = CD (the dotted purple lines on my chart) would reinforce that view.

I also note though that an impulsive scenario could generate a small gain in the new high and might run out around S&R at 8660 to 8700 odd.

Apologies if bringing this into your thread is a bit too much of a fibtrusion and I'm happy not to repeat it. But I wonder if you consider such things either semi-consciously or more specifically in your trading? FWIW I personally don't like the AB=CD as I find that overshoots and undershoots are too significant for me to get much from it but I wondered about it when I read your mention of impulse waves.

Hello again Kiwi Trader

I thought I'd best answer this fairly quickly to avoid us getting off-track. The fault is entirely mine and demonstrates the importance of clear language. I was wrong to use the term 'impulse wave' as this phrase has connotations that are not applicable to the chart in question.

To clarify, my thinking was that we are waiting for an hourly swing low on the instrument before one more move up. Whether we then resume the larger trend downward is anybody's guess. The example was mainly to allow Astellas to consider the simple function of trendlines and swing highs/lows and I used the hourly to demonstrate a live example.

I have attached a chart that speaks for itself in terms of wave structure, I hope. I'm relieved to say we won't be going into any more detail on the subject in this thread as it's not something I consciously make use of and I think a trader should definitely leave mastering wave patterns until well after they have an intuitive appreciation of the price structure within charts.

I love that you are stimulating questions though - please don't stop

Now, here's that chart, haha...

http://www.forexhit.com/images/relat...ajor-waves.gif

Hi O N D,

Thanks for starting up this thread! Now if I might I would like to sidetrack a bit from price anatomy discussion and seek your advice on the following topic.

Ever since I started trading forex I've been facing the following dilemma: should I focus my efforts on a couple seleted pairs or should I watch as many pairs as possible and trade the best setups?

The first camp advocates that each currency pair has its unique behavior and a beginner trader should focus and learn one or at most two pairs at a time, until he understands all the nuts and bolts of those pairs (how do they usually move, what make them move, etc).

The second camp thinks the form of a setup is more important. They'll constantly scan numerous pairs and trade only those which offer the best setups (based on price action, S/R, Fib, etc).

As a novice trader who'd like to learn your style of trading, I'd very much want to hear the view and opinions from an experienced trader. Thanks!

Hello again fthingf

Frustratingly, the answer to this question is "it depends".

There is a great deal of benefit attached to learning the particular nuances of individual instruments. I have on occasions experienced the rather bizarre and frightening (but extremely profitable) sensation of being so very much 'in tune' with a market so perfectly that I am certain I know the future. Difficult to do justice to how other-worldly this sensation is but the best way I could describe it is to say it's almost like you merge with the instrument and experience each moment from its perspective. I won't blame anyone who thinks I am now officially senile after sharing that, haha.

The pragmatic benefit of specialising is that you aren't having to flick between charts all the time and you have more of a grasp of what is developing. Knowing that price structure suggests a bearish reversal in EUR/USD or that a higher high is likely in USD/JPY soon brings clarity when those are the only markets being traded. Trying to keep a grasp of 12 markets in this way is nearly impossible.

On the other side of the coin, we owe it to ourselves to find the best setups and only putting in the effort of looking at many charts can optimise finding them. I have a friend who is a first-rate stock trader and he has a piece of software that lets him analyse something like 2000 international stock charts each evening. The software cycles through each chart and allows him to instantly freeze it when he spots a setup he likes. His expertise makes it possible for him though as he is able to discard uninteresting charts in a matter of seconds.

Learning to react to the structure of price history is a beautifully transferrable skill. Learning it trading oil or wheat or the S&P or Cable makes no difference as becoming proficient allows you to trade anything that moves. However, learning takes time and we are slower at analysing what we see initially. We are also more likely to misinterpret or completely miss valid elements.

So, to avoid rambling much longer, I will reluctantly provide you with a straightforward answer that goes beyond "it depends"

Stick with a maximum of 3 instruments until your performance is consistent and your trading hours are completely boring. You might then decide to stick with those initial markets for your whole trading career or you might decide to explore further markets and cherry pick your trades from a wider pool of options.

When you stick to 1 or 2 markets you have the opportunity to play all types of little games that teach you so much that will serve you for years to come. For example:

 

1. Predict the colour of the next two candles. Will it be UP-DOWN.. DOWN-UP.. UP-UP... DOWN-DOWN?
2. Predict the range for the next 4 hourly bars.
3. Attempt to pinpoint the next swing high/low to within 50 pips.
4. Forecast where price will be at 17:00GMT and make the forecast no later than 13:00GMT.

All of these games will seem frivilous but, at worst, will show you how difficult predictions are in addition to filling your time whilst waiting on setups. At best though, you will learn a great deal from these silly little games. When reviewing your predictions and comparing them with what the market actually ended up doing, you will be assimilating a picture of market behaviour that most traders will take years to inherit, if they ever do at all.

Another good reason for limiting the markets you watch in the beginning is that you don't have to have a financial interest in a market to watch it. A lot of traders are only interested in a market whilst they have a position. That is completely valid but it presents a problem; especially for inexperienced/unsuccessful traders. When they get stopped out or panic and close their position they usually move on to the next opportunity. Isn't there much to be learned from keeping watching that same market? Why did the position fail? Were you too early? Did you read it wrong? Did you do everything right but the market simply moved against probabilities? What happens to price in the time following a failed breakout? What happens when a higher high is posted but then a lower low follows? A trader who loses based on these scenarios and doesn't stick around to watch what happens next is missing out on the education the market is providing.

By all means, increase markets watched and analyse as you progress though. Also, for those who trade daily or weekly charts only, it would be rather silly to stick with 2 or 3 instruments if your method was consistently profitable when certain conditions applied. Let's say you had a breakout system that was 50% successful and winners were 2% bigger than losers. THe only way you can drive home that small edge is by either trading big size or big frequency. Much like a casino - some operations go for big rollers and some go for low value/high volume. Trading is the same - once you have an edge, use it mercilessly and continually.

Another ramble over. Thanks for the question and I look forward to your contributions

Kind regards,

O N D

Thanks Kiwi Trader

It will be an interesting exercise to monitor the PA on the Aussie in the upcoming days.

Thanks OND.

So if I understand you correctly you are implying to look out for something as in the chart below, and wait for PA to give the heads up for a long entry around point 4. I am also aware of the trendline, and that this may act as support around the 38.2 fib, or may act as resistance if price bounces off the 0.8360 level.

Absolutely.

Also, look at that first leg and recall what I said about scatter graphs and the statistical trend that we should mentally add to the chart. Recall what I said previously about a move trending and then getting ahead of itself before resuming the initial pace of increase/decrease. This is a useful signpost that there will be further moves in this direction more often than not.

I appreciate this is all seemingly rather elementary and might even appear that I am stating the obvious. However, trading has become so immensely and unnecessarily complex that newer traders think they must be extremely clever and find convoluted methods of exploiting price movement. The truth is very far removed from such a mindset. I noticed a young chap with the name PeterCrowns, a former pit trader, posted the inside bar method he has successfully used for years. The simplicity of this style of trading (a style that will be applicable for infinity most likely) probably makes less experienced traders cynical as they have spent a lot of time and money trying to find a killer system.

OK. This ramble is over I promised I would post some thoughts about Dollar-Yen after your previous request so I'll do that next.

Kind regards,

O N D

Astellas made some points pertaining to the Dollar-Yen weekly chart. See below for a visual.

As he correctly points out, a higher low was posted (Feb 2010 - initial low Nov 2009). Should we be on alert to trying to get in and anticipate a further move upwards? For me, no.

Mentally connecting those two lows with a trendline (fully acknowledging it is not a 'proper' trendline as it is only joining two points) tells me that price structure is actually still bearish. My view would be that, at best, the instrument has shown an unwillingness to extend the decline further - yet.

Zoom in on the past 9 or 10 weekly bars and you will note that the two biggest candles are bearish. Many traders will have viewed the candle with the large lower wick as a bullish sign but should now have changed their minds as the subsequent weekly candles do not support the theory.

Of course, we could go up from here. Price can and does go anywhere it pleases, however illogical it seems in technical terms at times. I wouldn't be betting on it though. That large lower wick I mentioned ... such candles are, justifiably, viewed as a rejection of lows. Take a look at hundreds of such candles though and you should find that this isn't necessarily bullish. What comes next usually tells you whether or not price will bounce up from there. Testing those lows is often a sign that price will be headed there soon but there isn't sufficient appetite/momentum to go there quite yet.

The other point I need to make for Astellas is that he is perfectly right to aim to get into longer trends. Bear in mind though that trading from a weekly chart requires a risk appetite that most cannot financially or emotionally handle. Trades cannot be as precise and require much more wiggle room. I've kept things very simple so far, looking at single entry and single exit scenarios. When I trade from the weekly charts, I consider myself to have X number of bullets. I will ease into a trend and might need to fire 4 or 5 bullets before I start to see some results.

Drill down to the daily Dollar-Yen chart and the picture will probably look quite different. The lows from 4th March and 6th May seem to me to be screaming out to be tested again imminently. If I was interested in trading this, I'd be looking for evidence of a swing high forming and riding price down for another go at getting under 88. Drill down further to the hourly chart and you'd likely notice that a breach of 90.60 would be a good sign we're headed down.

So, converting this into a basic trade plan, we have: short below 90.60 ... monitor price around 88.40 ... move to 91.60 tells me I'm wrong.

Notice how I haven't said Target is X, Stop Loss is Y. Doing so isn't invalid and suits many traders but I'd rather watch price structure developing than be inflexible about where I jump off.

This trade plan, in rigid form is still perfectly fine. Risking around 100 pips for a potential reward of 200. The R:R traders wouldn't complain about that. For me personally though, and I'll likely repeat myself on this point many times, risk:reward limits my trading and creates a dangerous arrogance that I have an edge. I could have said my target was 86 area. A potential reward of 400 pips - great, right? Well, of course not, on what basis is price likely to go there? Me hoping it will so I have a nice ratio and can rest assured I've chosen a great trade?

A lot of traders will want to trade using pre-prescribed stops and targets and that's understandable. I would never encourage a trader to trade without stops. However, please be mindful when using R:R that it's highly aspirational and can breed complacency, in my view.

OK. This ramble is done

Kind regards,

O N D

Hi OND,

Thanks for the excellent thread I have a question regarding fiesability of a couple of scenarios on the USD/CHF, if you'll excuse me I won't post a chart.

The weekly and daily charts suggest the price is hitting resistance, at the current 1.1587 mark. So a short entry below last weeks low at 1.1471 looks attractive.

My second scenario would be a buy on break of the the 1.1920 mark (9 Mar high)

On the short trade scenario (althouh I would probably exit prior to this) if there was a smooth ride down to 1.045 I'd trade out, and renter if the price broke the previous support.

On a buy trade I would plan an exit should the price reach the 1.23 mark, with a reentry if the price breaks 1.2315

I'd appreciate any thoughts you have on these, and I hope you can find the time to keep this thread going, although noone could blame you for getting distracted by your galavanting.

Thanks,

Pete

Hi OND

Pleased your energy levels are holding up, in fact, it’s us thread subscribers struggling to keep up with you ! Please, keep it coming http://cdn.forexfactory.com/images/icons/icon7.gif

You have mentioned the scatter concept twice now and I just want to make sure I have grasped it correctly. Chart one shows a scatter graph of the 4 hour time frame on the EUR/USD that you mentioned in post 6. I have plotted a line straight through the middle of the dates you mentioned (red circles). Have I plotted the ‘imaginary line’ correctly ? Are you referring to the period after the 2nd red circle as being the ‘non-orderly’ period , or are you referring to the scatter graph points which are the further distance away from the line during the dates you mentioned (between the 2 red circles) as being the non-orderly period. It’s just that price bounces back in both the period before the 2nd red circle, and also after it (although to a much greater degree), so I want to make sure I understand which part of PA on the chart you are referring to when you say ‘bouncing back to an orderly place’.

In chart 2 I have also plotted the scatter graph and ‘imaginary’ line for the AUDUSD as per you your suggestion in post 31. Have I got this correct ? If so, this suggests that price may be due a bounce down to the line.

Your USDJPY post offers some remarkable insight into how you read PA. I think I’m going to read this post a few more times before commenting to ensure I digest everything there.

Kind regards,

Astellas

Glad my energy levels are holding up Astellas - life in the old dog yet perhaps!

Yes, you understand scatter graph concept absolutely fine. I wouldn't get too hung up on it as often a trendline serves the exact same purpose. Your assertion that the Aussie could be due another down move fairly soon could be reached by a quick look at the chart or by drawing a trendline or following the statistical general direction.

I've tried to attach a better example of the point I was making. In the chart attached you will see that the initial decline was orderly (price followed the upper channel line downward) and then the decline got a bit ahead of itself when a sharp move to the lower channel line happened. It then got back on track after price either moved sideways to wait for the upper channel line to be reached or retraced slightly to meet it, before then continuing in the direction of the trend.

Kind regards,

O N D

OND

Thanks for sharing this with us.

I keep on following this thread and post charts i am willing to learn from you.

Thanks

O N D

Welcome to the thread, ingmarforex

I look forward to your involvement.

Kind regards,

O N D

Thanks for the thorough advice. Specialising it is... Now that you have spoken I can admit that this approach is my personal bias too!

I'll definitely give this exercise a try. By the way I now understand why you like wide stop loss: you are probably seldom wrong with your predictions!

Another good piece of wisdom. I'd have never thought about all these benefits by limiting the markets.

I'm glad I did ask the question.

Simplicity at the cost of precision is no bargain.
I'd prefer this:



Two flags (vertical runs with side triangles attached to the top of them) appear in the trend before the one you cover. Drawing a TL that is traditional, that is, through several pivots in a row, from them explains the trend and, at least in part, the reason for the trend. That side area highlighted with the yellow box is intersected with the trend, and, a little further along on the chart, another one just like it appears. Guess what -- The other TL, when extended, run through it at the same point.
Interpolate the entire chart as waving through these two TL's (which needs another chart study to reveal it), and you find that the area after the intersection of these two yellow-boxed side patterns also act similarly.

Hello ha-pattern

Quite a hardcore chartist, I see! You have some interesting threads going on the subject.

For the purpose of this thread I think it's a little more than I want to go into right now, especially as I have placed the thread in the rookie forum.

If anyone is looking to go into more detail on technical analysis though I hope they seek you out as you seem like a smart thinker.

Kind regards,

O N D