Key Concepts to Correct Trading Behavior - by FibStalker

just general I wouldn't dare to compete with your TA every experienced enough could tell if there is point in reading someone other posts here on FF and yours definitely are, even I don't always agree with your view, well most of the times I don’t read it at all or read on weekend, because I don’t want to spoil my view (this one is also important thing when you want to be successful in this business), however is good to know opinions of other traders especially when there is room to improve (there will always be room no matter how good you are - some things you disregard, some you study further)

Hi Fibstaker, looking forward to your thread.

A

tpsl.zero, first of all thank for you kindness.
I think you will be a great addition to this thread. I really hope you will stick around. I think the greatest contribution can be given by traders who do partially agree with someone else's view.

I perfectly understand what you mean and I tend to do the same. This is also the reason why I don't use indicators, because then I need to resolve conflicts. And, at least so far, I could find a good and consistent way to do that.

Like you, when I find things that make sense I always study them and try to incorporate in my view of the markets. With the years though I came to realize that easier/simpler is better and a consistent method which gives clear and good trading plans, even if with a reliability < 50%, is good to keep , trying to improve it with the aid of money management and market psychology.

Chat to you soon
Cheers
-fibstalker

Welcome to the thread Axel. Hope this is useful.

Cheers
-fibstalker

Hello all,
an updated view on the Dollar Index. The current price dynamics is very important as price could repeat last year's move (now, repeats in history are very rare, but that could still happen). Let me show you what I mean:

The 84.70 area is the first target of the 81.40 area of support that found participation at the beginning of May (corresponding to Euro’s lower low at 1.3240). The 84.70 area lines up with previous highs in the Dollar Index which could suggest profit taking from those levels. If history repeats (it rarely does though) we could see something similar to what happen last year in the Dollar Index.



The above picture shows the two current scenarios I could anticipate:

Scenario 1. Price could continue lower into the 83 area of support and then violently bounce higher into the 84.70 area of 1st target of the 81.40 long entry area. Then price could fail the next traditional measured move higher and start a series of lower lows and lower highs.

Scenario 2. After trading the 83 area, price could continues above the previous 84.70 profit level into the 85.30 area, 1st target of the 83 area long setup. If that happens profit taking could be seen at those levels (and we would deal with that at the proper time).

On my blog you can find the video explaining the scenarios I have just provided above: http://elitefive.wordpress.com/2013/...lish-language/

Let me know what you think.
Cheers

-fibstalker

Really excited for this thread and looking forward to more!

Hi biDc, I am happy to hear that. If you find it useful please feel free to recommend it to other people.
Tomorrow we will start the discussion on the key concepts.

Good night.
Cheers

PS: watch the videos to get a better picture.

You can now discard this scenario (history does not repeat often, indeed!).
The 83.60 area of long extension support kept working.

The Euro is well on its way onto the 1.2530 target.

Chat to you later.
-fibstalker

Ok, let's get it started with an INTRODUCTION (1/3).

If you are here of course you are interested in trading. Or maybe you are even a seasoned trader but still not part of that elite 5% of consistent traders?
Think of it 95% of traders are losers or do break even (which is a very good result when you consider slippage, trading costs and taxes).

I have called my blog after this fact: ELITE FIVE.
Let's think of this again. This is a fact! What makes us different so that we don't end up in that 5%? What's your edge? Think about it.

Of course we want to be successful traders, regularly extracting profits out of the markets. But to do that, and in light of the fact just reminded above, it is important we all start thinking of trading from a different perspective, as well as, start doing something differently. Or just (re-)learning doing things differently.

Now think of a few things you could start doing differently, pick one and start today. If you are new to trading and have no basis to do this exercise, think of risk. Do you risk 1% or lower of your account? Are you well capitalized? Under-capitalization is one of the major problem of why 95% of traders do lose money. The other important concept, very often connected to under-capitalization is too much risk. What makes professional trader feel comfortable? A risk that is manageable. What that means? You can be comfortable with a 2% or even 3% risk, but that does not mean it's a good practice.

A sequence of losses and your account is under a 2-digit percentage. Not to speak about your emotional capital, connected to market psychology. My suggestion is to stick to sub 1% risk as you are learning (I will talk about paper trading in this thread, but still too early for that).

So far we derived the following important points:
- be well capitalized
- risk less than 1%
- mind your emotional capital, as well as, your bank account
- market psychology is very important

Nothing new indeed. But how do you and your trading relate to these points? Let me know your thoughts.

Have a good day.
Ciao
-fibstalker

i can't comment anything, since i'm still learn to managing my risk in demo account.
so far i have experiment between 0.5%-5% per single trade, my comfortable zone.

it's very interesting topic fibs, also can't wait for the bandwagon theory and market psychology discussion.
Keep it up.


regards

@frz, thanks will definitely do it.

It's important to underline that the risk % is not only related to what we are comfortable with, but should relate also to the reliability of our trading method.
More often than not, traders do not know the reliability (% wins versus total) of the method they trade, also because the method is very often just an interpretation of market action through a number of TA tools, that are "known to work".

Understanding risk means understanding what we are trading. When we have proof of consistency and reliability (even if < 50%) of our method, it's possible to plug in money/risk management techniques/strategies to get the expectancy of the method (which is the average cents of gain for each $1 risked).
After that we should make simulations to understand what is the % risk percentage we are comfortable with, which can be decided based on the maximum drawdown we stand in a streak of losses.

So risk is a bit more complicated than just what we think we feel comfortable with. Because with real money we feel much less comfort than what we had planned for, in the first place. And that's the key of this game.

Have a great eve
Chat to you soon
-fibstalker

Of course as soon as I write something the market does something to make me look like a fool. But that's okay I don't mean to be right all the times. Also being a swing trader (and short from the 1.3230s) that's not an issue.

With today's reversal in the Euro this consolidation still can justify higher prices. In my next video and blog post will go through the 15min timeframe analysis to help taking decisions in the short term too.

See you later with the second part of the INTRODUCTION (2/3).

Cheers
-fibstalker

Let's continue with the INTRODUCTION (2/3).

I left you with some very well known concepts related to capitalization, risk percentage, emotional capital (very important) and market psychology.
I have also explained that 'perceived' comfortable risk depends upon a few things and, if we want to be rigorous, with time we will need to attach some significant numbers to our trading method. Such numbers are, at least: reliability, frequency of trading and mathematical expectancy.

We will need to focus on those things. But if we are still learning or we still don't have a well defined, tested method we need to begin to re-focusing ourselves on those key concepts that truly describe, explain and affect price behavior. Now Technical Analysis tools and indicators do explain price. Too often they explain price but with 2 main issues:
1) they only explain price ex-post, i.e. after the fact (the ha-ha effect, the "now I see it" effect)
2) they do with uncertainty and after having resolved conflicting signals.

The problem is that we need a method that tells us what is going to happen, or I should say the scenario with the highest probability of what could happen, before it actually happens. And the method needs to provide exact entry and exit prices, stop-losses and free-trades, whenever possible. Most of the analysis methods I see do not offer all this. But this is what we need if we want to get a realistic idea of our trading method and be able to trade it.

If you are a new or inexperienced trader you may benefit from what I am going to say more than experienced ones. The reason is that if you are just starting you have a unique opportunity to shape up the right beliefs and mindset about trading from the very beginning.

Traders with experience typically will need to work a bit more (quite a bit more!) to change or slightly modify their current beliefs. But when they face the effort they will be able to quickly turn around their trading (if they have improvements to be made, of course).

The psychology around price moves is the key and it is driven mainly driven by emotions. It is so rooted in emotions that rationalizing market behavior is not relevant and can even be counter-productive. How could that be? Should we not "understand" what the market is doing to trade it well?

When you understand the psychology behind price moves, you discover that understanding or explaining each move with TA or FA or any other method is not important. If price negates a setup or a previous commitment of traders and program trading in certain areas or even our current model of price structure, be it. We cannot know it all and why. And we don't need to know it all.

As said, rationalizing market behavior is not relevant and even counter-productive for successful trading. For instance, all the hype on market news and on its interpretation is misleading. News can and will only affect price on the smaller timeframes like 15min and 4-hour, but very often (if not always) it will have no effects on price patterns already in place, neither will on the outcome of well-formed daily and weekly setups.

So let's recap it and give you some thinking to do on the following points:
- define your method, clearly. Write rules on paper. Write exceptions and how you resolve conflicts if you use indicators. Try to be more complete and clear as possible
- does it help to "forecast" the next move? Does it help you compile a complete trading plan?
- does your method explain price structure, i.e. it's able to anticipate high probability price moves or allows you to enable price discovery, i.e. simplifies the understanding of the next unfolding leg of price?
- do you often follow news and use them to trade (or stay out of a trade)? Do you believe news are important? How?
- do you often need to have a rational explanation of a price move?

Hope this questions are though provoking.
Let me have your answers and let's discuss about it.

Thank you
Have a good night.
-fibstalker

good post fibstalker. one of the main problem i struggled with was always trying to "predict" with TA when TA is an after-fact information. this is the one reason i have lean towards fib based trading that you have posted. now i just need to define my clear set of rules for them. thanks again

Hi biDC,
a good place to start could be the DiNapoli Levels. I think they go a long way to try explain price structure or, at least, they attempt to have a good trading plan and with some well defined exits (DiNapoli defines 3 levels). However DiNapoli's method was developed with confluence in mind, rather than behavior enforced by modern program trading. It's a good starting point for fibs.

Cheers
-fibstalker

Hello all,

Here below please find attached the link to the latest video-analysis of the Euro FX currency futures for today May 29th:

http://elitefive.wordpress.com/2013/...sh-language-2/

As said in my last review the Euro is in a box play between 1.2910 and 1.3230. There is still a possibility that we move higher due to the continued support coming in the 1.28-1.29 area. Still no need to rush in now.

No pictures/scenarios today (too late sorry), but in the above video I review the daily, 4-hour and 15min charts for the Euro FX futures (this is not the EUR/USD spot, but the measured moves are the same, so you can easily find them). The scenarios are very clear on the 15min chart: if price moves below the 1.2918 level, the 15min extension long currently being observed by price will fail and the short scenario will be back in play. We may get a full retrace short like it happened yesterday.
If the 1.2918 level of stop-loss holds we could see 1.300 (1st target) and even 1.3045. To fail shorts price must continue to keep moving higher in extensions.

Have a good night.
Cheers
-fibstalker

For those who are interested, I have translated the article, by Enrico Marro, that was published on May 26th, 2013 on Il Sole 24 Ore, the major Italian Financial Newspaper. The article (which can be found here in its original format, in Italian language) discusses part of the content of the presentation I held on Friday May 24th, 2013 at the Rimini IT Forum, the major Investing & Trading event in Italy on the topic of innovative trading methods in a world governed by program trading and HFT.

The article titled: "Humans against Machines in the Markets: how trading robots amplify market collapses, creating systemic risk. Likewise in the 2010 Flash Crash.", can be found on my blog: http://elitefive.wordpress.com/2013/...n-the-markets/

Chat to you later.
-fibstalker

great article thanks for sharing!

The 1.2918 level held during the night and we had the first target at 1.300 being hit. This is also previous resistance being tested for the 3rd time. So some profit taking was to be expected.

@biDC thanks. Glad you enjoyed it.

Cheers
-fibstalker

Let's move into the last part of this brief INTRODUCTION (3/3).

I left you with some questions. They may be hard to answer at once, especially if you have limited experience. But I think it is useful to see some of the questions that more experienced and consistent traders have answered or are still answering.
I think it gives and idea of the width and breadth of trading. Trading is simple but not easy, they say. And it is true.
Keep answering those questions and strive to learn how to answer them.

I want to complete this brief introduction so we can start moving into the "meat", the Bandwagon Theory and how it represents a fitting allegory of the markets.

But before getting there, I want to stress a single important point. That is: in trading perception is all. It is definitely much more important than facts and their rational interpretation in relation to how price could and will be affected. I am making specific reference here to news and key events.

What is the anticipated traders’ reaction after a key event? This is a real guess and, in my opinion this the gambler's guess! Why? Simply because we have seen the same event being traded by the majority of the trading participants in opposite ways. So what's the difference? Fundamentals of course. Do we know and understand all the fundamentals? I don't think so. And even if we knew all the fundamentals still we could not know how they would be going to affect markets in that single and unique spot of market history. So why try? And do we need it: no, in my opinion.

I know I will attract the antipathy of all those people who think that fundamental analysis (FA) can make a difference. It can add to our conviction on a specific trade. But FA will never give you a trading plan, i.e. entry and exit prices and targets. So if you are not an investor, put FA aside. That's my idea. Price always tells all the story (ok, now you can unleash your lightnings onto me!). And for sure price will tell us whenever we are acting on our FA-based convictions too early or to late.

An introduction to each of the five concepts (actually they are really 4, because one of them is the same but it is illustrated with market price and reality, which I believe it is very useful) that are paramount for trading success will prepare the trader to build the needed beliefs.

This is the keyword: beliefs. Van Tharp says we don't trade the markets, we trade our beliefs about the markets. How true! If I see a "triangle" in my mind and then represent it on price, I am applying my belief that market prices assume these very regular shapes. But is that true? Not at all. The markets are auctions, very random auctions. Auctions only know basic emotions: fear and greed. They don't know about triangles. See it now?

How can we think the market can be easily modeled by a nice triangle? It's in our fantasy. I don't know if there will be the opportunity in this thread to show you what a triangle really is: indecision. But I can show this by highlighting traders behavior and the resulting price structure (a new perspective, insn't it? Yes it is!). Remind me this at some point (but later!)

So if beliefs are the key, you should really ask, what are my beliefs about trading. When we start meandering with the inner of our minds things always become difficult. How do I do this exercise? This is difficult! Oh man! Trading is not easy, we said that. We must learn to do these exercises if we want to understand how we trade and why. Uhm, not convinced. Do I really need this stuff? Let me tell you a little secret:

What gets us bored and we believe its not useful to us, is what we need the most! And this is a universal truth.

But I am going out of rails. So back to beliefs. If we know our beliefs and then we compare them to the beliefs we need to function well in the markets, we can now help shifting the existing beliefs in order to (re)learn how to trade successfully. That would be sweet.


If you have been in the trading environment for some time, you will have realized that trading success requires useful and focused beliefs and the right psychology.

The concepts presented in this thread are counter-intuitive (like that simple truth about what makes us bored) and challenge the widespread ‘truths’ of trading and, sometimes, life. Probably this is the reason why it is meaningful to analyze and study those truths carefully. A deep understanding of the key concepts I am going to discuss in this thread will also help understanding where the real profit opportunities lie.

In the next post I will start discussing the not-too-famous (unfortunately) BANDWAGON THEORY.

Let me know your thoughts.
Hope this introduction (1-2-3) was entertaining, inspiring and motivating you.

Now time for some market analysis on the Euro (big things happening, see next post).

Chat to you later
-fibstalker