Key Concepts to Correct Trading Behavior - by FibStalker

Hello all,
I will start here with the first part of the BANDWAGON THEORY (1/?), the first important key concept that I planned to introduce to you. This very important topic is going to be split in a few parts (don't know how many just yet).

The Bandwagon theory is an allegory for markets behavior. It's a brief story - at times funny, at times dramatic - that has a special reading key: it describes the behavior of market participants, both the smart money and the average trader. I believe this theory is so important, compelling and useful that its full understanding is worth alone the equivalent of months (if not even years) of market exposition and has the potential to save you a lot of time, money and mental pain.

It is not an overstatement that a profound understanding of the message and the hidden wisdom in this theory can create the conditions to reach true trading mastery. A mastery founded into the beliefs that market moves in waves, and those waves are mainly generated by emotions.

In my recent interview with Dale Pinkert I mentioned two types of emotions: fear of losing and greed. I think greed is only secondary to lack of success in trading. When you realize you can only bring your position that far and should instead take (partial) profits often (maybe at those high probability target areas indicated by program trading), because market structure and price dynamics will eventually bring price close to and beyond your entry price level, the greed part of the equation disappears. But the fear part of the equation stays: we will eternally fight our fear of losing money, as well as, our fear of losing an opportunity to make money. I will discuss these points in more detail when I will touch on the market psychology.

The Bandwagon Theory provides an insight into the inner workings of the markets and how the average trader is ‘manipulated’ for profit. Some of you are now thinking "ha-ha I knew the game was rigged and 'they' are after us all!". That would not be a fully correct statement.
Indeed it would be more honest to mention self-manipulation because consistent, professional traders and those ‘in the know’ cannot directly cause others to lose money.

Well, they can only use information that the average trader does not have because he or she hasn't learned it yet, to position themselves successfully in the markets. This is not about COT, insider trading, secretive information or special technical indicators. It is about understanding that the psychology we all bring into everyday life activity is dis-useful for correct and consistent trading. Why? Because when money is involved, our emotions and judgement are skewed. And such skewing is related to how we perceive and relate to money and how we were educated about it, which depends on how and in which conditions we were brought up.

You see, the responsibility of poor trading results is the lack of market-oriented psychology or maybe I should say money-oriented psychology. All the main and most costly mistakes done in trading, also by well capitalized traders, relate to money and risk management. Risk more than 1% per trade when you are starting and you won't see your 4th month (indeed 80-90% of forex traders blow their account up within a 3 months time-span, according to statistics). Traders are paid for the quality of their decisions. Losing money clearly means that the decision and/or execution process is ineffective and professional traders understand that.

Let me know what your thoughts are.
Thanks

Have a great eve
Cheers
-fibstalker

Hello all,
no time for the charts and blog post, but I wanted to post the following videos, sent on twitter.

S&P500-emini: video analysis & Forecast, June 6th 2013 (English Language) http://youtu.be/6i0XjkMHEC8 #FXroom http://www.fibastalker.com $ES_F $SPY $SPX

Euro-Dollar & Dollar Index: video analysis & Forecast, June 6th 2013 (English Language) http://youtu.be/DfVj0goNBO4 #FXroom http://www.fibstalker.com

Let me know what your thoughts are
Will post the charts and blog post later on.

Cheers
-fibstalker

Hello all as you may remember in my May 31st posts I have mentioned the fact that I would not be interested in shorts any more if price were to pierce the 1.3078-80 on the upside. This indeed happened on Monday this week and see what we have got today....

Today’s price move showed why it was so important to exit at the 1.3078-80 level. I wrote that a second test of the 1.3240 area was possible and indeed a very dangerous one, because we could not know in any way if bears would be willing to keep pushing prices lower. Today’s price action showed that bears did not step in to defend their shorts and price printed relative higher highs, piercing well into that area of short selling starting at the 1.3240 level.
Today’s move higher also confirmed – according to Down definition of trend – a new upwards trend with price structure now showing higher lows and higher highs. I anticipate a break of the 1.3355 level on the upside and then a correction where daily longs will want to take a position and weekly bulls (already long at lows in April and mid-end of May) will want to add to their current positions.



My two scenarios going forward (please reference the above picture):

Scenario 1. Price slices throughout the 1.3221 level and a more profound correction takes place into teh 1.3190 area of support. A low risk long trade could be initiated there with a stop below 1.3155.

Scenario 2. We get a very shallow correction and price stays above the 1.3221 level and just continues higher towards the 1.3356 level of failure of weekly shorts.

If you have not had the chance to watch the video I have recorded in the morning, you can do that on my blog: http://elitefive.wordpress.com/2013/...lish-language/

Please let me have your thoughts and ideas
Have a good night
Cheers

-Fibstalker

The S&P500 showed us the way enacting the Scenario 2b I have indicated on Monday the 21st. In that occasion I have clearly showed a support area (at the 1633 level) and a long failure price level, the 1622 threshold. Price first bounced off the 1633 level and then broke down piercing through the 1622.

After piercing on the downside the 1622 level I have indicated on May 21st, the market is now preparing for a deeper correction. Before that happens we could get a retrace up to the 1640 area, which could be a good short with a stop above 1652.
If the market started a correction as I anticipate, I see it stopping and reversing at two major levels: 1507 and 1462. The reasons for these two levels are explained in the video on the blog.



These are the scenarios I could anticipate for the S&P500 going forward (refer to below picture):

Scenario 1. Price could have started a counter move higher into the 1640 area of resistance (but it could also stop lower at the 1635 area). Once there we could see a reversal, with the price staying below the 1652 level, and a continuation lower into the 1575 area (1st target) and then 1540 area (2nd target). The final target for the related trade would be the 1507 area for a R/R ratio of 13.

Scenario 2. If price pushes above the 1642 level we could still see a correction. The reason is the fact that the sequence of measured moves failed on the daily chart (1622 pierced) and we could anyway sees price at the 1507 support area.
Notice that the 1540 area could be relevant for intraday traders. We could see some profit taking from bears around this area. Swing traders should not worry about bounces if they manage to position at the 1640 area.

You can find the full article and related video on my blog: http://elitefive.wordpress.com/2013/...lish-language/

Let me know your ideas and thoughts.
Thanks

Cheers
-fibstalker

This is an up to date review for the Euro FX futures contract.

Last week on my Blog I presented a viable trading plan for the Euro going forward (please review the June 6th post and related video analysis). I have indicated a Scenario 1 that played out so far. The level I have indicated was the 1.3190 area and the low print for the Euro was just one pip above that level. This is the proof that the 1.3190 area is actually offering support to price and the commitment from bulls will be warranted until the 1.3157 level (1.3153 on the spot EUR/USD) will be pierced on the downside. As I write the Euro opened with a gap down well above that level. Should that level be pierced on the downside we will need to identify the new support and long entry for the Euro. Such an entry could come at around 1.3060 or even lower. Why would we see such a pressure lower?

One of the reasons is that price did not break out of that 1.3356 level we have been watching since a few weeks now. That means that bulls (and long programs behind them) were not yet able to break the area of resistance and big offer being still present below those levels. The other reason is that several big traders, along with program trading, did not have yet the chance to establish a position in the daily timeframe (those in the weekly timeframe, on the other hand, had this opportunity twice). Make no mistake. Based on my experience, these traders (and automated programs) will want to get a position long before or after the 1.3356 level is pierced.


Typically I like to see the market keep moving higher and break relevant levels without taking a breath as it seems it happened on Friday. But we need also to take into account the 1.10%+ move on the BCE meeting day. If we continue higher from here we should anyway get an opportunity to re-enter long on the daily, so I would wait. This will also depend on whether the Dollar Index will continue lower and pierce the important 80.80 level, or it is correcting higher into the 83.10 to 83.50 area.

The ensuing week will tell!
Have a great week
-Fibstalker

This is an up to date view on the S&P500.

Last week I have also provided a viable trading plan for the S&P500 e-mini future going forward (please review the June 6th post and related video analysis). Notice that price came back at resistance but, especially if the Dollar decides to keep moving higher into the 83 area, seen the current direct relationship between the Dollar and the S&P500,we could see the S&P500 continuing higher, which would then tell us price is moving according to Scenario 2 (otherwise we stay in Scenario 1, currently being played). I believe the Dollar has cast its die so I don't think we are going to see a reversal in the Dollar to new highs. At least I don't anticipate it.

Notice that, in case the Dollar corrects to 83, price of the S&P500 could move higher into previous highs or even marginal higher highs. While this would let believe retail traders that everything is still fine and the "Bandwagon" is still going and up (please read the related eBook section about the "Bandwagon Theory", find more information here below), that's not the and cannot be. Please notice that Program Trading is not pushing price of the S&P500 higher in the daily and weekly timeframes. We need interest of Program Trading on the long side in such timeframes to keep the market going up. Another read is that "Smart Money is not pushing price higher". So who has been doing that in the last two days of the past week? Retailers, program trading on smaller timeframe, average up traders, etc.. My read is that when the current sequences of measured moves on the 4-hour or 15min timeframes will fail the market will start moving lower heavily, because now all the players on all the timeframe will be taking profits or selling short (starting from the lower timeframes up). What confuses traders at highs is that they believe that price action generated by players on the smaller timeframes warrants a continuation higher, while in reality those big players that can and move price higher are not involved at the moment. Indeed they are quietly leaving the "Bandwagon".

Therefore I suggest you don't get involved in longs at these levels and start shorting the S&P500 as soon as the move lower starts. With don't have a FibZone here but we can still use the FibStalking technique to check when a sequence of measured move higher fails. I will keep you informed.

Let me know your thoughts.

Thank you

Have a great week.
-fibstalker

I think the current action in the S&P500 is offering a good example of the "Bandwagon Theory". While I am going to continue the discussion with the second part of the BANDWAGON THEORY section tonight, I think it would be good for you to watch yesterday's interviews with Dale Pinkert's where we discussed the current action of the S&P500.

The link to that interview is on my blog: http://elitefive.wordpress.com/2013/...-dale-pinkert/

Let me know what you think.
Chat to you later

-fibstalker

BANDWAGON THEORY (2)

I have concluded my previous part on the "Bandwagon Theory" noting that the responsibility of poor trading results is the lack of market-oriented psychology / money-oriented psychology. As traders we are all paid for the quality of their decisions we are able to make.

Bad trading decisions cause that continuous transfer of wealth from the larger group of average traders and hedgers onto the smaller group of consistent professionals, and this is what keeps the markets moving. Notice that hedgers are not in the game for speculating on price, they are in the game to make their own business successful. Indeed they are the only group of participants using derivatives and other hedging instruments for the purpose such instruments were initially created.

The whole game called trading is contained in and explained by the "Bandwagon Theory" that I am going to offer in the following post. It's not a secret. It has been around for some time and published on a trading book. Probably in the trading environment the "Bandwagon Theory" is known in other forms and ways as well. I think it is important for you reading, and probably very beneficial, to not make any assumptions about the content, what it contains, suggests and conveys.

I think you should rather check for yourself. They say "listen to all, believe to none, trade your own ideas". However please consider how the following could really be the real and only truth about the markets. There are no secrets to the markets, only hard work, time, developing the right psychology, get a knack for price (throughout long screen time), but yes I believe there are some truths.

I often encourage traders to carefully study and think about the "Bandwagon Theory". After all, professional traders are not smarter individuals that what we are, they do not handle emotions in ways that we cannot learn to emulate. In fact, one of their edge is knowing and understanding how the crowd deceives itself, and simply leverage on this widespread weakness. Make your choice and decide which side you want to be on.

Before offering the "Bandwagon Theory" in the next post, which is not mine as I will be borrowing it from two known traders and writers, I want to remind that there are additional elaborations and stuff I have added and will share in order to better explain it. In fact the Theory is an allegory, so it may be difficult to immediately link it back to trading the markets, as well as, finding connections with price behavior in a straightforward fashion.

For this reason, and to make the Theory easier to understand, I will go to illustrate it in the coming days/weeks using a real market price, actually the Euro-dollar foreign exchange cross (EUR/USD). This will allow easier access to the wisdom and ‘secrets’ hidden in the "Bandwagon Theory". Again, there are no secrets. But the "Bandwagon Theory" is a good, new way to start thinking about the markets...

I hope you will find it fascinating as I found it when I first read and explained it to myself.


Let me know your thoughts.
Thank you

-fibstalker

Hello all,
in case you want to check the results of the two setup published on June 6th (Euro FX and S&P500 e-mini futures), you can find them on my blog:

http://elitefive.wordpress.com/2013/...une-12th-2013/

Cheers
-fibstalker

BANDWAGON THEORY (3)

Here is the Bandwagon Theory for you to read, re-read and study, as it has originally been published by Oliver Velez and Greg Capra in their book: "Tools and Tactics for the Master DayTrader: Battle-Tested Techniques for Day, Swing, and Position Traders

“Imagine a bandwagon that is rolling forward at a quickened pace. Music that is very pleasing to the ear is being played from speakers on each side of this bandwagon, and a few people currently on the back of the wagon are partying, having the time of their lives. The music, loud and clear, starts to attract many other onlookers that happen to be idly standing on the sidelines. These onlookers, unable to resist the sweet sounds being played, run to join the party that seems to be going on.

Progressively, more and more onlookers jump on the back of this bandwagon, and those few who were initially enjoying the first phase of the party begin to leave. As the crowd of new party animals on this bandwagon grows larger, the bandwagon finds it harder and harder to move forward at the same pace. It slows, enabling more and more late onlookers, witnessing the great fun, the chance to jump on. The crowd grows even larger. Larger and larger this crowd grows, until the bandwagon, heavily laden with the bodies of drunken party animals, can no longer move forward. It finally comes to a complete stop. Now that the bandwagon is at a complete standstill, more people jump on. And why not? At this point, joining the fun is easy. Absolutely no work is required, for individuals wanting to join the crowd no longer have to run to jump on board.
The nature of the bandwagon is to move forward. Its motionless state is unnatural, and therefore cannot last. It tries to move forward again, but can’t. The crowd, piled on back, is much too large. It must free itself of the heavy burden. And it does. It quickly shifts into reverse, and jolts backward, knocking a few of the party animals off the back. The music stops. Puzzled faces from the crowd begin to emerge. Before anyone figures out what’s going on, another backward jerk takes place, only this one is more violent. Another large group of people gets thrown off the back. Now, reality sets in. The fun has turned into a nightmare of epic proportions, and panic begins to run rampant. Some decide to jump to their deaths. Another thrust backwards sends an even larger group of drunken, off balance people, hurling to the muddy ground. It doesn’t stop. The jolts backward continue, each successive one more violent than the last. At this point, only a few die-hard wagon dwellers are holding on, their very lives hanging in the balance by a very thin thread. Failing to be completely free, the bandwagon angrily puts the pedal to the metal, and this final thrust backward is so vicious that its front wheels lift high off the ground, momentarily suspending the wagon in a perpendicular position. The last of the hangers-on crash to the ground, broken and maimed to no end.
At this point, a new group of onlookers emerge from the nearby woods. They are clean and serene. Each movement they make is deliberate and powerfully energetic, for they did not take part in the tragedy that just transpired. Or did they? A few of the dejected souls lying on the ground take a closer look, a look that reveals something very interesting. This seemingly new group is not new at all. It is the same group that was seen quietly exiting the party before it came to its violent end. An even closer examination by a few more beaten-down onlookers reveals something even more stunning. This group not only exited the party early, they were the originators of it! “My God,” someone exclaims.
Paralyzed, and unable to move freely, all these dejected souls can do is watch, as the masters of the game go to work, again. No sooner does the bandwagon’s wheels hit the ground than this professional platoon bolts for the wagon. In a flash they are on board. Easy. The bandwagon, now free of the larger crowd, can move forward freely and gracefully, comfortably carrying the more astute group with it. Its pace quickens, and before long a smooth elegant stride is in place. After a few miles of uninterrupted movement, someone from this masterful group flips on a switch, and suddenly the loud sounds of entertaining music start again. Someone yells, “OK everyone. Here they come. Let’s do it again.” Within moments, those who were the former victims of the backward crash become interested again. The music almost calling them from the grave. And once more, the never-ending cycle repeats.”


Source: http://www.dacharts.com/articles/_bandwagon.htm

Hello all,
if you like to trade or analyze the USD/CAD forex pair, you can find my latest review on my blog, including a short video:

http://elitefive.wordpress.com/2013/...lish-language/

Have a great weekend.

PS: I will elaborate a bit more on the BANDWAGON THEORY during the weekend.

-fibstalker

http://prntscr.com/1a56m7
And that fibstalker mini sp500 this on the way down. for me it will reverse where you say 1461.32 but then goes deeper fetch stops at 1.430.90'll see if I'm wrong.

Cumps ..
mv

Hello Takytto, how are you?

thanks for sharing here on FF and leaving a post on the blog as well (apologies still need to answer that).
I hope you are right.

I don't try to guess levels because the market will always tells us where it wants to reverse. A break of the sequence of daily moves lower on top of one of those areas/level will tell us where to reverse. I am taking profits at 1501-1507 on the shorts and then wait.

I will be more than happy with a R/R of 11 for this trade.

Thanks for sharing and hope to see you back soon.

Cheers

-fibstalker

Hello All,
hope you are well. I will resume this thread from where I have left it....

... but before proceeding, let me share my latest view on S&P500 (only published to Newsletter subscribers on Sunday):

After failing the sequence of measured moves higher in the second part of May price did not continue lower price of S&P500 never continuedlower into the 1500 area as anticipated. Price rather stopped at the next extension long traced on the weekly timeframe. That support started in the 1559 to 1566 area and saw strong participation on the upside, showing that Program Trading is still supporting prices higher.

I see the following two scenario developing (refer to the below picture):

Scenario 1. Thanks to the participation of longs at the 1566 area, which is an area of continuation higher in extensions longs, there is now the potential for the market to get to the 1800 to 1820 area (2nd target), before a sensitive correction takes place. This would require a continuation higher into the first target in the 1,710 1,715 area (1a) and then a continuation into the second target area and exit at 1800 (1b).

Scenario 2. Price printed fresh new highs last week but still we do not know if we are going to get a correction. If we get a correction in the coming days I do not see price moving below the 1647 to 1656 area. If we correct into that area that could be a a good opportunity to buy or add to longs as our model of Program Trading and professional traders seem to be targeting the 1,718 to 1,730 area (1st target). Below 1,647 I am going to reevaluate the situation.

https://d2q0qd5iz04n9u.cloudfront.ne...n_20130728.png
Picture: "ES S&P500 emini continuous futures contract daily timeframe, July 28th 2013"

Chat to you soon
Good night

-fibstalker

Dear all,
I want to pick it up from where I left it in mid of June. Apologies for this long wait but moving to another country always requires lots of stuff to do.
In my last post I have published the Bandwagon Theory. I recommend you (re)read it if you have not done so, just yet: http://www.forexfactory.com/showthre...40#post6749340

The metaphor of the bandwagon is a compelling one. But what does it mean in practice? What should an average, non-professional trader be aware of? In order to show how the Bandwagon Theory works in practice two stories are provided in the following: the first one applying to investors; and the other relevant to intraday traders. In this post I am going to relate about the first story.

The first story it is set back in 2000. Weeks before the burst of the so-called technological bubble a lot of investors (and traders) were not able to recognize the current state of the market. Too often people were making bad trading decisions and getting bailed out by general performance of the irrational market. For instance, people buying overbought conditions in a very strong market were rewarded by prices continuing higher. Something however that would not be considered a good trade, even if it made money; on the other hand, making money only reinforced bad behavior.

These people, who were not experienced investors or traders, just bought something and it went up. It did not matter what they bought, it went up. It did not matter they were chasing stocks at highs for less than $10 or $20 points, it went up. It did not matter that they did not have a method, a position sizing technique or exit strategies: the market (the tide) and all stocks (the boats) went up. They may have believed they were great traders but many of them have not fared too well since the bubble burst and many have lost everything. These investors and traders joined the bandwagon at the exact wrong time, when the professional players had already left the stock market or were in the process of doing so. This scenario repeatedly occurs, for example during the 2007 US markets topping process, and will happen again, maybe in 2013 or 2014.

I was lucky enough this did not happen to me, although I paid my due to the markets when learning day trading. Tell me about your experiences....

Till the next one
-fibstalker

yes,,, fortunately, I included in the "Elite 5". THX

Really nice allegory to describe the financial markets.

One question about it, is this also something that you use in trading? So, if for example it takes the E/U 3 hours to climb 100 pips, and it takes it 9 hours to retrace only 50% of the recent upmove, would this be something that shows bullishness in your opinion? I´d say that it does because there has to be buying into the retracement (or it´d fall faster). Looking forward to hear what you think about it.

Regards

Uh?

Hello Puzzles, and welcome to the thread.

Thank you for the smart observations.

Yes in a certain measure I use this concept in my trading. I try to find an edge by modelling how Program Trading acts on price in different timeframes, which I like a lot because it works and it is so different from what the majority of other traders attempt to do (not saying it is the only way to be right more often on the market, of course). The way I do it is using the Fibonacci retrace study (see examples in this and other threads in FF), learned and perfected with other traders.

The 50% level is important but you also need to understand how the market is moving on the target timeframe (is it in traditional moves or is price extended?) and in the larger timeframe too.

Based on my experience I do not think there is time symmetry and or proportion in the markets with relation to time. Corrections happen much faster or, when they are flags can take days, in a total unrelated manner compared to the initial move. In fact, I only try to model areas of support(entry), resistance (exit) and profit targets, not the time price will take to react to this areas.

To answer your last question, it depends. Price is the combination of what traders do on different timeframes. So what happens when, let us say, you get a nice retrace on the daily to the 50% and anticipate a continuation, but you did not realize that the relative high (before the correction started) was a target in the weekly timeframe?
It happens that we are toasted. Unfortunately profit taking coming from the participants (or programs) on the weekly timeframe has the potential to push prices well below your entry area at 50% and we end up holding the bag .

When I analyze price I try to take into account what happens in the lower and higher timeframe of the target chart.

Hope this helps
Have a great day.

-fibstalker

Sounds interesting, looking forward to reading more of your trading style, especially on your "program trading analysis".

Always good to see someone trading differently than the majority does, since only few really make it in the trading business, these few have to approach things differently than the rest does