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September 12, 2004 Commentary (weekend
edition)- It's always a question for me what I should
write about in this column. For the most part I try to respond to what the
readers ask me for. I find it interesting that, for the most part, the readers
are asking me for something very similar to what I would like to offer. I don't
want to just show a lot of potential chart setups. As I have said, I am not
trying to do a 'picking' service here. I want to continue the educational theme
that I have pursued so far. Many times this has me 'rambling on and on' about some
aspect of trading, based on my experience using the methodologies that this
website and the books are built upon. In recent e-mails I have seen a group of
words used repeatedly, describing what is appreciated about this column. The
most common words or phrases are: 'your insights', 'your unique viewpoint',
'your techniques', 'your comprehensive approach', and so on. They all seem to
be saying just about the same thing, and it focuses on what I have to say
about trading, and not the particular setups that I show. This is what
I was shooting for, and it appears my die-hard followers have totally come to
understand and value that. Maybe it's because I have worked so hard on that
approach (or harped on it so much), or maybe it's a selection process, where
those that see it stick around, and those that are looking for 'easy
money tricks' have long ago quit following along. Either way, I feel I am
presenting some good insight, and the readers are finding some value in
it. Let's move on to some discussion for today. I have so many ideas
rolling around in my head that I have to just pick a few and go with them. That
will leave me plenty to discuss in the upcoming commentaries. I have been asked
by more than a few people if I would consider doing a members' section, on a
paid subscription basis, where I could go into more detail on everything that I
normally discuss. This was part of my original plan, but then I started to
write more books, and I just didn't feel that I had the time. At this point
I just don't know that I could find the time to expand into a members' section
yet. I'm thinking that if the interest is still there after the upcoming
spring, I might consider giving it a try as the slower summer months approach.
I can't say yet what I may do that far out, but for now let's say I'm listening
and tossing the idea around. If you want to voice any comments on interest or
possible format/content, feel free to send me an e-mail on the topic. Today I want
to take a quick look at the concept of filtering trades, and then we'll look at
some charts. One of the things that I do, with regard to pattern trades, that
is very, very unique is my filtering. I filter trades in many ways, most or all
of which are unique to my methodology. When you study most other pattern
traders, you see that they focus on the pattern, and then simply take the
trade, usually with a 'fade in' entry. As those familiar with my work know,
this is the antithesis of what I do. I was struck by an interesting analogy the
other day thinking about this. Most pattern traders attempt to trade patterns
in a very 'system trader' manner. They don't trade them in a discretionary way;
they trade them in an all or nothing manner. If the signal is there i.e. the
pattern completes, it's 'go time', end of story. Now, I'm not saying this
doesn't work for those traders. It may. It just doesn't work for me. That's why
I devised my unique methodology, and wrote it all up for people to
study. I use many layers of discretion and filtering, so I can pick out
what I expect to be the best trades, based on my experience. One example of a
filter is my use of entry
techniques, as outlined in the book. This filters out trades that are
going to just sail right through the potential trade area without any hint of
reversing. Another filter is in choosing trades that are set up to continue the
trend on my 'traded timeframe', not call the end to it. I cover this
in great detail in all the books, but especially in Advanced Fibonacci Trading
Concepts, Trading ABCD
Patterns, and the book created totally for this, Multiple Timeframes and
'Context'. I also delve into 'context' quite a bit in the new book,
A Totally New 5-Point
Pattern. My use of 'context' for filtering is totally unique to my
methodology, and MTAC was the first book written totally by request.
Once I started to lay out my 'context' filtering ideas, the e-mails poured in
for more. Other than those that have bought the books and incorporated some
of my ideas, I don't see my 'context' ideas spreading out at all into the
'general public' yet. My .886 retracement is known all over the world now, but
some of my other equally important concepts are still virtually unknown. I
actually prefer it that way, but it is interesting how 'stubborn' a lot of
people can be about experimenting with, or even looking over, new
ideas. I think the .886 caught on because it was 'gimmicky' for people. It
was simple and easy to just start using. It didn't take any thought to just add
it into the mix. The rest of what I am showing may actually take some work,
thinking, and worse yet, some changing of beliefs. It's very hard for many
people to change their pre-conceived notions. Now, the most interesting thing
that I have been noticing lately in my own trading is yet another way I filter
my pattern setups. I talk a lot in the books about 'price action'. I say things
like how I might consider a trade if the PTA is hit and I get an entry trigger,
if I like how the price action is behaving. This is hard for many people
because it is subjective. It has to do with discretionary decision-making.
Sorry, but that's trading, at least as far as my methodology is
concerned. I try to 'talk out loud' in my books as much as I can,
to show my thinking process and help the reader to develop his or her own
skills in this area. It takes practice, experimentation, and time to develop
this, and it's not an all or nothing thing. It's something that one can strive
to constantly improve on. I feel that I am still improving quite a bit in this
area. This leads to my latest thought regarding filtering. In the chat
room I am frequently looking over intraday e-mini setups, and then making a
decision to either trade the setup, stand aside, or frequently as of late, fade
the setup (play for a pattern failure). I use a lot of 'context' in these
decisions (right out of what I put in MTAC), and entry technique
filtering. But I also use a lot of price action filtering. I am watching
every tick and every print on the T&S. Now, I am
not talking about reading the market depth here like in the old days of
reading level II with NASDAQ stocks. Many scalpers and other mini traders do
this, and I am not knocking that at all. It's just that this is not what I am
doing. I watch the size of the blocks and their relative number. I watch the
1-minute volume. I watch the market depth, and see if anything is jumping out.
I also watch the bar characteristics on the 1-minute chart very closely, and
the 'lay of the bars'. But, most of all, I 'watch from a distance'. I have no other way to describe
this. I 'step back' when I watch and get this holistic overview of what is
going on. Other than a few small vacations, I have watched pretty much every
single intraday tick on the e-minis since they were introduced. I have quite a
feel for what they do. When they 'act' certain ways I can expect certain
things. Some traders are so good at this they trade entirely off that 'feel'. I
use it, instead, to filter my setups. This has come in very handy lately with an
idea that I used to use occasionally, and now I'm using frequently. If I see a
setup and the price action is simply screaming at me that the pattern won't
hold, I sit back and wait for a failed pattern entry trigger. This has been
happening a lot lately, and I have been 'reading them' quite well. As I always
say, if the pattern holds that tells me something, and if it doesn't, that also
tells me something. Many times, both are tradable. That's
something I like about many of my pattern setups. A lot of times I've set up
more of an 'action area' than a reversal area. It's an area I can look for
setups in, but what setup may depend on the price action. I expect to
see prices act certain ways as a grouping for a pattern completion area is
approached, and if that action is 'off', I start looking for other ways to
play. I do this frequently in the chat room, and I think most of the time
it baffles a lot of the people (it also doesn't help that a good number of the
people in there don't have all my books, either, especially Multiples Timeframes and
'Context', which explains a lot of what I am looking at). Perhaps I
seem to be doing all sorts of things, sometimes for no obvious reason. If you follow
me, you know that I don't do anything without good reason. There is just
no way that I can make real-time calls live and explain all the reasons why I
don't like the price action and 'context', and hence I'm now going to fade a
setup instead of attempt to play the setup 'straight up'. The point is
I use a lot of price action, on all timeframes, to further filter my trades.
The surprise to me is how much better I feel I am getting at reading price
action, in the 'context' of using it to filter a pattern trade. I am seeing
what the action 'should' look like, and seeing when it looks the
opposite. I suggest that the readers focus on price action as they study the
various pattern trades setups. And really consider the potential value of
filtering. As an aside, did you notice with all this filtering talk that not
one indicator was mentioned? Let's wrap up today with some charts. Let me first quote
from Wednesday's commentary: "
While all the talking heads are very
bullish, and the S&P is still going up, look at what is happening in the
semiconductors. The NASDAQ is trending up right now, and the SOX is getting
pile-driven into the turf for new lows for the year. This can't go on for too
much longer, in my opinion. I'm keeping a close eye on this situation for
possible opportunities." Let's now look at the SMH on the open on Thursday
morning. The question is: what was Jim thinking?
I had only one thing on my mind. This was
likely the change-up that I was looking for, the resetting of the equilibrium.
Maybe it wouldn't follow through, but that wasn't where my focus was. I decided
to look at the long side, until proven otherwise. The rubber band got stretched
too far, and it seemed more likely this would correct itself with the SOX going
up, versus the other indices going down. Let's see what we already know, and
that is what happened from here until market close on Friday.
This was just about what I was expecting. I
didn't know when, but I suspected it was coming soon, and I made that clear in
the Wednesday commentary. Now let's look at this run on the 3-minutes chart. It
will be a little crowded on the chart, but I need to show the entire run for
perspective.
Now, what does the arrow point to? As this
was unfolding, a beautiful 5-point pattern set up. The 'context' was for it to
call the end of the upside correction, and for a resumption of the downtrend.
That, however, was not what I was seeing from the overall market dynamics. I
was looking long here, or standing aside. I was filtering that potential
pattern trade out for 'context', market dynamics, and price action reasons. In
fact, I was playing it for a pattern failure. Let's see just how nice that
pattern looked, and how the SMH felt about it, on a closer view of the 3-minute
chart.
No doubt about it, it was a beautiful
pattern. But I was thinking that there is no way that small pattern on the
3-minute chart is going to stop the clock spring from unwinding that had been
unleashed when this equilibrium imbalance was set off to adjust itself. It was
too clear what was happening to even think about taking a trade like
this. Instead, I looked for the pattern to fail, and I worked that into any
plans I was formulating. I look to play the patterns, and I look to fade
the patterns. The 'context' tells me which way to look at it. The next
commentary will be the mid-week edition, posted on Wednesday.
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