Book: Kane Trading on: A Totally New 5-Point Pattern
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?

Chart 1
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.

Chart 2
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.

Chart 3
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.

Chart 4
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.
  NOTE: Reading this page or any page on the Kane Trading website, or utilizing this website and any material
  contained herein in any way, shall constitute an acknowledgement that you have read, understood and agreed
  to all the disclaimers, terms & conditions, and policies of this site
.
This website is best viewed with MSIE 6.0, text size set to medium, and screen resolution set to 1024 by 768.
Copyright © 2004 Kane Trading. All rights reserved.