Anatomy of downside moves.

I thought it would be worth looking at the Dax 5 min chart on Friday and the SPI 5 min chart today.

Both had downside moves with the structure showing similarities which could be exploited when timing trades.

Trading inside bars that fail can help in capturing these momentum moves.

The move down in both cases was steep with little or no retracement until a large volume bar printed in both cases.

I call these exhaustion bars with a wide range and large volume signaling forced selling in the market.

These bars signal a potential short term momentum slowdown as buyers and sellers move to a more equal balance.

In many cases after a bounce, price retests these lows giving a gauge of directional strength.

In each of these examples price moved to new lows showing that buyers have only slowed downside momentum.

The new lows are showing less volume than the exhaustion bars but more than the retracement bars.

As the day progresses selling dissipates and we see higher lows form, setting up potential for buyers to take control.

Points to take away from these trend days.

Failed inside bars can be efficient momentum entries.

Look for exhaustion bars to halt the momentum.

Expect a retracement in the short term reaction.

Watch for a retest of the exhaustion lows.

Gauge how strong sellers are by the strength of the retest. (new lows show strength in sellers, higher lows show buyers getting the ascendancy)

Look for reversal bars which coincide with higher lows to time reversal trades.

SPI 5min exhaustion.jpg (125.59 kb)                            

Dax 5min exhaustion.jpg (117.93 kb)

This is a blog with some insights from a great trader and fund manager - Paul Tudor Jones

http://www.firstadopter.com/2008/08/03/lessons-from-paul-tudor-jones/

One thing I notice with trends is that on retracements price often bases but then pushes just below the lows to take out stops and panicky trend traders.

This is the natural order of price movement in that for a trend to move it needs a continual supply of new fuel.

If the trend is up and a trader is already long he will not bid up price.

If he is not positioned he will be tempted to trade into a position and in effect provide fuel to the move.

Price structure of a single bar in the context of a set of bars gives clues as to when traders are caught out of position.

This is what I look to trade off.

This does not mean I nail every move! For me it is still constant learning and practice.

Dax sep23.jpg (134.28 kb)

SPI sep 23.jpg (134.16 kb)

There is a few ideas I have formed from watching trading screens and executing thousands of trades over the last 10 years.

To me it seems that markets trend when the majority least expect it.

This creates the fuel for a directional move as traders caught in losing positions cover and momentum traders jump on the trend.

For a group of traders to be caught out a sudden directional move is required which requires a re-adjustment to the new reality.

The past 2 posts illustrate such a move with the "failed probe".

There are other patterns like the tap pattern, pump fake and inside bar failures that create this cause and effect.

It may be worthwhile with trading to think in terms of boxing.

The advantage is gained in trading by hitting with a counter punch when your opponent is off balance.

Alexander at www.tradewithpride.com has been a great help in creating a trading structure around various setups and some proprietary parameters that I have adapted to fit my style.

A Real Trader VS the pretenders

It frustrates me that many traders and investors seek out education from gurus and investment advisers that don't make profits themselves.

If you are forking out money to improve your trading I think it is important to do your research.

Although I don't regularly post my results. (I don't have the time to teach and I think Alexander does a good job) you can see my past results on my old blog at http://davinstradingreport.blogspot.com/ on the right hand side.

Since this time my results are still what most regard as excellent returns. (I think it is important to show I am a profitable trader because many in this game don't walk the talk)

I will get my last few months results once they're audited.