1) An auction market's structure is continuously evolving, being revalued; future price levels are not predictable

2) An auction market is in one of two conditions: balancing or trending.

3) Traders seek value; value is price over time; price is arrived at by negotiation between buyers and sellers.

4) Change in demand drives change in price.

5) One can expect to find support where the most substantial buying has occurred in the past and resistance where the most substantial selling has occurred.

*Volume may look “big” at the highs and lows, but the price points are vertical, not horizontal (as they would be in a consolidation), so the volume – or trading activity – at each price point is lessr than it would be if the same price were hit repeatedly (again, as it would be in a consolidation).

If price drops through one of these zones, those who bought within that zone are going to be miffed. Some of these people are going to try to sell if and when price re-approaches that zone. This is the basis of resistance. There's just too much old trading activity to work through in order for price to progress unless there is enough buying pressure to take care of all those people who want to sell what they have, then push price even higher (in which case those who sold may think they screwed up yet again and buy back what they just sold). However, those who bought or sold at the outer reaches of these zones will also be disappointed if they can't find buyers for whatever it is they just bought, not because there's too much volume but because there isn't enough.

So how does one trade all this? First, you will have to monitor several intervals at the same time in order to (a) find out what interval you want to trade and (b) where price is within whatever range or ranges is/are in that interval. For example, if you’re most comfortable with a 5m interval, you’ll want to check a smaller interval or two to see what price is up to down there, but you’ll also want to look at larger intervals, such as the 15m or 60m or even the daily (I’m using time intervals here in order to keep this from becoming even longer than it will be, but the same approach applies whether you’re using range bars, volume bars, tick bars, candles, lines, etc).

Second, locate the ranges. Box them or circle them or color them or in some other way highlight them. If you find a range that is wide enough for you to trade (that is, there are enough points from top to bottom to make a trade worthwhile), get “into” the range via a smaller interval in order to find a trend. Perhaps at some smaller interval, price is at the bottom of that range. That gives you a good possibility for a long (or it may be at the top of the range, giving you a good possibility for a short).

At this point, you have three options: a reversal, a breakout, or a retracement. If, for example, price bounces off or launches itself off the bottom of the range (support), trade the reversal and go long. If instead it falls through support, short the breakout (or breakdown, if you prefer). If you don’t catch the breakout, or you prefer to wait in order to determine whether or not the breakout was “real”, prepare yourself to short whatever retracement there may be to what had been support and may now be resistance.

A more boring alternative is that price is nowhere near the top or bottom of any range that you can find but rather drifting up and down, aimlessly. No change is occurring; therefore, there is no trade, or at least no compelling trade. Finding the midpoint of the range may be useful since price sometimes ricochets off the midpoint, or launches itself off the midpoint if it has settled there. Such actions represent change since price may be looking for a different value level. It may come to a screeching halt and reverse when it gets to one side or the other of the range and return to the midpoint, or it may launch itself through in breakout form and extend itself into the next range, if there is one, or create a new range above or below the previous range (in determining which, back off into larger intervals in order to determine whether or not price is in a range in one of those larger intervals).

Next: Getting Down to Cases

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You need never read anything on the financial page of your newspaper except the table of stock prices and volumes.

You need pay no attention to the news, earnings, dividend rates or statements of corporations.

You need never study the financial or the business situation.

You need not understand railroad or industrial statistics, the money market, the crop situation, the bank statements, foreign trade or the political situation.

You can absolutely ignore all the thousands of tips, rumors, reports and especially the so-called inside information that flood Wall Street.

You can discard all of these completely and finally.

I saw more and more that the action of stocks reflected the plans and purposes of those who dominated them. I began to see possibilities of judging from the very tape what these master minds were doing. My editorial work was proving a most valuable means of self-education. In gathering material that would benefit my readers, 1 was actively searching out the stuff that would aid me personally. While my subscribers were given the best of what I collected, there was much in material discarded which helped to build up what I might call a code of enlightened procedure for use in this greatest of all the world’s games.

I had a friend who had been a member of the Exchange and who was well up on the technique of the market from the standpoint of the floor trader. We often discussed the difference between reading the tape simply to follow price changes (as most clients did) and reading the tape in order to judge the probable action of stocks in the immediate future.

Starting from the simple ground that the logical action of a stock was to decline when offerings exceeded the number of shares bid for, and to advance when the amount bid for was greater than the amount offered, we agreed that the quantity or volume of stock changing hands in each succeeding transaction was of great importance. Anyone who undertook to rend the minds of the momentary buyers and sellers was able to measure, to a certain degree, their eagerness or anxiety to buy or sell; also to measure the force of the buying power or selling power as shown by the number of shares; and to judge of the purpose behind the action, whether it was to buy without advancing the price, or to force the price up, or to mark it down, or to discourage buying or selling by others, as the case might be.

Each transaction carried with it certain evidence, although it was not always possible to interpret that evidence. All stocks no matter by whom they were owned, bought or sold, looked alike on the tape. But the purposes behind this buying and this selling were different and these might be fairly clear to those who understood market psychology.

Each transaction, although recorded only once, represented a meeting of minds; those of a buyer and a seller. This meeting of minds took place at a certain post on the floor of the Stock Exchange, even though the buyer might be in the far west and the seller in Europe.

Not all transactions were significant, but the interpreter must detect those which were. He must see that some indicated a purpose. Some one or some group was carrying, or attempting to carry, something through. He must take advantage of that.