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A Successful Trader's Perspective on Price Action I Found to Share.
I am in a time in my life where I am trying to give back so let me try and tell you some things that I have learned over the years so that you may become a better trader. I'll make you a deal, I only ask that you share what I write with your group so that they may have a chance to add to their learning as well.
Let's start by talking about what indicators and trading 'systems' are designed to do and what they are not for. Indicators are just a way to choose and filter the best chances to win over other ones - particularly for spotting divergences which as I said is one particular strength in the way Ryan Watts uses the MACD. Ryan will tell you also that the indicators are a guide and not somethng that need be followed blindly - except in teaching yorself the value of discipline and following rules which is obviously very important as is risk management, which we don't need to get into here. The bottom line is that years ago when I developed and traded my own pure indicator models I still won 60% of the time, but now that I have been trading mostly price action WITH the addition to those, my monthly W/L is ALMOST ALWAYS over 80% and has been for many years now.
Think of the indicator fallacy in another way, and I'm not trying to discourage you, but do you really believe that the 90% of traders we know are losing are failing because they really can't interpret and execute the thousands of perfectly good 'trading systems' available - including Ryan's that costs $50? Come on. Think about that. There are more smart traders than dumb ones. All decent trading systems have basically the same indicators and to qualify as a good system the combination just needs to be robust enough to take all 'angles' of past information into account so as to give you a most likely scenario for the future. There are basically only five things we can look at and we can twist up in 1000 different ways - the high, low, open, close and volume data of previous price events. These are all really important to know but what they don't do is tell you buyers can't push prices past 1377.50 - RIGHT F'ING NOW. Sorry for the drama but I am trying to impress on you that price action is what really matters. That information is right on the entry chart and as plain as the nose on your face. The bottom line sadly enough is that there wouldn't be much of a trading industry if everyone new the real secret of scalping is just looking at two numbers which constantly change throughout the day. Those dynamic numbers are called support and resistance and those coupled with the interperatation of how participants are acting at and on these levels is the real key to scalp trading. How could it be that easy? It is - and then again it isn't and that is why 90% fail.
The best futures traders in the world are trading the pits on a handheld with X-trader. No indicators. No charts. All they have is a DOM and a sense of what and who is moving the market as represented by PRICES and the number and size of participants at those prices and whether there are more sellers or more buyers - that is it. It really is pretty basic and deceptively simple. They make note of intraday support and resistance levels as they change and the floor pivots for the day/month/week which don't change, etc - all centered around you guessed it, the PRICE RIGHT NOW...The spaces BETWEEN these levels are the trading opportunities. Their screen looks like this...
Could you trade with just this and a pencil and pad to make notes? Maybe not yet, but you will be able to some day if you take to heart what I am telling you. My best friend is one of these guys. He trades the SP in open outcry and consistently makes $750,000 a year from his seat. So do I, in fact I made over $1,000,000 last year. I'm not bragging and I know that is an insane amount of money, but it is true and I am living proof that a guy with average intelligence can get filthy rich trading the S&P. There is more to life than money, but in this game it is how we keep score. There is no other way to evaluate the success of what we do. I grew up in the woods with no running water and used an outhouse until I was 13. Point made.
Now I'm really going to get controversial. I think (let me correct that - I KNOW) I actually have an edge over pit traders. That's right I said it - I have an EDGE over pit traders - and so do you if you want to accept that. Why? I get to look at tons of charts - and you guessed it INDICATORS to filter - let me say that again FILTER out the bad trades. That is not practical in the pits. Indicators when used properly give you reasons NOT to trade as opposed to reasons to trade. Spotting divergences or inconsistencies in the cash market - or other times frames - or big sectors not following the move - or metals are selling off early, or, or ,or, etc...whatever you want to use - can help you insure that coupled with intelligent price action analysis, you will have the best possible chance to win. You have way more information than the guys in the pits, plus your moves go undetected even if you are a relatively big trader like me. How cool is that? The best traders all understand gambling theory. Filter down until you have the nuts.
I am sick of hearing people say that 90% of traders lose because the market chews them up or the system doesn't work or whatever. That is just BS. The problem is those traders spend all their time playing with indicator values or analyzing timeframes or whatever and they miss the whole point of what they are doing here. This is a MARKET. All markets have buyers and sellers. I don't know why everyone can be experts on value when they look at items in a store or a piece of real estate or whatever but not in the market. If you wanted to sell your house for 500k and you had nobody even look at it in a booming market what would that tell you? The price was too high. Would you then raise the price of the house the next day? Of course not, you drop your offer if you wanted to sell it. You see what I mean? Markets make sense when we are talking about real estate or whatever, but people just blindly look at indicators and follow systems even in the face of obvious current pirce information. Example: in the last 5 minutes price has had a high failure at 1350 three times and is currently trading at 1348. Do you take a long setup here because a momentum indicator is above zero and the 9 day moving average just crossed over and above the 20 day? Why not, don't we always have to stick to our trading plan - blah, blah, blah? That is a great example of how traders follow systems to the letter and then scratch their head because they can't figure out why they are losing. Into the 90% pile they go. This isn't a ridiculous example either. This scenario repeats itself about once every 10 minutes on most days in any market.
In closing I would like to give you an exercise. Turn on a simulator of some kind or use a pencil and paper. I want you to put up one chart of any market you like in a timeframe that moves but is not too fast or too slow - say 250 ticks in the ES or 75 in the YM. I want you to use nothing but the one chart and the DOM to trade. Turn off the news too. From 9-9:30 spend exactly 1/2 hour looking over previous and current price action. Find the S/R levels - there won't be two, there will be several on each side. Write them down. Don't forget, resistance becomes new support and vice versa. You should also use the floor pivots as well. How will you set your targets and stops? It is right there in front of you. See how obvious it is? Trade this from 9:30-10:30 EST EXACTLY like you would with Ryan's system, but without the indicators for the moment and tell me how you did. Wait for pullbacks within strong price pressure and don't take any trades against recent S or R zones within a few points. Give it an honest run and let me know how you do. If nothing else it will show you how weak, as once was, you are at really seeing the market for what it is - a mess of chaotic buyers and sellers that actually does have a very measurable pulse. It will just take you a while to find it. When you do, look out world, here you come! Then add Ryan's filters on top of that and you will be deadly accurate.
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04-10-2008, 06:10 AM
I wonder if it is fairly newly found? I seem to recall posts of yours not so long ago where it appeared that you still had stuff to deal with. Anyway that's not the point what I wanted to ask was if really concentrating on PA is what you attribute your success too or is it using indicators to filter poorer trades? I am really loath to put squiggly lines back on my chart. It's my contention that if you study price action enough you would pretty much know what an oscillator derived from it would be showing you. It took me long enough to loose the indicators I'm not sure I want to put them back again!!
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