Search the Community

Good Morning All: Over the years, I have written many articles. Hundreds, maybe even thousands if you include partial repeats and every short lesson. Sometimes the lesson is a partial re-write, or a new take, or a new way to explain or organize the information. So, while there are many summaries out there on various topics, and while the topics on this lesson may be found somewhere else, I thought I would take today to start answering a very direct question. What causes failure in trading? This will be a no-nonsense, nuts and bolts look at the question, not a philosophical dissertation. I will discuss the top three over three letters. What Causes Failure? Part One of Three After many years of seeing many issues in trading through the eyes of many traders, I have come to one inescapable conclusion. Something I now consider a fact. Everyone who enters trading is exactly the same, and stay the same for a long time. It is not until later in development, that some break out into 'unique' ground. So relax, everyone has gone through what you are, or have gone through. You may not like the answers. However, you need to hear them. While education in technical analysis is absolutely needed, most who really try, receive that education. In addition, they receive enough to make them potentially successful. For those who do not get an education, it may be the biggest cause of failure. However, anyone can understand the education material once presented, and many who receive the education still fail, so lack of education, while critically important, is NOT making my top three list. Number one quite simply is the ability to do what need to be done, and do it now. The word for that is 'discipline'. This is the number one reason for failure amongst traders. Initially it may be the lack of discipline to take a stop. Later it may be the lack of discipline to reach a target. Note that the trader knows what the stop is, and what the target is. This is why the 'education' doesn't make the list. The problem is, even those that know what to do and when to do it, do NOT do it. Lack of discipline. It shows up in many other places. The lack of discipline to review material learned. The lack of discipline to review trades and make changes. The lack of discipline to create and use a trading plan. The lack of discipline to honestly analyze your trades and determine you need an education. All of the key things in trading are easily learned by someone who wants to learn them. However, they are not easily done. Lack of discipline is a number one reason traders fail. Do you suffer from a lack of discipline in your trading? Is it holding you back from your goals? Closing Comments: This is the first of three things we will look at. After seeing them all, you may disagree about the order. Do not. They will not be in any particular order. They are all important and it is like the 'chicken and the egg' argument. All three of them are critical, and the lack of any of them will cause failure, just like removing one leg of a three-legged stool. Pristine Capital Holdings, Inc. 1-800-340-6477 Counselor@Pristine.com

n a previous article, I wrote about the true value of paper trading and having a plan of how to move from successful paper trading into real money smoothly. The issue is; now that you are successful on paper, what next? First, as described previously, you must make sure you are successful at paper trading by some objective measure. Set up a test that you must pass. Four winning trades in a row, three out of four winning paper days, or any measure as long as you enforce it. I rarely hear of anyone who is not making a killing on paper. If you cannot do it on paper, do not proceed assuming it will 'all work out'. The next step then is to put a very small amount of money on the line. I mean small. The objective here is to start an 'official' record. Even the most honest people will be 'cheating' while paper trading. Also, you will now be subject to 'real' fills (or lack thereof) rather than your 'pretend' fills. Even real software paper trading systems are very gracious on fills. Also, all those order entry 'mistakes', and trades that you swept under the table will be real now. You will now have to deal with the psychological issues. Putting money on the line, even fifty dollars, will evoke egos that will step in and start changing everything you do. That is why I emphasize, even if you have a million dollar account, the fifty-dollar risk will be enough to make you change what you do. Again, if you do well, you can move your risk amount up. You will be surprised how your paper trading results change when you have a real trade on the table. If you can pass the same 'success' test that you first set up to get you beyond paper trading, then you start moving up the risk amount. One hundred, two hundred, until you get to the objective risk amounts that you have set out in your trading plan. Along the way, if you begin losing you need to go back to the prior risk amount. If you feel you are handling trades different due to the increased risk amount, then go back to the prior level as well. You see, if you follow this plan, it is very hard to lose a significant amount of money while you are learning. That folks is the whole objective. KURT CAPRA Contributing Editor Interactive Trading Room Moderator Instructor and Traders Coach

What I am sharing is my interpretation of Open Interest in futures. What is “Open Interest” in futures? For every single futures contract of open interest there is a buyer who is “long” and a seller who is “short”. There are never more longs than shorts and vice versa. At the end of the day each contract that has not been closed out between the “long” and the “short” equals one digit of “open interest”. If open interest is increasing it means that there is an increase of both buyers and sellers that are building a position or putting one on. This has nothing to do with volume increasing. Volume can decrease on a trading day and open interest can increase. Likewise, volume can increase on a trading day while open interest can decrease for that day. A single digit of “volume” is a transaction between a buyer and a seller but not necessarily between a long and a short. Now how does that make sense? There are two types of buyers, those who are buying to initiate a “long” position, and those who previously sold “short”, and are now buying to close out a position. If you are the buyer of a contract and you are going “long”, what affect will that have on open interest? It all depends on whether or not the seller who is selling it to you is liquidating an existing “long” position or if they are initiating a “short” position? Next… If you are looking to buy because you are closing out an existing “short” position, what effect will that have on open interest? Again it would depend on whether or not the seller who is selling the contract to you, is closing out an existing “long” position or if they are initiating a “short” position. The two types of sellers are those who want to sell and initiate a “short” position, and those who were previously “long” and are selling to close out their position. This is why volume or transactions don’t have to be between a “short” and a “long”, just a buyer and a seller. The topic of open interest and volume along with their implications can be as confusing as it gets in this business.If you are confused or having difficulty understanding this so far I would suggest coming back again and re-reading before moving on. Let’s look again at the scenario where you are buying to initiate a “long” position. If the seller who sells you the contract was already “long” and closing out their position, then open interest will stay the same. There is still someone short on the other side of that contract out there.So you have volume for this transaction but open interest does not change. In this same scenario, let’s say the seller of that contract to you was instead actually someone initiating a “short” trade, than the open interest will increase. Volume can be down from a previous day and open interest can still increase and vice versa. In summary, if the NET buyers of the total contracts traded on a given day want to initiate “long” positions and so do the NET sellers want to initiate “short” positions, we will see open interest increase. If the NET sellers of the total contracts traded are liquidating their “long” positions and the NET buyers are also closing out their “short” positions on a given day, then open interest will decrease. If “longs” are buying or selling to other “longs”, and if the “shorts” are buying or selling to other “shorts”, open interest will not change. What is also important to add to this conversation is that money is never made or lost in the open interest as a whole. This is what it means when futures are stated to be a “zero sum” game. If you make $1,000 in profits trading futures today, you can be sure there are positions that have an equal $1,000 in losses today somewhere else as well. Profits and Losses are debited and credited in equal amounts at the end of each day from those who traded or have positions on. In order for you to make $100,000 trading futures, other traders or investors will lose $100,000. One should know their competition AND know themselves before considering whether or not they can thrive or even survive in this business. Lastly, the greater the open interest the greater the speculation and/or hedging and vice versa in the futures markets. I believe this is extremely important in determining the probabilities for supply and demand within the profile of the auction market in the weekly time frame. Questions for the readers: If open interest is increasing or decreasing is that bullish or bearish? What if volume is decreasing or increasing in either scenario? Are you bullish, bearish or neutral? What if the commercial traders are going NET long or NET short in each scenario? What if price is increasing or decreasing with each one of these different scenarios? Do you know which one of these scenarios gives you the greatest “edge” with your system? Ignore the changes to open interest and you may be wrong on what the changes to price, volume, and the COT report mean. Yours truly, Scott Pluschau This piece was written by one of TopstepTrader's Funded Traders Scott Pluschau TopstepTrader http://www.topsteptrader.com seeks to find and develop undiscovered trading talent from around the world. While in our program, those who display a strong trading skill and aptitude will be backed as a fully-funded trader.

CONSTRUCTING A FOREX TRADING SYSTEM - PART 1 Before beginning our construction of a forex trading system we need to know whether our system is going to be purely rules-based and fully mechanical, or discretionary, or a mix of both (the most popular ones). We shall keep in mind that there are hundreds of systems available on the Internet trading forums, and I shall be posting several of the better ones on my blog, with the permission of the originators. But for now, we are going to build our own “from the ground up.” WHAT KIND OF SYSTEM? It would be wise for us to stick to purely rules-based trading for our first forex trading system. I say this because beginner-traders usually trade with their emotions, and with poor knowledge of how markets, indicators and charts really work. For inexperienced traders to be making discretionary trading decisions based on what the account balance is doing, can cause panic and uncertainty. Mechanical Trading Systems can always have a degree of discretion added later on, as traders grow in trading wisdom and experience. For example, it might be ok to simply take a “buy” trade because the rules say so, but to be buying when price is almost hard up against a strong resistance level, is not something an experienced trader would be looking to do. Therefore, discretion to ignore that signal would be used, and the trader would wait with interest, to see if a “sell” signal developed after testing the resistance level. There is far more to that situation, of course, but enough for now. FIRST PRINCIPLES … things we need to know and consider Right now we will keep our trading system simple. All we need to know is how to “read” the chart, so as to understand what kind of probability we have of price going higher/lower, and how to get into and out of that trade in the best possible places. In order to profit through trading, we need to be along for the ride when price moves … simple. Buy when price is going up … sell when price is going down … right? Well … yes … and no. Quite often much of the move is over by the time we visually recognise a change in the trend. Or the move is short-lived, and reverses or moves sideways before we can take a position, or establish any profit. But sometimes a strong trend commences, and it is these trends that make us the money in trading, providing we recognise an entry in good time. I should state here that many traders start their trading careers by trying to scalp the market. While I have no opinion on what you should or should not do, I would just say it is something that I would not be looking to do myself as a beginner. Why? Because scalping requires specialist knowledge of the instrument traded. The moves can be fast and furious – as can be the reversals. Traders need very well-developed reflexes to know and understand and judge what might be going on in the market when certain moves occur. Experience can tell the trader if the move is a reversal, or volatility. A novice trader would not be expected to understand or know how to handle that. Volatile price moves could be fake-outs, designed to shake weak hands from their positions. Or they could be just knee-jerk responses to news, causing great price swings before settling down again, and the previous trend, more frequently than not, resumes. Such trading occurs in the lower time-frames like the 1 minute and 5 minute and even the 15 minute charts. Traders of the higher time-frames, like the 1 hour, 4 hour and Daily time-frames call this “noise” and avoid trading it. It usually has little to do with the main trends. So let’s make our first decision based on time-frame to trade. For the purposes of this exercise, we’ll choose the 4 hour. This is a time-frame that gives us plenty of time to analyse, and is not easily moved by news announcements, or sentiment. And if there is going to be a change of direction, this time-frame usually sends signals to traders that it is going to do that, in time to react to what price is doing. Our decision will be unhurried, and low-stress. I should add that after we construct our forex trading system, we will be able to apply it to other time-frames too. Price action is said to reflect the thinking of the market participants, and the price activity seen in the chart is the manifestation of what the market was collectively thinking at that time. Well … we didn’t get far today. I had hoped to define all the parts of the trading system, but I can see it is a bigger task than I realised. I did discover one thing though, and that is if we are going to create a trading system, we have to define every component. There are sound reasons for that. I have never been one to simply put indicators or trend-lines or moving averages on a chart and expect to be able to make a trading decision based on what I can then see. If I have something on my chart, then I need to know it has earned the right to take its place there. I will have an expectation of it, to tell me its secrets. I need to have as many indicators and filters on my charts as I need to confirm my actions … but not more. If there are too many, then the purpose of having them there is defeated. Each filter chokes back the opportunities more. Each moving average and indicator screams “Look at me!” and soon you have a series of conflicting signals. We don’t want that. We want to keep it simple, and meaningful. We need to be able to look at every object on out charts, and KNOW why they are there, and WHAT it is that they are telling us. We'll take this further next time ... and hopefully get some real progress on designing our own strategy and system. _________________________ __________________ Posted in my Blog: http://forexapplepie.com/

Electronic Currency Trading is characterized by fast execution speeds on downloaded or web based platforms. Where in the past, investors would need to be present on trading floors to complete similar transactions, Electronic Currency Tradinghas enabled individual traders to do this from any location with a web connection.

A Dirty Float is generally implemented by a central bank. In most instances, the intervention is meant to act as a buffer against an external economic shock before its effects become truly disruptive to the economy.

The main thing to remember when dealing with direct quotes is the nationality of the person making the quote. *For example, a direct quote from Europe in the Euro against the Dollar will not be the same number that is quoted in the USA.

Depth of Market is also referred to as market liquidity. *Higher liquidity levels generally mean less volatile trading conditions, as there are more willing buyers and sellers at all levels.

Forex brokers offer free demo accounts so that forex traders are able to practice trading strategies before real money is deposited into an account.

Generally, the information on a Deal Slip will include Dollar amounts, transaction type and the settlement date.

A Deal Blotter can help a investor to monitor the progress based on many different variables. *This information can be looked at from a time basis or a strategy basis, and the Deal Blottercan help an investor to know which type of trading activity is producing profits and which activitys are creating losses.

Traders are often instructed to “cover on a approach” when short positions are taken and prices approach a significant area of support. Excessive declines might indicate that prices are ready to reverse upwardly, and thus, sell positions should be closed.

Traders are often instructed to “cover on a bounce” when short positions are taken and prices bounce out of a significant area of support. This bounce might indicate that prices are ready to reverse upwardly, and thus, sell positions should be closed.

Cleared Funds are thought of as being “liquid” in nature and are different from “pending” funds as their source has been verified previously. Cleared Funds can be easily transferred into a new account or into cash form.

The Bitomat was introduced to support the Polish Zloty and is deposited digitally into virtual wallets. Since all transactions are digital the Bitomat is viewed as a way of keeping trading costs low and as a way of providing constraints to inflationary pressures.

Volatility describes the change in price movement of a financial instrument. If a Stock moves up and down rapidly over a short span of time, it has high volatility, If the price moves slowly it has low volatility. In other words Volatility can be referred to uncertainty in the market.

Volume indicates effective clues for future prediction and is very useful technical indicator. High volume in any directions of the markets form future trends while low volume appears during the unsure periods.

An Automated Trader is generally focused on trends in technical analysis and sets trade entries to meet predetermined criteria. This type of trading carries with it specific types of risk, so traders looking to automate their processes should take position sizes into consideration so that excessive risk exporure is not seen.

Bear Markets show that investors lack optimism on the strength of the economy and expect asset prices to for the medium to long term. Downtrend are generally defined as when prices continue to make lower highs and lower lows and when this happens in excess relative to the historical averages, markets are said to be in a bearish trend.

Bad Fills can be frustrating for traders as they are often executed as a worse price than expected (too high in buy positions or too low for sell positions). There are generally two situations where this might occur. First is during times of excessive market volatility. Low liquidity levels can make it difficult for brokers to execute trades at specific prices. Other instances are seen when broker platform reliability is questionable. This situation is more avoidable, however, as long as a reputable broker is used.

The 3 M’s are: MIND METHOD MONEY MIND This part of Trading is most important. It deals with Psychology. When one enters Trading business, he/she has some beliefs about the environment, about markets. They have to understand the importance of Discipline, How people think, how greed and fear affects investors. There are sub-parts to this Individual psychology of traders: You have to understand how to control Fear and Greed. How you should take rational decisions and not fall pray to your emotions while trading. Mass psychology of the markets: You also have to understand how mass psychology works. Why most of the people do what they do. The rules for maintaining personal discipline: You also have to understand the importance of Self Discipline, why you must be always consistent with your trading. You must never violate your rules. Because in long run your discipline in one thing which will make you most money, not your knowledge or your skills. METHOD This is the part which deals with your knowledge about market, technical analysis, and other tools which you can use to make Entry and Exit from any trade. This part is perceived to be the most important aspect and most of the people run after these a lot, but these are the least important part of your trading. Let us see part of this. Technical indicators : These deals with the tools available for making decisions , for example , MACD , RSI , Stochastics , OBV and other 200 weird words . The best chart patterns: Then you must know different types of patterns, which gives some idea about future action and how masses are thinking, some examples can be double top, Head and shoulder pattern etc . Developing a trading system: Then finally after you are done with knowledge part, you should build up your trading system .What is trading system? It’s your rules for buying, selling, booking profits and cutting losses. MONEY Now this part is an amazing one and my favorite. What this determines is how will you manage your money, it decides how much money will put in market at any given time, and how much loss will you take maximum on any given trade. How much will be your maximum loss on any one trade, things like that. Basically this part decides how long can you in the game of trading if things would go wrong. This part is extremely important. Without proper money management no can survive for long in Trading. Let’s see some basic and widely accepted views. - The 2% Rule for individual traders: These rule days that on any given trade your loss should not exceed 2% of total capital. So if you have Rs 1, 00,000, first time your loss should not be more than 2,000. This rule makes sure that even if you make long series of loosing trades, still you are in the game. Even if you make 10 consecutive losing trades, your overall loss will be 18.3%, though this will be rare, still you take care of this situation. The 6% Rules for every trading account: This rule says that your monthly loss should not cross more than 6% in a month. Sometimes when you trade it may happen that there is some problem with your analysis or some issue between you and market which cannot be explained, you keep trying to win, but don’t succeed, that time you have a great urge to revenge trade and get your money back. The best thing at that time is to stop and get some rest, go for vacation and come back with fresh mind. This rule will make sure that if your chemistry with market doesn’t fit, you stop after losing 6% of your capital. You can choose your own percentage amount. I would like to choose 12% for me. it all depends on your risk appetite and stubbornness You might be interested in money management example Essential record keeping for success: This part says that you should always keep all the information regarding each trade. Buy price , sell price , date of purchase , how many days you carried , Reason for buy , reason of sell , what you learned from the trade , chart at the time of buying , charts at the time of selling etc . Why do you do this? Record keeping makes sure that any day you can go back to your records and see what kind of mistakes you have done, why some trades failed, why you succeeded in some trades? You can get lots of information from your records, you need to analyze your performance over days/months/years . It’s extremely important , after a series of trades when you look back to your records , you may be able to find out some pattern , some particular aspect or mistake which you do with each loosing trade and hence can take corrective measures . So, finally we are done with 3 M’s of successful trading. If we talk about how much percentage a trader should give to these 3 M’s should be Mind: 60% Money: 30% Method: 10% It’s totally opposite of what people perceive it to be, general people think that having all market knowledge and technical analysis is most important. Nothing is far from truth, it won’t be too ambitious to say that you can make money in market by simple coin toss if you have sound money management Techniques and Great control over yourself; you need to cut your losers short without any emotion and let your profits run till they can by sitting tight and doing nothing.

So how does AMT play out in trading? There are several ways of locating the requisite support (upper limit), resistance (lower limit), and consolidations (or congestions or trading ranges or any sort of sideways movement). One can, for example, plot a volume distribution (the hinge is circled): Drawing a line below the bottom of the middle distribution gives one a zone on which to focus, particularly when price opens below this zone (price also opened below this zone the previous day, leading to another profitable trade): Or one can draw a box around the congestion: Or one can use plain ol' S/R lines, noting the test of the previous day's high: All ways of illustrating the same thing. And it doesn't require special software. This, then, is what one should have had for the day following the previous chart, at minimum. If one doesn't know in advance what he’s going to do at each point, then he’s not prepared. And this is what happened the day after that: Price finds support at B, resistance at C. Preparation, Execution, Review. Let's see how it all worked out (same chart but drawn with Sierra): Monday and Tuesday, price tested R ©. Thursday it bounced off the midpoint of the lower trading range (D) and tested R © again. Friday it dropped to S (E). The advantage being, again, that all of this can be plotted in advance, saving one from having to peer fixedly at his screen for however long looking for a particular type of bar. For the coming week, the setup was the same, keeping in mind that the interface between the two ranges, at 1970, might take on added importance. And as it turned out..... Note that while intraday data is included in these charts, the principles of AMT apply regardless of the bar interval of the chart, even if there is no bar at all (e.g., a tick chart or a T&S digital display). The high of the range is the high of the range, regardless of how one chooses to display it. Ditto the low of the range. And the bulk of the trades take place in the middle. Therefore, whether one trades off a tick chart or a weekly chart, he can incorporate AMT principles into his work. NEXT: [THREAD=12805]For Daytraders Only: the TICKQ[/THREAD]

The indicator phase is something that probably everybody probably has to go through, whether it's MAs, stochastics, MACD, %R, VWAP, Market Profile (if you're looking only at the form if it), Pivot Points, Fibonacci, Bollinger Bands, chart patterns of one sort or another, candles, or even the price bars themselves (range bars, CVBs, tick bars, VSA, etc). And if one can make that endeavor successful by going through the necessary testing and developing the necessary plan, then there's absolutely nothing wrong with settling into that phase for the rest of one's successful trading life. Since all of this depends on its existence on the movement of price, however, it is all "price action", hence the confusion over what is meant by "price action". But trading by price means simply that one is following price flow (not order flow, but the movement of price) and the imbalances between buying pressure and selling pressure that prompt that flow. It has nothing to do with any kind of indicator or any sort of bar or even any kind of chart. Is it superior? Yes, if it makes more money than an indicator-based approach. If it doesn't, then no. Does it get one into moves earlier than an indicator-based approach (including those which focus on bars)? Yes, if one understands the buying-selling dynamics mentioned above. But getting in early is only part of what is required to make a profit. Otherwise, all counter-trend traders would be rich. Though there are undoubtedly price action people who look down their noses at indicator people, the PA people have no reason to feel superior. And contrary to the beliefs of some indicator people, the PA people do not fail to understand indicators; they just don't see the point (other than perhaps scanning a database for price movements). In most cases, the latter have in fact gone through all this, as mentioned earlier, and had insufficient success with it, just as they've been dissatisfied with the chat room phase and the newsletter phase and the advisory service phase and the red-green arrow software phase and the seminar-course-workshop-DVD phase and the trade-the-news phase and the chart pattern phase and have instead found a more comfortable fit with a focus on price flow. It's all about the money and how one chooses to go about getting it. There is no inherently better way, particularly if the trader doesn't care to do the work. A good fundamentalist, after all, will beat a bad technician any day. Therefore, if one is using indicators but has no idea how they're calculated, much less done the testing necessary to make the most of them, he is unlikely to reap the full -- or any -- benefit. If one is trading price flow but embraces irrational views of what constitutes support and resistance, he is similarly unlikely to reap the full benefits of that approach. Either way, it's all about study and testing and screen time. Without that, it makes absolutely no difference how one goes about the process of entering and exiting a position. NEXT: [THREAD=12808]Auction Markets[/THREAD]

A springboard can be said to exist when preparations have been made for, and the psychological moment has arrived for, a quick and important move . . . Auction markets are in continuous flow from trending states to non-trending states. If a trader is interested in movement and momentum, he will likely be interested in a trending market and try to avoid a non-trending market (what is often called "chop"). Springboards serve to alert him to upcoming changes from one state to another. They alert him to prepare for a transition (whether it turns out to be substantial or trivial) from non-trending to trending or vice-versa, i.e., that point at which price is on a "springboard" to an advance. One can busy himself with questions of who's doing what and why (weak hands, strong hands, professionals, amateurs, intent, prediction, and so on), but none of this is essential or perhaps even important. What is important is being prepared for whatever hand the market deals you. In this way, one can maintain calm and objectivity, not dither with last-minute surprises. What one does with what is in front of him depends largely on whether he is in a trade or he is looking to enter one. If he is in a trade, he's looking for signals that momentum is slowing. If he isn't, he may be looking for the same thing as an opportunity to enter, depending on what else is going on (e.g., is support being tested, is this the end of a parabolic move, has trading activity spiked or evaporated). However, before getting into all the possible tactics that can be employed to play these movements, I suggest that whoever is interested in this subject work toward finding these zones where traders are seeking balance (or equilibrium or fair value or whatever one chooses to call it). Again, these zones occur in all charts in all timeframes. And if one understands why they form, he is less likely to be freaked when his trade stops, much less retraces (he will, of course, have decided in advance what he is going to do when this unavoidable circumstance presents itself). To start, a chart of the DJTA over the past four years (originally posted in March ’07). It could be any instrument over any time period with any bar interval, but I'm being specific -- and using bigcharts, which is available to everyone -- so that anyone who's interested can follow along. I've also deleted the periodic volume bars and used dots rather than price bars in order to turn attention away from what is immaterial and toward the movement of price. Without any annotations whatsoever, one ought to be able to see that price is moving in a generally upward direction with occasional "pauses": If annotations are necessary, the following may be helpful: The exact lower (support) and upper (resistance) levels of these "zones" are not critical. What is more important in each is the general area in which the bulk of trades occur. What may also be important to the trader from a tactical standpoint is the "mean" within each of these zones toward which price will revert when bouncing around between support and resistance. Note that each time price trends upward, it then stops or pauses in order to find equilibrium (or balance or fair value or whatever). It may engage itself in this for minutes or years, depending on time frame and bar interval. Once it has found this equilibrium, it gets comfortable. This is a "safety zone", and the bulk of trades will occur here. These pauses are not as dramatic as the trending moves because it seems as though nothing is going on. But more trades are placed at these prices than at the prices within the trending move simply because these prices are traded again and again over a period of time. This process lays the groundwork for what may become important support and resistance later (as opposed to, for example, a swing point, which, while dramatic, represents relatively few trades). Eventually, there is an imbalance, or disequilibrium, and the springboard makes good its name. Price emerges from this "comfort zone" and either reverses the trend or resumes it. The emergence may be gradual, or it may be dramatic, as with a breakout. Here, in June of '04, it moves up 200pts and immediately forms a new zone. Only later, in October, does it make a more dramatic move. But that, again, reverts into yet another zone in which traders seek balance, this one lasting for 11 months. For those who aren't scalping and who like a deliberate approach to trading, the profit opportunities will most likely be found in the reversals which occur between support and resistance in these zones and in the breakouts which occur when price's state of equilibrium is fouled and it seeks a new one. But whether one trades reversals off of S&R or breakouts through S&R, he is working the edges and avoiding the "chop". If price isn't approaching S or R, much less testing it, he's waiting, and observing, and monitoring. Traders rejected 5000 in May ‘06, then again in July. 4200 was rejected in August and September. This is a wide range, the mean of which was 4600. Price worked the area between 4500 and 4900 for several months, again seeking equilibrium. This equilibrium was broken in February, but traders have now returned to their most recent "comfort zone". This is where they can find trades and reasonable safety. Price may remain here and find balance either side of 4800 (again, this was posted in March ’07). Or it may try again to resume the uptrend. The reversals trader who doesn't mind trading tight ranges might trade here. The breakouts/momentum trader will wait for some determined move out of the range, either up or down. But he will not likely be searching for trades in chop. If locating these zones or pauses in which these efforts toward balance and equilibrium take place is a problem, plotting "volume by price" can help: Note, again, that the bulk of trades are taking place within these zones. It is those areas with the fewest trades, those areas where traders are least secure, where the most potential for price movement -- often sustained price movement -- occurs. If one has no understanding of support and resistance whatsoever, much less where to locate them, this is as good a place as any to begin, and better than most. As for hinges, these are an additional aid to spotting those areas in which traders are seeking equilibrium. They are created by successive lower highs and higher lows and represent a tightening and compression. If interest is sufficient, this compression will eventually lead to a worthwhile move (if it isn't, price may simply dribble off into nothing worth bothering with). As Schabacker later said, these hinges or coils should be "filled with price", that is, there is no aimless drift but a struggle between those who want to move price ahead and those who don't. Therefore, price should bounce in an ever-tightening range which culminates in a release of pent-up energy and a tradeable move.

Jones buys 100 shares of Fruehauf Trailer at 24. He will tell you with all the enthusiasm of the true believer what a fine company Fruehauf is, and what excellent prospects they have for the coming 12 months. He will tell you everything he knows that is good about the stock, but he will not tell you anything that is bad. For him there is no bad. His mind is made up. He does not want to be confused with facts. He is not looking for the truth; he has found it. And like a politician or a minister or a trial lawyer, he is not trying to see reality as it is. He is trying to keep himself convinced that his map of Fruehauf is actually a good one. He wants to hear nothing that will upset his all-out judgment. What he wants and needs is argument to bolster his shaky judgment and make him feel a little more secure. Therefore, he will not read, or he will forget, anything that appears in the Wall Street Journal that threatens his faith that Fruehauf is all good. And he will clip and treasure the favorable comments or reports that tend to show that he was in fact right. The data he collects are no doubt true, but they present a very one-sided picture. Suppose, now, that Fruehauf stock sells off to 18. Will he re-examine the territory and see whether there have been essential changes in the situation “out there”? Or will he, more often than not, cling to the old map of his original opinion and simply go on a search for more evidence to confirm his rightness in that opinion? He may even buy another hundred shares on the basis that if his original conclusion was valid, then this new purchase will lower the average cost of all the shares he owns, so that even a moderate advance would put him back in the profit column. What is he doing? Is he making an impartial evaluation of a stock? Or is he defending his obsolete opinion in the face of present facts? Is he acting in a way that is likely to make him profits? Or is he setting a higher value on being right than on the money involved. Let Fruehauf drop to $12 a share. Will this man sell now? No. It would hurt too much to sell. Who would it hurt? Why, it would hurt him, of course. How would it hurt him? Well, it would mean a loss in money. But isn’t it clear that the larger loss is not measured in dollars, but in pride? It will hurt less to sweep the facts under the rug, delude one’s self, and maintain that one was right in the beginning and is right still, than it will to admit that one was a fool. To put it another way: If he has decid-ed, “The stock is worth $60 a share,” and the market says $12 a share, then the market must be wrong. For the sacred map cannot be wrong. It would hurt too much. Call it fantasy, prejudice, opinion, judgment, or what you will, when the high abstraction collides with bare facts, it is the facts that have to give way if your value system places such a high premium on rightness that your tender ego cannot suffer the slightest setback. Many men cannot afford to take monetary losses in the market, not because of the money itself so much as because of their oversensitive, poorly-trained selves. The humiliation would be unbearable. The only way that occurs to such men to prevent such painful situations is to strive to be always or nearly always right. If by study and extreme care they could avoid making mistakes, they would not be exposed to the hard necessity of having to take humiliating losses over and over again. And so? And so, too often, rather than settle for a relatively minor loss, our friend will stand firmly on the deck of his first judgment, and will go down with the ship. The history of Wall Street, and of LaSalle Street, too, is studded with the stories of men who refused to be wrong and who ended up ruined, with only the tattered shreds of their false pride left to them for consolation. How to avoid such unnecessary tragedies? Be always right? You know that isn’t possible. Keep away from the speculative market entirely? That is one answer, but it’s rather like burning down the barn to get rid of the rats. There are other answers, and they are simple. They are standing there, right at hand, like elephants in the front hall, if we can only see them. In the first place, there is no rule that we can’t change our minds. It’s not necessarily wrong or a mistake to believe that Fruehauf stock will go up from $24 to $60. What is wrong is sticking to the opinion after the evidence clearly shows that the conditions have changed. The rational approach is to be ready at all times to consider new evidence, and to revise the map accordingly. In the second place, it need not hurt so much to have to change one’s mind. Unless we are so wedded to absolute standards that we cannot entertain anything that will conflict with what we decided in the first place, we can alter the map to any degree we want, or completely reverse our position. If we have a good method of evaluation, in which we have confidence on the basis of observed and verified results, we will not have to think of these changes of opinion as defeats. They are simply part of the process of keeping our maps up to date. If we plan to travel to Boston over Route 20 and there is construction underway on a five-mile section of the route, we don’t try to blast our way through. We take the detour. We go by the territory as it now is, not by the old map. And if the road is blocked entirely and no detour possible, we don’t shoot ourselves, or run our car over a cliff; we simply turn around and go back home and try again tomorrow. It is perfectly amazing how many losses you can take in the market and not get hurt very much, provided you are able to cut these losses short as soon as a change of trend appears. In order to do that, you will have to keep an open mind—not open just to favorable things that confirm what you wanted to believe in the first place, but open to any reports that will have a bearing on the situation, whether good or bad. The really serious losses come when someone closes his mind and stubbornly refuses to recognize new factors in the situation. Of course, it’s not enough merely to keep losses small. In order to keep solvent, one must also have some profits; but profits, too, bring their psychological woes.