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【笔记】《技术分析之艺术与科学 · 5.1》  

2014-01-02 12:35:59|  分类: 汇市博弈 |  标签: |举报 |字号 订阅

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【笔记】金融交易心理 - 汇士4xAce - 4xAce汇士
文源:《The Art & Science of Technical Analysis: Market Structure, Price Action & Trading Strategies》
作者: Adam Grimes

 

On  Technical Analysis of Financial Trading [5.1]

1>>> It is therefore exceedingly difficult to derive a method that makes superior risk-adjusted profits, and it is even more difficult to successfully apply such a method in actual trading. Last, it is essential to have a verifiable edge in the markets—otherwise no consistent profits are possible..

2>>>The real trouble with this world of ours is not that it is an unreasonable world, nor even that it is a reasonable one. The commonest kind of trouble is that it is nearly reasonable, but not quite. Life is not an illogicality; yet it is a trap for logicians. It looks just a little more mathematical and regular than it is; its exactitude is obvious, but its inexactitude is hidden; its wildness lies in wait.
---C. K. Chesterson

3>>> The market doesn't care that the fast MACD line crossed above the slow one. These price charts we use can give us the impression that trading is some sort of mathematical game, and yes, ok, it's expressed in numbers, but really it's a daily competition, a fight between you and the other market participants. For every winner there is a corresponding loser, by definition. And, more importantly, not only can some of the competitors (the professionals--market makers, floor traders, banks, etc.) crush us little guys, but it's their job to do just that. This is the truth--the job of pro traders is to take retail traders' money, and they have a repertoire of jukes, fakes and other dirty tricks to try to shake us out of our positions for losses.
---Mark Bray

4>>>So, if you want to survive in the markets, learn things like the price levels where the buy/sell struggle is taking place. Learn to identify when the big guns are making their moves, and ride along with them.
---
Mark Bray

5>>>Art is often seen as more subjective and imprecise, but this is not entirely correct. In reality, neither can exist without the other. Science must deal with the philosophical and epistemological issues of the edges of knowledge, and scientific progress depends on inductive leaps as much as logical steps. Art rests on a foundation of tools and techniques that can and should be scientifically quantified, but it also points to another mode of knowing that stands somewhat apart from the usual procedures of logic. The two depend on each other: Science without Art is sterile; Art without Science is soft and incomplete. Nowhere is this truer than in the study of modern financial markets.

6>>>If you would be a real seeker after truth, it is necessary that at least once in your life you doubt, as far as possible, all things.
—René Descartes

7>>>...price represents the end product of the analysis and decision making of all market participants, and believe that a careful analysis of price movements can sometimes reveal areas of market imbalance that can offer opportunities for superior risk-adjusted profits.

8>>>Most of the time, prices fluctuate in a more or less random fashion. Though a trader may make some profitable trades in this type of environment purely due to random chance, it is simply not possible to profit in the long run; nothing the trader can do will have a positive effect on the bottom line as long as randomness dominates price changes.

9>>>Newer traders especially are often drawn to focus on elements of performance psychology and positive thinking. There is an entire industry that caters to struggling traders, holding out hope that if they could just get their psychological issues resolved, money would flow into their trading accounts. However, this fails to address the core problem, which is that most traders are doing things in the market that do not work. Excellent execution, risk management, discipline, and proper psychology are all important elements of a good trading plan, but it is all futile if the trading system does not have a positive expectancy.

10>>>A positive expectancy results when the trader successfully identifies those moments where markets are slightly less random than usual, and places trades that are aligned with the slight statistical edges present in those areas.

11>>>Some traders are drawn to focus on high-probability (high win rate) trading, while others focus on finding trades that have excellent reward/risk profiles. Neither of these approaches is better than the other; what matters is how these two factors of probability and reward/risk ratio interact.

12>>>The bottom line is that you must have an edge. If you are not trading with a statistical advantage over the market, everything else is futile. Nothing will help. Discipline, money management, execution skills, and positive thinking add great value in support of an actual edge, but they are not edges in themselves. From a statistical standpoint, the definition of an edge is simple: can you properly identify entry and exit points in the market so that, over a large sample size, the sum of the profit and loss (P&L) from your winning trades is greater than the sum of your losing trades? The question then becomes: how do you find, develop, refine, and maintain an edge?

13>>>...in the real world, prices are determined by traders making buy and sell decisions at specific times and prices. When markets revisit these specific prices, the market does have a memory, and we frequently see nonrandom action on these retests of important price levels.

14>>>People remember the hopes, fears, and pain associated with price extremes. In addition, most large-scale buying follows a more or less predictable pattern: traders and execution algorithms alike will execute part of large orders aggressively, and then will wait to allow the market to absorb the action before resuming their executions. The more aggressive the buyers, the further they will lift offers and the less they will wait between spurts of buying. This type of action, and the memory of other traders around previous inflections, creates slight but predictable tendencies in prices.

15>>>The conclusion is logical and unavoidable: buying and selling pressure must, by necessity, leave patterns in the market. Our challenge is to understand how psychology can shape market structure and price action, and to find places where this buying and selling pressure creates opportunities in the form of nonrandom price action.

16>>>Every edge we have, as technical traders, comes from an imbalance of buying and selling pressure. That’s it, pure and simple. If we realize this and if we limit our involvement in the market to those points where there is an actual imbalance, then there is the possibility of making profits.

17>>>Be clear on this point: we do not trade patterns in markets—we trade the underlying imbalances that create those patterns. There is no holy grail in trading, but this knowledge comes close.

18>>>You are certainly not the best-capitalized player in the arena, and, in a field that attracts some of the best and brightest minds in the world, you are unlikely to be the smartest. You also will not win by sheer force of will and determination. Even if you work harder than nearly anyone else, a well-capitalized firm could hire 20 of you and that is what you are competing against.

19>>>One solution is to focus on the three-day to two-week swings, as many swing traders do. First, this steps up out of the noise created by the HFTs and algos. Many large firms, particularly those that make decisions on fundamental criteria, avoid short time frames altogether. They may enter and exit positions over multiple days or weeks; your profits and losses over a few days are inconsequential to them. Rather than compete directly, play a different game and target a different time frame. As Sun Tzu wrote in the Art of War: “Tactics are like unto water; for water in its natural state runs away from high places and hastens downward … avoid what is strong and strike at what is weak.”(夫兵形象水,水之形避高而趋下,兵之形避实而击虚)

20>>>Charts are powerful tools for traders, but it is important to think deeply about what a chart is and what it represents.

21>>>...charting software also encourages some potentially harmful habits. It is so easy to add various plots and indicators to charts and to tweak and change settings and time frames that some traders are forever experimenting and searching for the holy grail of technical indicators.

22>>>One lesser-known relationship is that all vertical distances on charts scale with the square root of the ratio of the time frames. This has implications for risk management, profit targets, stops, and volatility on each time frame. For instance, if a trader has been trading a system on 5-minute charts with $0.25 stops and wishes to transfer that to 30-minute charts, the stops will probably need to be adjusted to about $0.61 ($0.25 × ). ... it is a good rule of thumb and can give some insight into the risks and rewards of other time frames.

23>>>Focus on tools that highlight and emphasize important elements of market structure, because your main focus should be on the price bars themselves. Intuition comes from repeated exposure to structured data in well-planned and consistent contexts; make your chart setups serve this purpose.

24>>>...market action appears to be the result of two interacting forces: a motive force that attempts to move price from one level to another and a resistive force that opposes the motive force. These forces represent the sum of all analysis and decision making at any one time.

25>>>Market action in this environment is highly random; if we were to analyze this type of action statistically, we would find that it conforms very closely to a random walk model. This is also precisely the type of environment that technically motivated traders must strive to avoid, as there can be no enduring statistical edge in a randomly driven market.

26>>>There are two broad schools of thought in technical analysis. One approach is to catalog every possible chart pattern and variation of those patterns. A trader using this approach might look for wedges, pennants, flags, boxes, ledges, head and shoulders patterns, and double tops and bottoms—...... Richard Schabacker was the first writer to codify this approach, in the late 1920s, and it was crystallized in his landmark 1932 Technical Analysis and Stock Market Profits. Upon his early death in 1935, his brother-in-law, Robert Edwards, took over the company he had founded and continued his work of market analysis. Later, Edwards teamed up with John Magee, and the two wrote Technical Analysis of Stock Trends (1948; 4th ed., 1964), which is now considered to be the ultimate, authoritative source on chart patterns. The Schabacker approach (which is not known by that name because few people know the history behind Edwards and Magee) is the predominant school of modern technical analysis, but there is another path. The second broad school of technical analysis is Richard Wyckoff’s approach. The core concept here is that chart patterns have very limited utility, and what predictive power they do have is highly dependent on the context in which they appear. The only real purpose of chart patterns is to quantify and to define the buying and selling pressure in the market. In many cases, traders using both approaches will arrive at similar conclusions. These are two different means to the same end, but many traders find a richness and depth in the Wyckoff approach that surpasses a simplistic focus on chart patterns. We trade the underlying buying and selling imbalance, which is what will move price in our favor if we are correct.

27>>>Do not accept price bars at face value. Always think deeply about what is going on behind the scenes, on lower time frames.

28>>>Trading within triangles is usually a losing proposition, as the market is in equilibrium and the actual movement within the pattern is highly random. However, they can set up good breakouts with expectations for strong, extended moves away from the pattern.

29>>>it is important to start thinking about these concepts in the context of actual market action, which is always less clear and noisier than we wish.

30>>>To every thing there is a season, and a time to every purpose under the heaven.
---Ecclesiastes 3:1, KJV

31>>>Referring to the Wyckoff method is a bit of a misnomer, for he offered no simple system or one way to trade. Rather, Wyckoff created a method for understanding the buying and selling convictions of very large traders and institutions through the patterns their activity left on prices.   If the smaller trader could recognize the signs they left in the market, he could align his positions with their activity and interests; in the end, it is the buying and selling pressure of these large pools of money that actually moves the markets. This method is as powerful and as relevant today as it was a hundred years ago.

32>>>WYCKOFF’S four MARKET CYCLEs

【摘】《技术分析之艺术与科学 · 上》 - 汇士4xAce - 残夢天涯

[1]. Accumulation: A sideways range in which large players buy carefully and skillfully, without moving the price. The public is unaware of what is going on; the market is off the radar and out of the public focus while under accumulation. ......There are some price patterns and clues we typically see associated with classic accumulation. The most common of these is what Wyckoff called a spring, which is called a failure test at the bottom of the range in modern terminology......The presence of other buyers just under the level where the institutions were buying telegraphs real interest. The large player would probably be compelled to immediately resume their buying plan, working very hard to not spook the market......This type of activity leaves a distinctive and important pattern on a price chart: it will be clear that the market has defined a support area and that price has probed below that support, but that the market spent very little time there because buyers immediately stepped in and pressed the market higher...... Everything we do as traders is a matter of shifting probabilities. We deal in probabilities, not certainties, but the position and context of the higher time frame can often provide warning that a market could be under accumulation, lending more importance to these lower time frame patterns......The distinguishing psychological feature of a market in accumulation is that it is off the public’s radar; no one is thinking about it or talking about it.

【摘】《技术分析之艺术与科学 · 上》 - 汇士4xAce - 残夢天涯
 Classic "Spring" at candle A

[2]. Markup: The classic uptrend. At this point, the public becomes aware of the price movement, and their buying serves to propel prices higher. Smart money players who bought in the accumulation phase may sell some of their holdings into the strength of the uptrend, or they may just hold and wait for higher prices......Because market action is, at least to some degree, the sum of many traders’ and investors’ hopes and fears, many people observe that price action often encourages traders to make mistakes. Markets often present us with the temptation to do the wrong thing at the wrong time, and we will be lured into doing so if we do not understand the psychology of the crowd. Understand this so that you can stand apart from it. The emotional cycle of trends can be summarized as disbelief, acceptance, and, eventually, consensus. When everyone agrees, the trend is usually close to being over.

[3]. Distribution: Eventually, the uptrend ends and the market enters a distribution phase in which the smart money players sell the remainder of their holdings to the public who are still generally anticipating higher prices. Really smart money players might even sell more than they own and go short in this range. ......This pattern is the opposite of the Wyckoff spring, and is usually called an upthrust......Even with the best analysis and trading plan, we will simply make the wrong decision sometimes, so any good trading plan will focus on risk management first.

【摘】《技术分析之艺术与科学 · 上》 - 汇士4xAce - 残夢天涯
 
[4]. Markdown: The downtrend that follows distribution. Smart money players who are short will buy back some of their shorts into this weakness. Eventually, the public realizes that higher prices are not in their future, so they panic and sell their positions. This panic, more often than not, marks the end of the downtrend.

33>>>The concept of fractal markets, ...is especially important when considering the Wyckoff cycle. Simply put, this means that the same patterns appear in very long-term markets as in very short-term markets. However, much of the academic work supporting this concept does not recognize that patterns may not be tradable on all time frames. It is not always possible to trade 5-minute charts the same way as weekly charts, even though the patterns may superficially appear to be similar. In addition, not enough work has been done on the relationship of fractal markets and liquidity.

34>>>Setting stops under accumulation areas is usually wrong, because you want to be buying those flushes, not selling into them......Risk management is essential to limit the damage on the times you are wrong.

35>>>If you are a specialist who focuses on only one setup or pattern (and, to be clear, this is not a criticism if you are successful this way), then you need to realize that only a few specific market environments favor your play and wait for those environments. You can redefine your job description to include not trading. Wait on the sidelines, and wait for the environments in which you can excel.

36>>>The key to defining risk is to define the points at which the trend trade is conclusively wrong, at which the trend is violated.

37>>>Most really dramatic trading losses, the kind that blow traders out of the water (and that don’t involve options) come from traders fading trends and adding to those positions as the trend continues to move against them. If this is one of the situations where the trend turns into a manic, parabolic blow-off, there is a real possibility for a career-ending loss on a single trade. For swing traders, there will sometimes be dramatic gaps against positions held countertrend overnight, so this needs to be considered in the risk management and position sizing scheme. More than any other category of trade, iron discipline is required to trade these with any degree of consistency.

38>>>The dropouts below support actually contribute to the strength of that support, as buyers are shaken out of their positions and are forced to reposition when it becomes obvious that the drop was a fake-out......support/resistance holding trades, as a group, tend to have the lowest reward/risk ratios.

39>>>It is worth mentioning that there is a special subset of support/resistance holding trades that actually are very high-probability trades: failed breakouts. Remember, when everyone is leaning the wrong way, the potential for dramatic moves increases greatly, and nowhere is that more true than in a failed breakout.

40>>>Many trading books show example after example of dramatic breakouts, but there is one small problem with breakout trades—most breakouts fail. In addition, the actual breakout areas tend to be high-volatility and low-liquidity areas, which can increase the risk in these trades......The presence of unusual volume and volatility can create opportunities, but it also creates dangers. Execution skills probably matter more here than in any other category of trade, as slippage and thin markets can significantly erode a trader’s edge. These trades can offer outstanding reward/risk profiles, but, especially in short-term trades, it is important to remember that realized losses can sometimes be many multiples of the intended risk, significantly complicating the position sizing problem. This is not a fatal flaw, but it must be considered in your risk management scheme.

41>>>Executing unplanned breakout trades in a reactive mode is unlikely to be a formula for long-term success.

41>>>When buying pressure seems to be strongest, the end of the uptrend trend is often near. When the sellers seem to be decisively winning the battle, the stage is set for a reversal into an uptrend. This is why it is so important for traders to learn to stand apart from the crowd, and the only way to do this is to understand the actions and the emotions of that market crowd.

42>>>Don’t fight forces, use them.
—R. Buckminster Fuller

43>>>In practice, the interactions of structures on lower time frames are usually components of price action, while higher time frames are more likely to provide context or motivation for market structure patterns within the trading time frame.

44>>>Impulse moves drive trends. As long as each trend leg extends in a momentum move approximately consistent with previous moves, the probabilities favor buying the next pullback for another trend high, or, in the case of a downtrend, shorting the pullbacks for another run at the lows.

45>>>...extremely strong impulse moves are more indicative of climax or exhaustion. This is one of the common ways that trends end, so it is important to fully understand these patterns.

46>>>...it is extremely unusual to see bars that are completely outside the Keltner channels, called free bars; the presence of these bars is another sign of potential climax.

47>>>Other terms for pullbacks are consolidations or consolidation patterns. These are functional labels—they explain what pullbacks do, which is to pause and to consolidate the energy of the previous trend leg, usually in preparation for another trend leg in the same direction. These are not always easy to trade, as it can be difficult to define precise entry and risk points in these patterns. However, working to overcome those challenges is worthwhile, because some of the most reliable statistical tendencies in the market are for continuation out of these formations.

48>>>The character and extent of the pullback can give some insight into the buying pressure behind the market. In fact, judging the commitment behind pullbacks is a key component, perhaps the key component, of reading the market tape. If buyers are aggressively accumulating positions, then they will not let the market come in as much on the retracements; they will step up and buy aggressively at higher prices. This will result in shallower, smaller pullbacks compared to a situation in which buyers are relatively more complacent. If buyers are more uncertain, they will demand lower prices as protection and will not be willing to bid the market aggressively higher. The end result will be deeper pullbacks, perhaps with a more complex structure.

49>>>The parabolic expansion into climax pattern is a dramatic but rare pattern. There are a number of other more common and subtle patterns that can also indicate climax. One of the most important of these is three pushes, which appears on a price chart as three drives to a new high or low after a somewhat extended trend......but this pattern is reliable enough that it demands attention when it occurs.

50>>>One of the classic rules of support and resistance is that support, once violated, becomes potential resistance. Conversely, resistance, once violated, becomes
potential support.

51>>>Do not place stops in areas that are likely to suffer from poor liquidity and adverse order flow.

52>>>My trading rules for triangles are simple and reduce to one principle: do not fade the first breakout from one of these formations.

53>>>What we call the beginning is often the end. And to make an end is to make a beginning.
—T.S. Eliot

54>>>Markets, especially deep, liquid ones, do not make large moves without the commitment of large pools of money. In general, these large traders are usually trading positions that are so large they could not enter them on the actual breakout. Small traders—the public who, on balance, tend to lose money—focus a lot of attention on entering at the actual breakout points. In many cases, the larger traders who are already positioned will take advantage of the volatility and sell a portion of their positions to the small traders rushing to buy the breakouts. Think about this if you trade breakouts; this is the pressure that often results in failed breakouts.

55>>>If large players are positioning themselves in the range in anticipation of a breakout, it is very likely that we will see these springs and upthrusts in the pre-breakout ranges.

56>>>Much accumulation and distribution is invisible; institutions spend a lot of money on salaries for skilled execution traders and in the development of execution algorithms. All of this subterfuge is designed to hide the execution of these large orders. However, there are points in the market where they cannot really hide their hands, and, if we know exactly what to look for, we can sometimes get clues as to their intentions. Violations of support and resistance in well-defined ranges are important areas to watch. If excursions beyond the range are short-lived, printing springs and upthrusts at the edges of the range, this becomes strong evidence that large traders are positioning in the market, and often sets up good breakout trades.

57>>>Good breakouts are driven by unusual order flow, so we need to see increased volume, activity, and interest associated with the actual breakout. In general, the ranges of individual bars should expand, and they almost always will expand on lower time frames.

58>>>Most traders think of slippage as only that: a bad thing, a cost to be avoided. However, around breakout points, slippage is actually desirable. It should be difficult to buy a market making a good breakout. You should have to pay higher prices to get in if the market is really moving......Think deeper, though, and consider the possible reasons for the bad fill......However, slippage is a fact of life in (true) breakout trades. In fact, positive slippage, where you receive a better than expected price, is often the killer here......Positive slippage is often a sign of an impending failed breakout trade......the breakout trader should receive immediate feedback on whether the trade is right or wrong.

59>>>Nothing in the market continues indefinitely, though, and eventually this initial thrust gives way to a pause and a pullback. This is a critical point because, if the breakout is the beginning of a new trend, this first pullback after the breakout is the optimal time to establish positions for the new trend. If the breakout is going to fail, it is going to fail at this first pullback. In addition, the character of the price action in this first pullback can communicate a lot of information about the conviction behind the move and the character of the market.

60>>>There are a few valuable lessons here: Do not expect levels to hold cleanly. The initial breakout level failed to hold on the pullback, which triggered the short-term traders to exit their positions. This, in turn, was actually the catalyst for the real move. Make sure your trading plan respects the realities of the market; any other plan is a recipe for disaster.

61>>>One of the characteristics of market action is that markets will probe levels for resting orders, seeking out levels where that will create trading volume. It is not that difficult to figure out where these orders might be placed, since traders use previous pivots and visible support and resistance levels to define risk points for trades. Stop orders tend to cluster just outside the day’s range, or at more or less predictable chart levels.

62>>>Imagine that you are a large player who would like to sell some of your inventory in a futures market. You can see that the market has held a resistance level cleanly (let’s say $80.00 for this example) on several tests, and it is reasonable to assume that many traders are short against this visible level. If so, where will those traders probably put their stops? There is no exact level, but we can assume that they will be clustered just beyond the resistance, probably in the range from $80.01 to $80.20. What do you do the next time the market trades up to $79.98? Remember, you actually are holding more of a long position than you are comfortable with and you want to sell some, but you want to sell as high as possible. Paradoxically, one good way to accomplish that goal might be to actually buy more at $79.98, $79.99, and eventually to try to buy enough that your buying pushes the market to $80.01. Even though you need to sell, the most effective way for you to sell actually begins with you buying more. If you are correct and shorts have their stop orders clustered there, those stops will trigger and a rush of additional buying will come into the market. As soon as those stops fire off, you can stop your buying (which is a good thing, because now you are even more long than you were before), and you will be more than happy to sell some of your position to those stop orders. If this campaign is successful, you will be able to sell a significant portion of your position into the volatility resulting from those orders, and, if you continue selling the rest of your inventory after the burst of stop orders is completed, you will most likely roll the market over into a strong sell-off. This is a highly simplified model, but this type of action happens constantly in all markets and all time frames.

63>>>What I call a failure test is the simple case just described, where a market trades beyond a significant level just far enough to trigger stops without any significant follow-through beyond the level. As a pure price pattern, a failure test is a brief excursion beyond a level, followed by an immediate reversal.

64>>>While there have been constant reminders that nearly everything in technical analysis is time frame dependent, one important element is not: When significant price action is anticipated at a specific price level, it should occur at that level. Whether the trader is watching tick charts or monthly charts, the presence or absence of action at a level is an objective criterion that cannot be ignored.

65>>>Failed Pullback Following a Breakout: ......If the breakout level was truly an important level, there should have been a high level of activity on the breakout and it is relatively uncommon to see breakout pullbacks fail by going into flat ranges...... There are usually too many competing influences and too much order flow for the market to just go dead after a breakout, and this type of consolidation, when it does happen, is usually indicative of a successful breakout. The fact that the market is able to hold outside the level shows that there is real conviction behind the move, and can often set up a sustained move in the direction of the breakout.

【摘】《技术分析之艺术与科学 · 上》 - 汇士4xAce - 残夢天涯
 
66>>>Failure Pullback: If sharp momentum emerges against the breakout, confirming the breakout failure, the first pullback is probably tradable against the direction of the breakout. As this pattern describes what comes after the best failure patterns, it is not actually useful in making decisions at the time of the breakout.

【摘】《技术分析之艺术与科学 · 上》 - 汇士4xAce - 残夢天涯
 
Point A shows a typical breakout, and at point B the market is consolidating in a standard breakout pullback. At this point, you would be fully justified in holding a long position as long as the lower time frame price action is judged to be favorable. However, C marks a classic breakout pullback failure, as sharp downside momentum breaks out of the bottom of the pullback. Now, think back to trading pullback trades—one of the strongest conditions setting up good pullback trades is that they are preceded by good momentum. In this case, the move following point C is on very strong downward momentum (against the direction of the breakout), and the ensuing trend leg is longer and steeper than previous downtrends. Shorting into the pullback at D is a good trade based just on that criterion, but, in this case, it is further motivated by the failure of the breakout level at A. When price turns down after this pullback at D, there may be some panic as the last trapped longs scramble for the exits.

67>>>Structurally, trends that terminate into a trading range will always do so through a failed pullback, but this may not be extremely useful information in real time.

68>>>...in most cases, failed pullbacks are preceded by some form of a momentum divergence. This momentum divergence, by itself, is not sufficient reason to take a position against the trend, but it is an initial warning that the trend is losing some conviction. Once this condition appears, counter-trend positions are justified if supported by other factors, the most important of which are lower time frame price action and the emerging market structure on the trading time frame. Other common conditions preceding failed pullbacks are extremely high volatility, indicating possible climax or exhaustion, and/or the presence of multiple trend legs in the same direction. After many directional pushes (more than three), it is likely that the market needs further consolidation before continuing the trend; the probability of pullback failure becomes higher with each subsequent trend leg.

69>>>The common pattern tying all of these transitions from trend to trading range is a failed pullback, and this point is important: trends fail when pullbacks fail. This is why it is so critical for all technical traders, whether they trade with the trend, counter-trend, in ranges, or on breakouts of those ranges, to be familiar with the patterns associated with pullbacks and their failure. The point of a trading methodology is not to predict the future, but to understand the forces at work in the market at any time, their relative balance, and the most likely resolution of emerging price structures. When something changes, and this happens frequently, a good trading methodology will embrace this change and make adjustments to trades. Exactly how you choose to implement this will depend on your personality and your chosen methodology, but the key is that you understand the ebb and flow of market dynamics.

70>>>...the classic “buy the low or sell the high,” which, though emotionally gratifying when it works out, can be very challenging to execute.

71>>>Once the trend termination has been successfully identified, it is important to take higher time frame market structure into consideration......a trend on the trading time frame may terminate into a range that is a simple with-trend consolidation on the higher time frame. Pressing trades against that higher time frame trend is usually a bad idea, as that trend is very likely to reassert itself and at least make an attempt at another trend leg.

72>>>There is nothing worse than correctly identifying a trend termination, correctly executing counter-trend trades at exactly the right time, watching them grow to nice profits, and then aggressively adding to those positions at the point you should be taking profits. Errors like this can make the difference between a successful and a failed trading career.

73>>>...there are two specific scenarios in which a sudden reversal is somewhat more likely than usual: following a parabolic climax or on a “last gasp” test of a previous trend extreme.

74>>>Parabolic Blow-Off into Climax: Trends end in one of two ways. The most common is for the trend to simply run out of steam and roll over, as momentum divergences develop against the trend and the market eventually finds balance at a new price level. This type of trend ending is more likely to be followed by an extended trading range, which itself may be a consolidation for another leg in the direction of the original trend. The other classic trend-ending pattern occurs when a trend ends in a parabolic range expansion that culminates in a buying (or selling) climax. These moves are dramatic and powerful, often exceeding any reasonable limits that could have been imagined. They seem to be the ultimate expression of a strong trend, but they carry within themselves the seeds of a dramatic trend reversal.
Psychologically, one of the keys to this type of action is the acceleration of the normal trend preceding the parabolic expansion.

75>>>The actual “last gasp” pattern is nothing more than a Wyckoff upthrust, but the key is that it is preceded by sufficient consolidation to set up the potential for another trend leg up; the pattern draws its power from the failure of that potential. (It is exactly reversed for a downtrend—i.e., a spring after a long-enough consolidation that the market appeared to be primed to break down.) Traders who recognize this pattern early can establish short positions at advantageous prices or at least can aggressively limit damage on long positions.

76>>>First Principles:
>>Markets are highly random and are very, very close to being efficient.
>>It is impossible to make money trading without an edge.
>>Every edge we have is driven by an imbalance of buying and selling pressure.
>>The job of traders is to identify those points of imbalance and to restrict their activities in the markets to those times.
>>There are two competing forces at work in the market: mean reversion and range expansion. These two forces express themselves in the market through the alternation of trends and trading ranges.

 <<Chapter 1 - Chapter 5>>
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