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Trading Insights --Cycles and Such
Posted By: Tanabear
Date: Saturday, 21 October 2000, at 10:13 p.m.I have wrestled with this thread , literally for months! It is the one thing I have learned from the BBs I've been on and in watching myself AND others getting whacked. I have posted parts of it here as I fought to get a conscise floormat so that a reader could follow it. I am para phrasing a very long chapter in this post so a little imagination may be required on the readers part. None the less if members can grasp it, it would help them immensely in their trades whether they trade IBM options, QQQ, MSFT, or SPOZ. by the minute, day or week. Well here goes.
Over a hundred years ago Charles Dow observed that the market was like unto the Ocean, with Tides, Waves, Ripples and Droplets. That basic theory has been expanded on by Elliot, Gann and a host of others, yet none has ever been able to refute it. All most have done is to paint an old boat with their own embelishmments.
Initially we have to realize that the market is NOT a homogenious mass. It compossed of layers within layers all of which are giving off conflicting signals simultaneously. Essentiallly the Market is made up of two CYCLES
CYCLES:
To put it into perspective lets analygiously consider the CYCLES as being two ONIONS. A White Onion and a Red onion. Both are onions and both serve the same "general" function, yet they differ. So it is with Market Cycles. Those CYCLES are always either:
1. Bullish (White Onion) or -------------------------------------
2. Bearish (Red Onion) ------------------------------------------
Now each of those two onions have their own individual layers which are always the same, which for the purpose of explanation we shall limit to just four and call PERIODS. All Red Onions have Four layers and all White Onions have four layers or PERIODS, Okay?
********************************
PERIODS:The White Onion or Bullish Cycle is composed of four layers or PERIODS:
1. An Accumulation PERIOD ----------------------------------------
2. A Mark up PERIOD ---------------------------------------------
3. A Mania PERIOD -----------------------------------------------
4. A Resolution PERIOD ------------------------------------------The Red onion or Bearish CYCLE is composed of:
1. A Disbelief PERIOD --------------------------------------------
2. An Anxiety Period---(Where I think we are now, FWIW) --------
3. A Panic Period (1929) ----------------------------------------
4. A Resolution Period (1931) ------------------------------------It should be noted that it is nonsensical to even think about trying to trade CYCLES since they are TOO large and their TRADING RANGE would dictate too much capital to do it right. More on Trading Ranges latter.
*******************************
MODIFIERS:Trading activity in each of the PERIODS can be MODIFIED as being:
1. Position Trades which represents holding for long periods, Weeks, Months, even Years.
2. Swing Trades which represents positions taken and held for Days Weeks or even Months
3. Day Trades which represents trades held for Minutes to a Day. And which are usually closed out each night.
4. Scalping Trades which represents trades lasting from several seconds to minutes and which are also closed out each day.*********************************
This does not represent a trading methodology. It is more of a road map so that you know EXACTLY where you are at all times and understand what is REALLY happening around you. That in my opinion is the True value of E. Waves, It gives you a road map! Hard to get from here to there and not know where "there" is!
HINT: It ain't Up or Down!***********************************
WINDOWS:All of this is well and good an quite esoteric but how does it help you to make MONEY? Well as we trade, we constantly work in Windows of exposure within the the NEXT LARGER Window. It is what Dow called "simultaeniously conflicting waves within waves" It is always from the Macro Window to the Minor Window that we should go, as we attempt to evaluate any trade.
THAT keeps us on the right side of the Market. IT KEEPS US FROM FADING THE MARKET. Now that won't make you rich but it will give you an edge. It WILL raise your odds from maybe 50/50 to 60/40. And sometimes a little edge is all a real gunfighter needs.
As I trade I use Four windows and 17 charts of the S&P, and 2 monitors The Windows are:
#1. My BASIC Window,---------------------------------------------
#2. My MINOR Window --------------------------------------------
#3. My MEDIAN Window --------------------------------------------
#4. My GENERAL Window ------------------------------------------*****************************
TRADING RANGES:
ALL markets and each window have their own TRADING RANGE. As most who read this know, I am an S&P Daytrader. I shall therefore use the S&P in my further explanations since I am comfortable with it and it provides easily accessable data to anyone who might be interested in pursuing this subject further. None the less for any market dogma to be valid it MUST be Universal, It must be just as valid trading IBM as trading Oats. I think this thesis meets that criteria.Rather than actually describing each Window and how to use it, let me digress first and talk about TRADING RANGE. All Items traded have a Trading Range. Makes NO DIFFERENCE what it is. If its traded, whether is an Option on IBM, SPOZ, or Wheat, it has a Trading Range. The TRADING RANGE is nothing more than the average normal price bar action in the window in which we're operating in. It governs our Capital requirements, Risk control and Position Sizing and if you don't understand it your fighting with one hand tied behind your back.
****************************
Examples:#1. My Basic Window has: a 4 Tick, 30 Tick, (4) 1 minuted, and (2), 2 minute charts. I basically work off of just TWO but the others are teriffic handholders. All have various oscillators ( Macd, %R, OBV etc) This window has a $5 Trading Range, The Trading Range tells me that The MOST I should ever be willing to go underwater, while trading this window, is $5, and actually the Maximimum Risk Norm is $2.50 (1/2).
Picture with me this scenerio. The average Price Momentum on a 1 minute S&P chart is reflected by a 16 Simple Moving Average. If we take a 16 SMA and add two more, one with $2.50 UP and the other $2.50 DOWN we form a $5 dollar simple channel. This allow us immediately upon execution to see where the Extremes of the Trading Range are and lets us immediately set a hard stop on any execution. Maybe $3 maybe $1. It depends on the Trd. Rng. extreme and the Executions direction. (I placed this here as an example but I do in fact have this as a part of one of my 1 Min.charts)
NOTE: Anybody who has ever tried to trade "channels" know the are unreliable as an execution tool. Their greatest strength is to keep a trader from positioning POORLY. They should NEVER be relied upon independently.#2. My Next Window is the MINOR Window. It is composed of (2),3 Minutes, a 4 Minute, and a 7 minute charts. ITS trading range is $6.50. Since it is the NEXT LARGER WINDOW, it GOVERNS the BASIC Window. In other words if My Minor 4 says DOWN. I probably would have trouble with taking a long EVEN THOUGH MY 1 MINUTE SAID "GOOD TRADE" It keeps me from fading the market. Now I know that a lot of you may say that I miss a lot of good trades. Hey I do! But my goal is NOT to make all the money in the market...it is to keep from losing MINE. It is not the individal trade that counts its the Aggregate for the month!
I had a friend who posted me about some MSFT puts, last night and wanted to know what I thought of them. Now they Might be great and I hope they turn out profitable, but the MEDIAN Chart (Day) MACD says its turned up. I hope his trade works but it looks to me like he is FADING THE MARKET, and at best, may just catch a little "dying quiver". I see that all the time on the BB. Its called chasing the bus! Its what happens when you lose sight of where your REALLY at in the overall market, and end up trying to BULL THE MARKET. Remember NEWP? Your down to rolling dice with Marke .....and, friends, he CHEATS!
Since my friend is probably intending to hold them for quite a while, he is actually trading in the MEDIAN Window, and the Window Governing the MEDIAN Window is the GENERAL which IS bearish, so in his case everything moves a couple of seats forward! MY Median becomes HIS BASIC. And my GENERAL his MEDIAN. and MY MINOR and BASIC are GONE! As long as he can hold them long enough and time erosion doesn't eat them up they may well work Its just that he may have to go underwater to do it, and why gamble? Why not catch some thing CLEAN instead. Get in on Resolution and a Reversal rather than try to fade the market!
#3 So now lets go on to my MEDIAN Window. It consists of several long term minute charts and 3 day charts. It has a TRADING RANGE of $22 or $11 as Max. Risk Norm. In other words I better be able to stand a couple of $11 - $22 ($5500) hits and still be a able to keep on trading if this is where I want to play. The MEDIAN governs the smaller MINOR and BASIC windows.
#4 My GENERAL Window consists of one chart and is made up of a Weekly bar Chart and has a trading range of $65. It is resplendent with a MACD and keeps me aware of long term support and resistance and I check it every couple of days....Maybe.
All of this said, when a trader wants to work in a MEDIAN Window (Swing Trade)and use a BASIC Window (daytrade) for Probability Signals he is going to get Whipsawed to death! He's out of Sync.!
EXAMPLE 1:
How does all this work. Lets take it from the top on a Couple of actual trades.1. Its 7:30 AM Fri., The market opens. I know that I am in a Bear CYCLE. Can't trade that, but it is comforting and a lot better to know, than what Maria is talking about,
2. I am in PERIOD 2 of that Cycle------prognosis BEARISH
3. My GENERAL Window (WEEKLY) show signs of having turned over and I am approaching a 50% Fibonacci number. The General market appears to have broken a neckline on long term H&S. Long term prognosis--BEARISH.
4. The Median Window (DAY) shows signs of a ralley. Since the General window is down I can not take any long term Longpositions (I wouldn't anyway being a daytrader) but I can trade neutral. In other words short or long is acceptable here. MEDIAN term prognosis---BULLISH
5. I then check out my MINOR Window which says its Long for awhile anyway! MINOR term Prognosis--------Bullish
6. Upon checking in my BASIC Window it says a STRONG short! I elect to pass since I would be fighting the NEXT LARGER WINDOW and wait for a LONG!I decide that after the ramp Thurs. I would back out a little and use a bigger chart in the BASIC window. I went to a 2 minute, and since the 2 minute MACD had already crossed for up, and since we'd gapped down on open, I got on @ 1398 after about 20 or 30 minutes of watching it screw around. By the time it covered the opening gap I was on Marke Money, I felt lucky, so I just rode along, knowing that the worst I could be out, was my time. No big deal really. As time went on it became appartant to me that it was going to scallop or "Ramp" probably all day and I then moved to my MINOR window on a three minute chart,for exit. Where upon it turned short and I exited.
I then picked up a short for a couple of dollars when I found one on my Basic chart.Example 2:
This is a paper trade that I did while working on the book the other day. (Wed) I did it as an example of Trading Ranges, as it occured, but it will work well here. Especially since it was a LOSING trade.
Initially,my MEDIAN Window was still Bullish but You had to be grasping at straws to see it at the time since earlier it looked like it was going to China. Still it hadn't broken support and at the time of this trade was up about $30 off the lows. My MEDIAN Window was Bullish but my BASIC was BEARISH. REMEMBER; THE NEXT LARGER WINDOW CONTROLS!I said lets go SHORT trading $1352 (because I was hunting a failing trade for the example). At that point the high for that Bars Trading range was 53.30, Low was 48.30. (the Channel)
It promptly dropped to 50.90 or (+$1.10) Nothing to get to excited about since it was really only about mid Trading Range and had it been for real I'd of been hoping for a chance to get on Markes Money with the trade. It then turned on me and started up as it approach the hard stop which was the Executions High TRADING RANGE. I bailed at 53, as it approached 53.30. Since it was rather obvious that it wasn't going to work. At that point the high Trading Range was 54 and some change but I was working off the EXECUTIONs Trd. Rng.. 6 minutes later it was trading $55.50. and eventually went to $60+ But I was long gone with a $1 loss and looking for a long. I WAS NOT STANDING AROUND CUSSING MARKE! All that counts in this business is the NEXT trade!I don't CARE what Marke does. And neither should you! We don't have to even know, as long as we're doing what the market tells us to do! But if you don't know what the market is doing and where it REALLY is at, and more importantly, where YOU are at....your cannon fodder.
The main thing I have done with this is to turn the decision making process more Mentally Mechanical....but not to the point where I no longer THINK! The more mechanical we can become without losing our common sense the more we profit in our trades. In other words we trade on a track not by rumor and wish.
I had a bunch of other stuff in here about risk control and contract sizing but I've already burned up too much bandwidth. Hope this helps somebody as much as it has helped me. That has been the real value of that book for me. It has made a lot of ducks get in a row so to speak.
FWIW---------------------Tanabear
Tanabear -- Saturday, 21 October 2000, at 10:13 p.m.
- Thanks Tanabear - I Have Copied and There Looks to (views: 65)
Albertabear -- Saturday, 21 October 2000, at 10:38 p.m.
- I am drawn to that book of yours (views: 39)
QuietBear -- Sunday, 22 October 2000, at 12:26 a.m.
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