Thoughts, Trading

Gelling Situational Awareness and Price Action (a.k.a Don’t Fight the Price Action)

There are two main things I use in my intraday trading:

  1. Price action from reading the charts
  2. Situational analysis from reading the DOM

Price action provides the structure, it determines the trend, key levels, the intermediate outcomes of the battle between bulls and bears.

Reading the DOM provides the meat that allows you to build the story. How fierce (aggressive) are the bulls? How strong is the resistance? Do the bulls need to engineer a dump-and-pump in order to push the market higher? Are there manipulative buying / selling to accumulate / distribute before a strong push up / down?

Usually reading the DOM allows me to paint a pretty good picture of what is happening that day. Most of the time, the price action unfolds in a consistent manner with the picture. That is helpful in making sense of the trading action of the day, instead of reacting to pure technicals.

The success of that however led me to commit the mistakes during the July 31 (Weds) and Aug 1 (Thurs) sessions. On July 31, 2013, I noticed something unusual: while the trend is clearly up, there were repeated failures of support levels. Imagine a set of support levels where S1 < S2 < S3 < S4. The pattern goes like this: (1) S1 support formed and held, price moves up, (2) S4 support formed and failed, (3) S3 support formed and failed, (4) S2 support formed and held, price moves up to next higher level. Such a pattern was indicative of more “quiet” accumulation, where the aim is not to immediately push up the market, but to accumulate some, let the price sag, accumulate some more, let the price sag again, and accumulate some more. As other players catch on to what is happening, the price gradually gets taken higher.

So I was looking at that, and my thought was that the market is _definitely_ going higher. Well what did I do, I bought. And to ‘counter’ the issue of support levels not holding, I ‘decided’ to not have any stops. Why get taken out by stops when you know the price was going up? And since I was so convinced that the big boys were accumulating, hence the price was going up, when price fell, I bought some more! So now you have the recipe of (1) obstinate and overconfident view of what is market is going to do, (2) trading without any stops, (3) fixated on a single direction, (4) averaging down (again and again). Guess what happened. The market crashed down in the last hour, very steeply down.

So what’s the lesson here? You can have your view, but never never never ever go against the price action!!! If the price action confirms your view, great, you can trade with greater confidence. If not, obey the price action, period.

Even if what you think is happening is indeed occurring, with any decent fight, its difficult to tell who the winner will be definitively. There is always a chance that more aggressive selling might overwhelm the buyers and push the market down by a lot more. Hence the only safe way, or rather the only profitable way to play here is to follow the price action.

Furthermore, let’s say by the end of the day, price indeed makes a new high. But imagine the psychological trauma that you would have to withstand if price swung up and down wildly, with lower and lower highs in the mix. There is no way you would have the psychological capital to be able to withstand the journey until the end of the session. So you would end up puking somewhere during the journey.

Well as it turned out, my view that I had on July 31 was correct, the big boys were accumulating big time. The market went up a lot on Aug 1 and Aug 2. In fact, during the extended trading hours on July 31, the market was taken further down a notch for the accumulators to load up more. I had spotted the accumulation and figured out what was happening, but my timing to go long was too early (for intraday trading, it would have been great for position trading), and in trading, timing is everything.




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