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With the New Year in full swing, our Winter Webinar Series completed, and the 2015 Intensive kicking off on January 20, Jim Dalton has put together 40+ years of market wisdom to help you make the most of the opportunities ahead.
These trading principles were discussed throughout the Winter Webinar Series and are an integral part of Jim Dalton’s work. Jim has condensed these time-tested principles in one document for you.
We hope you enjoy them!
Value versus Price: The Auction Process
- Bids and offers are distributed via the continuous two-way auction process.
- Price is the market’s mechanism employed to advertise the bids and offers.
- No two prices are equal; a price made on increasing volume is quite different than a price made on decreasing volume.
- Successful traders trade value not the advertising mechanism known as price. Value sorts out the daily conflicts between timeframes.
Market Profile Structure
- Structure allows us to see distribution patterns, for example:
- P formations indicate short covering.
- b formations indicate liquidation breaks.
- Anomalies within Market Profile structure indicate structural weakness—these anomalies are likely indicating that the shorter timeframes are dominating the auction. The odds of a reversal have increased.
- Prominent and very prominent POCs often help us differentiate between timeframes. For example, rising prices with prominent and very prominent POCs below them may indicate that the shorter timeframes are carrying prices forward.
- Sorting out the above: When the longer timeframes are leading the way the shorter timeframes generally simply “pile on”. Market Profile structure is smoother and the Profile’s shape is more symmetrical.
Size of Opportunities
- No two opportunities are equal. Some opportunities are small while others are very big.
- The smallest opportunities occur when the market is within balance.
- For the day trader remaining within or just slightly above or below the previous day’s range suggests small opportunities. Wishful thinking won’t expand these opportunities.
- For the longer-term trader remaining within a trading range or bracket represents smaller opportunities.
- The largest opportunities occur when the market is out of balance (a gap) or attempts to trade out of balance and fails. A failed attempt then increases the odds that the opposite extreme will be tested.
- For the day trader the reference is the previous day’s range.
- For the longer-term trader the reference is the current bracket, trading range, or balance.
- Focus on the size of the opportunities to help you determine how long to remain in a trade. Some evidence shows that we get only about 40% of the good trades.
- Cognitive dissonance is both positive and negative. ”The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function.” F. Scott Fitzgerald
Successful traders can keep two conflicting views and continue to trade the shorter-term view. For example, the underlying structure is poor suggesting substantial longer-term risk; however, for the present time, the day timeframe trend or value is working higher.
- Unsuccessful traders constantly struggle with cognitive dissonance. For example:
- They can’t resist looking at the economic announcements. If the announcement is positive they can’t pull the trigger if the market-generated information is signaling a weak auction.
- Because they don’t like the market on a longer-term basis they can’t go long for a day trade that is justified on market-generated information.
- Overnight pricing is a constant source of cognitive dissonance for many. They intuitively want to believe what is just in front of them. (What they just witnessed in overnight trade.)
Trading the Odds
- Think in terms of odds. For example:
- When the market is trading lower; however, value is likely to develop to at least unchanged relative to the prior session, the odds of making much more on the downside are greatly reduced. Additionally, the odds of a rally are increasing.
- Earlier we wrote about big opportunities. A word about staying in good trades:
An example—the market is out of balance, tempo is strong, confidence is strong; the odds favor continuation. Thinking in terms of odds can temper your psychological need to take a profit or, help you fight the fear of giving back a profit.
- No professional in any field practices their profession without constant preparation. The hours of preparation and training far exceed the event time. Because our event time is so long the prep will be less; however, there is no change in the training time to prepare you to compete.
Risk and Trade Management
- You can control the risk you take; however, you have no say over the market’s returns. You do have the ability to learn how to monitor for continuation. You control risk by:
- Placing stops at a structural reference and never using an arbitrary ‘money’ stop.
- Exiting a trade, whether a winner or a loser, if the odds for continuation no longer appear to be in your favor.
- Stops should seldom take you out of a trade. You should exit under your own power. This is where your confidence comes from—managing your trades helps you build confidence.
- Most stops are placed too tight. Intuitively traders think they are taking less risk by placing tight stops. In truth, most are actually taking more risk. It is similar to the analogy, “Death by a thousand cuts.” In this scenario a trader not only takes a small loss, but is often stopped out of a winning trade.
- Trailing stops should go from one structural reference to another, not based simply on profit earned.
- If you find yourself looking too hard for a trade it is likely a poor opportunity. The good trades, providing you are properly observing market, just begin to reveal themselves. Properly observing means you are highly focused, are well aware of developing value, and are recording how the market is behaving at day timeframe references.
- Any time you begin to become afraid that you are about to miss a really good trade you become impulsive. Impulsive trades have a poor track record.
- The final sign of an emotionally maturing trader is a willingness to miss an opportunity if you are not comfortable with the trade.
For those who are ready there’s still time to register for Jim Dalton’s 2015 Intensive. Receive Jim Dalton’s Signature Trades Worksheet and become a JD Member when you enroll.
Take Your Trading to the Next Level!