Let the Trade Come to You

Wednesday, June 21 | 4:30  - 5:30 pm EST

A key process that sets us apart at J Dalton Trading is that we teach our students the concept of monitoring for continuation. Most instructors will only talk about targets (the price followers you talk about). They might teach you to have a target and stop and tell you that either the trade will work or not. But there are many other signs that offer valuable clues. In this webinar, Jim teaches you what to look for and how to train your brain to monitor any type of trade.

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J Dalton Trading is offering 10 FREE Webinars with Jim Dalton leading up to our May Market Master Series intensive program to help give you a flavor of the depth of the Market Profile Mastery Series Program.

Learn how to prepare for a morning trade, how to observe a market, the importance of “value” and much, much more!

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How to Monitor a Trade for Continuation

Wednesday, July 6 | 4:30 - 5:30 pm EST

A key process that sets us apart at J Dalton Trading is that we teach our students the concept of monitoring for continuation. Most instructors will only talk about targets (the price followers you talk about). They might teach you to have a target and stop and tell you that either the trade will work or not. But there are many other signs that offer valuable clues. We’ll teach you what to look for and how to train your brain to monitor any type of trade.

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TEMPORARILY RIGHT WHILE BEING SYSTEMATICALLY WRONG 

NOTE: Jim's S&P Report for Monday, May 22, 2017 is available for download at the end of this post.

Interpreting market-generated information is the foundation of J Dalton Trading. Short-term traders were temporarily right during Wednesday’s selloff and systematically wrong. Our Recap and Preparation Report for Thursday, May 18, which is part of the current Mastery Series education for traders, delivered the following cautionary statement Wednesday evening:

“I have an upward bias because of the low volume, mechanical upper references and the failure of the POC to migrate lower than it did.”

That prescience sentence was followed by Friday’s sharp recovery. The economists Daniel Kahneman and Amos Tversky, two of the brightest stars in behavioral economics, helped me understand the mistakes people make. What was most eye-opening was that these mistakes are predictable and systematic.

The simplest trading approach, and by far the most employed, is price-based, momentum trading. Traders who ignore this approach place themselves in harm’s way. Similarly, price-based, momentum traders who fail to recognize the extremes to which momentum players pile on taking this approach to extremes, can’t conceive of the financial danger they are exposed to.

Recap and Preparation Report for Wednesday, May 17. The report, which was distributed on the evening of May 16 for Wednesday, May 17 stated;

EXCESS HIGH For the first time [since April 26th] we have and all-time high established during pit session trade.” Excess is one of the two most important factors we deal with. Excess marks the end of one auction and the beginning of a new auction. This statement wasn’t calling for Wednesday’s break; however, it identified the possibility.

Wednesday, May 17 trade Let’s review the market-generated information that began to expose the potential for momentum traders being in the process of taking prices too low. When emotions are involved, risk can be greatly underestimated, particularly if you can’t conceive of being wrong or don’t even know how to assess risk.

In the following graphic, we are viewing the Market Profile for Wednesday, May 17. The market gapped sharply lower, rallied slightly, then sold off for the remainder of A, B and C periods. Before we proceed, let’s take a minute to reflect on what a market often does following a large gap opening. We often see a trend day that elongates throughout the session. The elongation results from constant wave-like selling. On Wednesday, you notice that (see circled area) there are five 30-minute highs clustered close together. Finally, the market streaks lower for I, J and K periods.

The exactness of the five circled highs suggested that selling was not widespread but rather the actions of price-based, momentum traders selling on intraday rallies. In other words, there didn’t appear to be institutional-based selling or selling by “sticky” money. We refer to this as “sticky” money because these sellers stick with their positions for extended periods of time. Longer-term, larger sellers do not sell at such exacting levels. Their size is simply too big. If longer-term sellers were dominating the auction it is unlikely prices would rally this many times; we would see a more elongated Market Profile that didn’t print more than 5- or 6-wide.

POC The POC or point of control represents the fairest price at which bids and offers are being distributed through the session. In a more normal trend day to the downside, the POC constantly migrates lower with price. This suggests that lower prices are constantly attracting new sellers. In the following graphic, you see that the POC finally begins to migrate lower; however, the lateness of the migration along with the failure to migrate lower throughout the session is the second alert that the market might not be as weak as price would indicate.

The final alert was that overall NYSE volume was not supportive of the magnitude of the decline. Successive 30 minute periods probing lower were met with lessening NYSE volume.

The perceptive trader The perceptive trader knows what questions to ask and what information to seek. The perceptive trader also appreciates that timing counts, fully understanding that price-based traders can quickly move markets to extreme inventory conditions. The perceptive trader can fully participate alongside price-based traders as prices are being herded to extremes. Yet this trader with market perspective can fade (go against them) when they are exhausted. The key is being trained to know what to look for. In the above example, the market reversed a good portion of Wednesday’s loss by Friday’s close. This was not unexpected.

Download Jim Dalton’s S&P Recap and Preparation Report for Monday, May 22, 2017 here.

SPECIAL REPORT FROM J DALTON TRADING MAY 17, 2017

GAPS I have consistently discussed the market vacuum that can exist following multiple, successive gaps. A single gap may simply represent a change in market thinking and may exist for extended periods of time. I have generally labeled the three successive gaps as excessive.

Multiple, successive gaps usually signal the emotional, late stages of momentum buying. When markets advance in a more orderly fashion, there are congestion areas (sometimes referred to as market consolidation levels) that act as ‘elevator stops’ in case of a market decline. When the congestion or consolidations level are lacking, markets, very often, fall much faster. There are three successive gaps associated with the current market extending from 2352.75 on the low to 2392.25 on the highs.

OBSERVATIONS FOR WEDNESDAY MAY 17, 2017

Would I see today’s expected gap lower open differently if this was Tuesday versus today. Yes. The difference is that as of Tuesday morning there was no completion or excess to the long-term auction. Tuesday’s auction cleaned up the prior all-time high, which had occurred during an electronic session, leaving a more dependable excess high.

VOLATILITY Volatility has been exceptionally low for some time. While overnight volatility was higher, it certainly wasn’t sounding any startling alarms.

GAPS It is expected that we will gap lower on the opening. Gap trading rules are in play this morning.

  1. Go with all gaps that aren’t filled fairly quickly. The best way to trade a lower gap that isn’t filled is to short an early rally that loses tempo as price rises.
  2. If the gap is filled and value doesn’t begin to overlap (become similar to) yesterday’s value, the odds are increased for a later session break (a move in the direction of the gap).

EMOTION If you have been listening to too much news and feel emotionally anxious it is probably best to sit out early trade.

REFERENCES Broader references for this morning will likely be very visible. My focus this morning:

  1. Overnight high and low. Any significant change outside of what we already saw overnight will occur outside of the overnight range.
  2. Overnight halfback is a good starting point this morning.
    1. Acceptance above the overnight halfback range keeps the emotional reaction to recent news in check.
    2. Continual acceptance below overnight halfback pressures recent momentum longs and raises the odds of more serious liquidation.
  3. The prior gap highs and lows seen on the first page identify additional references this morning.

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TRADING FAST AND SLOW: DIFFERENT REFERENCES FOR DIFFERENT TRADER PERSONALITIES

Wednesday, April 26, 2017 | 4:30 pm - 5:30 pm EST

What kind of trader are you? We’ll discuss the tools that fit your trading personality. For example: Very few traders have the experience or mental flexibility to be successful fast traders. For them, short-term references such as the daily low, the opening, and halfback drive these short-term, fast thinking traders. However, the slower, more thoughtful trader uses different references such as value, balance, and directional confidence for their trades.

We recommended the book, Thinking Fast and Slow a couple of years ago. This book was still on the New York Times Best Seller list as of Sunday, February 12, 2017.

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