Jim Dalton Blog

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.

TOS MONKEY BARS SET UP AND STUDIES

This post has been created to help traders set up Think or Swim Monkey Bars to be similar to Jim Dalton's Market Profiles. A JD member furnished these instructions for fellow members at J Dalton Trading.

Studies you can add:

#Calculates half back in multiple available aggregation periods.

input aggregationPeriod = AggregationPeriod.DAY;

plot HB = hl2(period=aggregationPeriod);

HB.SetDefaultColor(GetColor(0));

HB.SetPaintingStrategy(PaintingStrategy.HORIZONTAL);

Adds the moving price line to TOS charts: 
#This will only plot during regular trading hours unless you have the charts set to extended hours.
 
plot priceLine = highestAll(if isNan(close[-1]) and !isNAN(close) then close else double.nan);

Instructions to set up TOS Monkey Bars:

There is a Chart Style called "Monkey Bars" that shows the market profile. Only real difference is that it uses numbers for the periods instead of letters. Its not even close to WindoTrader Blue, but is free..

Silent video for Monkey Bars setup

This is a link to TOS help file.

The workspace replaces all your existing settings with those. This could be an undesired effect.

Screen shot of TOS TPO Profile Settings

TPO-Profile-Settings.PNG

We’re Back

Roses are red
Violets are blue
J Dalton Trading is back
Because of you!

Yes, it’s true! J Dalton Trading has been officially re-launched and I have come out of retirement — for the first time, that is. (I figure that if I take a cue from the likes of Michael Jordan and Brett Favre, I should have at least another two retirements left in me. Right?)

In all sincerity, I have come out of retirement because of you, and the many committed traders who have continued to reach out to us to tell us how we have profoundly changed not only how they trade, but how they think. And you told us that J Dalton Trading didn’t just re-shape your thinking about trading; it also informed how you think about learning.

So, we thought, what better time to re-ignite J Dalton Trading with new courses, advanced webinars and a brand new website than on Valentine’s Day mpms-draft-logowhen we can show our appreciation for all the love we’ve received since we’ve been away.

Now, let me be clear: I value our traders too much to come back just for the sake of taking a victory lap. We’re back because that time away provided me with important insight, context and perspective that I have integrated into my teaching, which I hope will deeply enhance your market logic and your trading.

jim-in-thailandWhile I was in Thailand sipping a Singha while floating down the Chao Phraya River, in Colorado fishing for trout with my granddaughter, and in Alaska coming face to face with a brown bear (No, really!), I was unknowingly sowing the seeds for our newest and most comprehensive course series to date, the Market Profile Mastery Series.

The Market Profile Mastery Series is about discovery, both of yourself and of the market. Master yourself, master the markets.

If you’ve traded for any length of time, you know that trading demands skill on many levels. Most breakthroughs come from deliberate practice over time and, simultaneously, learning to be nimble during changing times.

And then there are those breakthroughs that happen when you take a step back — or float down a river, as it were. My time away has led me to several compelling insights between momentum trading and its relationship to the Market Profile. Recent events have delivered a momentum market as stocks make new, all-time highs. No two markets are the same, and no two real-time learning environments are the same. A course in 2017 is far different than courses we have held in prior years. For example, 2016 started out as one of the worst in stock market history. Then came Brexit in the summer, followed by the US election —and results nearly as surprising as coming face to face with a bear!

Our new Market Profile Mastery Series will not only put these historic changes into market context that market-profile-mastery-inset-course-1-2you can use but, most importantly, lay the groundwork to help you harness new trading habits that will lead to lasting success in 2017 and beyond.

Learn How to Become a Market Master

New this year, we are excited to welcome Shadowtrader news and web cast founder Peter Reznicek who will join me during the Market Profile Mastery Series every week to share insights, trade scenarios and powerful Market Profile observations.

box-images-webinars1aWe’ve also launched a new J Dalton Trading website complete with easy-to-navigate tools and resources that our traders can use immediately — from signing up for our FREE webinars to easy access of our premium content for our J Dalton Trading members. JD members enjoy special discounts, access to our premium content and exclusive invitations to J Dalton Trading events.

Of course, J Dalton Trading wouldn’t be the trusted, go-to trading education resource I am deeply proud of without my trading partner, Julia Stuart. Her trading insights and her continued, tireless support of all our traders provides the foundation our traders need to be successful. I hope you will feel free to reach out to her with any questions about our courses, products and offerings — or questions about my bear encounter.

And, of course, we look forward to working with you and helping you become the master of your own trading success!

Again, thank you for all the love!

ENROLL NOW TO BECOME A TRADING MASTER!

Market Profile Mastery Series, Course 1: May 1 through June 2
Market Profile Mastery Series, Course 2: July 10 through August 11

become-a-trading-master-4text

COURSES | PRODUCTS | WEBINARS

Jim Dalton’s Top 5 Tips for Successful Trading

No matter what timeframe trader you are, we are all day traders on the day we enter and exit a position. And how we enter our initial trade, no matter our timeframe, will ultimately influence our subsequent actions. Understanding that influence — both positive and negative — is vital to success. Positive psychology is an important element for successful trading. Knowing how your emotions influence your behavior is just as important as understanding the market-generated information made available from organizing the market’s continuous   two-way auction process via the Market Profile.

For example, most traders are far too eager to get involved as the market opens, for fear of missing an opportunity. And when such a feeling is controlling you, the odds are good that you’ll make an impulsive trade as a result. And impulsive trades seldom work out.

So what’s the secret sauce? It’s the not-so secret combination of melding self-understanding and market-understanding to uncover your edge. So how do you rise above the distracting maelstrom of conflicting information to develop the edge?

Read on for our Top Five Tips:

  1. It’s OK to wait. When markets open within balance relative to the previous day’s range, the opportunities are limited. It’s best to wait for better trade location.
  2. Think big picture. View the opening on a continuum relative to the previous day’s range—the closer the center of the range, the lower the odds that you need to trade early; the closer to the previous day’s extremes, the more likely that you can benefit from early entry.
  3. Mind the gap. Attractive opportunities usually develop around gap openings, as gaps reveal the ultimate out-of-balance experience. The bigger the gap, the smaller the odds that it will be filled during the current trading day. (Note: The gaps we refer to at J Dalton Trading only occur if the market opens outside of the previous day’s range; the gap is big or small depending upon how far it is away from yesterday’s range.)
  4. Embrace contradiction. (See above) It may feel counterintuitive, but the bigger the gap the more likely that timeframe traders are caught the wrong way and will have to trade in the direction of the gap to adjust their existing inventory.
  5. Remember wise words. To quote an adage touted by wise souls throughout the ages: We must free ourselves from attachment to desired outcomes if we are to see the world (and our trading) as it really is. OK, the sage did not mention trading, but this age-old imperative is as true for trading as for anything else in life.

Now on Jim Dalton’s Reading List: David and Goliath

David and GoliathAs with any study or craft, you have to continuously fill the well of knowledge to draw upon new ideas, inspiration, problem solving, and to simply recharge. And it’s no different with trading. One of my biggest sources of inspiration for new trading concepts has always been from books. Not trading books. Not meaty financial tomes. In fact, I deliberately avoid them.

I am an eclectic reader, and often find myself drawn to characters — from historical to fictitious — who give us insight into our complicated human behavior.

Of course, as our J Dalton Trading clients well know by now, the element of human behavior plays a pivotal part in developing our skills as a trader. Self-understanding and market understanding equals mastery. Understanding and harnessing human behavior is the foundation of our teachings. And when traders embrace this, a keen instinct develops that is transformative, allowing them to react thoughtfully and nimbly and harness market-generated information. The Market Profile is the tool we use to organize the information generated by the market.

Sometimes the inspiration I draw from books has a direct impact on my teachings — as was the case with the book Fooling Houdini by Alex Stone. It was this book that was the impetus behind bringing in esteemed magician Dennis Watkins to one of our J Dalton Trading seminars this past year to emphasize the point of how easily we can be misdirected by price. Magic is the art of misdirection. (Read more and see the video here.)

On this month’s reading list is Malcolm Gladwell’s newest book, David and Goliath (Little, Brown and Company). Truth be told, I was a bit leery about reading it. I’ve always been a fan of Gladwell’s books, from The Tipping Point to Outliers, but was getting worried that his signature gift for quilting together seemingly disparate anecdotes to drive home unlikely success stories was wearing a bit thin. But I was pulled in yet again and, inevitably, found that its message is equally applicable to trading.

There is no bigger underdog story than the biblical tale of David and Goliath, where a young shepherd defeated a formidable foe with the simple tools of an axe and a sling. And Gladwell mines the essence of that tale to uncover what forces drive the underdog to become the victor, starting with the first chapter, which says it all: The Advantages of Disadvantages (and the disadvantages of advantages).

The trading equivalent to an axe and sling is the pairing of self-understanding and market-understanding — a seemingly puny weapon to those who do not understand how to wield it effectively. Our foe is ego: cockiness, impatience and a false sense of capitalizing on the Next Big Trade. And it has been the undoing of many a trader. But combining market understanding and self-understanding, and knowing how to wield it together is powerful. And when you go one step further and understand the behavior of your opponent, it gives you the competitive edge to bring down the foe.

Trading Magic: Are you Watching The Wrong Hand?

Magician Dennis Watkins

Magician Dennis Watkins

Since it is Halloween, I thought that this was a perfect time to revisit a theme from one of our most popular seminars: Trading, Magic and The Art of Misdirection. We held it this past spring in Chicago and brought in esteemed magician Dennis Watkins. Through slight of hand, Watkins — who has been featured in Time Out, Huffington Post, The Chicago Tribune and many other publications — illustrated just how easy it is to be fooled while trading.

The impetus for the seminar came while I was reading the book Fooling Houdini by Alex Stone. Successful trading is dependent upon your ability to be a creative problem solver, and as an educator, I constantly explore creative ways to communicate important points to you.

It dawned on me while reading the book that the art of misdirection is the key positive element employed by magicians in an effort to intentionally mislead their audience. Being misdirected and focusing on price vs. value is the most detrimental error that we make as traders. And the most important aspect of trading is distinguishing price from value. By now, I’ve said it so many times that traders often don’t hear it anymore. So, I brought in Watkins to illustrate this slight of hand in person and drive home one of the most vital tenets of trading. (Check out an article we wrote on the subject here, 76 Misdirection.)

If you haven’t seen the magic show video, or were at the seminar and want to revisit it, we’ve included the segment here. Enjoy!

To watch the full magic show with Watkins at the seminar, see below:

What is the Market Profile®?

The Market Profile is a unique charting tool that enables traders to observe the two-way auction process that drives all market movement—the ebb and flow of price over time—in a way that reveals patterns in herd behavior. Put another way, the Market Profile is simply a constantly developing graphic that records and organizes auction data.

Scientists from all fields analyze information using the time-tested “bell curve.” The Profile is based on the same principles; it compares price (the variable) on the vertical axis to time (the constant) on the horizontal axis in order to create a distribution over the course of any trading day. Whether you’re trading ETFs, stocks, or futures, this time-sensitive, ever-evolving database provides real‐time insight into the forces shaping market activity.

The basic auction building block recorded by the Profile is the TPO, or “time-price opportunity.” The three components of the TPO are:

  1. Price—advertises opportunity; there’s a clear distinction between price and value.
  2. Time—regulates all advertised opportunities.
  3. Volume—measures the success or failure of these advertised opportunities.

The Market Profile offers a charting approach that is markedly different than bar or candlestick charts, which have been used historically to graph market activity. The following graphic provides a visual comparison of the two methods to illustrate the vital differences in the way they portray market information. A conventional 30-minute candlestick chart is on the left; the Market Profile, presented in 30-minute periods, is in the center; and on the right is the Market Profile in its final composite form.

what is mp graphic

Notice the difference in the candlestick chart on the left, versus the composite Market Profile on the right. The Profile’s unique construction produces a two-dimensional display that contains structure. It reveals far more information than the one-dimensional view inherent in conventional candlestick or bar charts, which do not expose the character of the market—where the majority of business took place, at what prices levels, and for how long. The Profile conveys significantly more information that provides the experienced observer with clues about both the complexity and the nuances driving the ongoing auction.

The structure depicted by the Market Profile reflects market-generated information; it represents the actual buy and sell orders transacted in the marketplace. This allows us to interpret which timeframes are participating, and provides insight into inventory conditions, completion, emotional trading, and other vital cues that are not apparent in conventional charting methods and price-derived indicator analysis.

The Market Profile is much more than a collection of individual data points. It graphically conveys complex information to reflect a composite, broad perspective of the market as a whole. As traders, we have the ability to more precisely observe the flow of the market’s auctions through this remarkably useful tool. The detailed examination made possible by the Profile is distinctive, and savvy traders who take the time to learn how to read its nuanced facets are able to decrease risk and improve the odds of success.

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