The Awakening (edited on 10-28-2010)

(Note: I keep editing this because I keep reading it. I didn't do such a great job the first time. Still not sure that I am able to express how my thinking has changed. Work in progress...)

Say you were given the choice between trading systems. One system has a success rate of 55%. The other has a success rate of 35%. Which would you choose?

Did you make a decision? Easy right?

Did you choose the 55% system? Why not choose the 35% rate system and do the exact opposite?

This is the deal: somewhere between 80% to 90% of traders are failing or on the way to failing at this game. If you want to win you need to do something different.

And this is the difference: nothing matters.

That is to say, nothing I used to think mattered, ever really mattered. Not TA, not moving averages, not patterns, not charts, not colors - not price. The only thing that matters is what everyone else thinks matters. That is it.

And - I have no idea what that collective 'it' is, no one can know what everyone else is thinking.

But - I can guarantee that some things matter to 80% to 90% of traders, e.g., the ones that are failing. That is a lot of people - and they are all doing the exact opposite of what they should be doing. Enough of them do whatever they do for the same reasons and at the same time. I still don't know what the reason is, but as long as they have their reasons and act on them, I don't have to know.

Here is the other deal: how many people want to buy/sell a stock? This doesn't matter either. Only one person will always buy at the very highest price, and one person will always sell at the very lowest price. The 'a lot of people' eventually becomes one person. It has to. There is not an endless supply of people on either side of the trade. Pick your time frame (or in my case, range) and wait till the tide is ready to turn. It doesn't matter how long it takes, it doesn't matter what the TA says, it doesn't even matter what the price is. To 80% to 90% of the crowd something matters a lot, and it matters enough for them to act on it. Use that and capitalize.

Jankovsky (btw - the question at the top of this entry comes from his book) sets it up like this: every trade is a conflict in perspectives. In order for any trade to take place, there has to be two people with opposing view points - someone looking at the same information that you are and thinking the exact opposite. Who is right?

Who knows? No one knows.

The conflict will eventually be resolved, it has to be, and it will only be resolved when one of the parties capitulates.

What does capitulation look like? Why does one side give in to the other side? I have no idea. But one side will always give in - at some point they have to. The side with the most opinions always wins, and the losers will have to give in When does this happen? I don't know. I would be willing to bet that the vast majority of traders don't expect to change their minds, they entered the trade thinking they were right. They themselves probably don't really know when they will change their minds. But they will; each side of the trade will run out of opinions and people willing to act. They will come into the market and they will go out of the market. They have to.

All I have to do is wait.

There is the very real chance that I will completely fail at my trading tomorrow. I still have some skills to develop, and it might take awhile. But I see what is happening now. I may have some emotions crop up and make some mistakes, but I can't ever stop knowing the true nature of the market. I am a believer.

Here is how it works out on the charts I am using: I am using the fancy MA's as a general indicator of what is happening. If the MA's agree then the probability is high that the price will continue in that direction. (Personally I think that having the range/price based MA is more reflective of the trend - the price is moving, it doesn't matter how long it takes to get to where it is going.) Both of the MA's are color coded for a fast simple read. It doesn't matter where they are in relation to price, or if one is over the other, or anything. They are relatively long periods and are meant to show what the price is doing, especially as the range bars don't always allow a lot of information on screen (dependent on how much the stock has moved during the day). I have the charts set up for 24/7 time frames to keep the MA's smooth. The straight lines are all price based S/R; the shaded band is the fastest, the teal line is next fastest, and the red and green are longer term. This saves me the trouble of drawing lines on the chart - again because there is not a lot of info on the screen and these are fairly reliable. I primarily use these for stops. I also have the volume bars and an MA based on the volume:

So what I am looking for is volume changes, this tells me buyers/sellers are coming in and one side is running out of an opinion. The great thing about range bars is that the volume bars are also based on the range bars, so I can see at exactly what price volume is coming in. Volume is neutral. But if volume is coming in and the price isn't moving, then tides are turning.

Check out yesterday's CRM trade:

Notice the exceptionally high volume on the exit candle. The bar is only $0.15 long and look how much volume came into that price level without it budging. Probability says we have to run out of buyers. And it looks like we did.

On a time based chart this is harder to see - at least for me. That high volume bar lasted 8 minutes, covering 2 5 minute bars. Here is what it looked like:

  I can't see this as well; even though it is prettier.

The charts are no good if you don't know what is happening underneath it all.

Trade well.