Market Logic and the Big Picture
To Shadow Traders,
When learning a new trading approach like "The Dalton Approach" or "The Shadow Trader Approach", it is extremely easy to get lost in the details and lose site of the Big Picture. What follows is how I have tried to maintain a Big Picture perspective when it comes to overall Market Logic.
Per James Dalton, the financial and commodity markets function as a two way auctioning process which matches buyers and sellers. The markets auction higher to find sellers and auction lower to find buyers.
How you view the auction process will depend on the time frame you are trading. A day time frame trader breaks the auction process down into 5, 15, or 30 minute auctions/candles on intraday charts. A long term investor views the auction process via monthly auctions/candles on monthly charts, an intermediate term trader looks at weekly auctions/candles on weekly charts, and a short term trader looks at daily auctions/candles on daily charts.
No matter what time frame you are trading, James, Peter, and Brad, remind us that we should always be trying to answer the following questions:
1) Which way is the market trying to go? --- Attempted Market Direction
2) Is it doing a good job in its attempt to go that way? --- Market Confidence
Our read on market direction in a particular time frame, is done by comparing the high and low of current candles to prior candles. Are current candles taking out highs or lows of prior candles (trending) or are current candles being contained by prior candles (balancing)?
Our read on confidence in a particular time frame, is done by comparing the body size and tail length of current candles to prior candles. Are current candle bodies larger with smaller or no tails (higher confidence) or are current candle bodies smaller with longer tails (lower confidence)?
James maintains that markets are visual. The most visual reference levels on the monthly, weekly, and daily charts are prior highs and lows which represent resistance and support go/no go levels.
James uses a top/down approach, which he shared in his interview with Peter. He uses the monthly, weekly, and daily charts to find important resistance and support go/no go levels, and determine whether the monthly, weekly, and daily charts are trending up or down or balancing. When you combine this market information with the determination of the Ruling Reason, you get the ongoing Market and Trading Narrative that James, Peter, and Brad are always talking about and updating. Throw in Trade Location and you have the Market Context, which provides the basis for making trading decisions.
Once you know whether the market is trending up or down or balancing in your particular trading time frame, then you monitor for change. If markets are balancing, change looks like coming out of balance or a breakout. If markets are trending higher, change looks like an excess high. If markets are trending lower then change looks like an excess low. Remember, that if longer time frames are not involved, then change can also be indicated with a lack of excess (high or low).
As far as James is concerned, the two best types of trading opportunities in any time frame are coming out of balance and after an excess high or low.
Examples of important resistance and support reference levels which represent go/no go levels.
1) Prior session -- high and low
2) Overnight -- high and low
3) Prior session close -- unchanged
4) Prior session POC's (fairest price to do business)
5) Prior session afternoon rally high or pullback low
6) Balance areas -- high and low
7) Spikes -- base and top or bottom
8) Gaps -- top and bottom
9) Current session open
10) Current session half back
11) Prior session double distribution ranges
12) Prior highs and lows from trends daily, weekly, and monthly charts
13) Prior highs and lows from balances areas on daily, weekly, and monthly charts
What you will notice is that most of the references listed above are shorter term references. Part of what makes shorter term trading so complex and difficult, is the fact that there are so many references to keep track of. In fact, when you are trading intraday, you need to be aware of all the shorter term references as well as longer term references listed above.
No matter what time frame you are trading, when the market approaches a resistance or support go/no go level, market logic boils down to three scenarios:
1) If the market cannot penetrate a go/no go level, then odds are higher the market will reverse
2) If the market penetrates a go/no go level and is rejected, then odds are higher the market will reverse
3) If the market penetrates a go/no go level and is accepted then odds are higher that market will continue in the direction of breakout
Go/no go levels on longer term charts have higher odds of more significant price moves because they affect more time frames and therefore more overall participants.
1) Long term investors, intermediate term traders, short term traders, and day time frame traders react to monthly chart reference levels
2) Intermediate term traders, short term traders, and day time frame traders react to weekly chart reference levels
3)Short term traders, and day time frame traders react to daily chart reference levels
"The best trades often fly in the face of the most recent market activity, and never lose sight of the bigger picture." This is a quote from James Dalton's book Mind Over Markets.
What often makes it difficult to pull the trigger on a trade is because we are so focused on what price is doing and we lose site of the big picture. What makes market logic so powerful is it takes our focus away from price and gets us focused back on the bigger picture and how markets work.
For example, when the market is trending higher:
If the market can't take out the prior high, then the market will probably reverse and go lower.
If the market takes out the prior high and price is rejected, then the market will probably reverse and go lower.
If the market takes out the prior high and price is accepted, then the market will probably continue higher.
When you understand market logic and know the important go/no go levels for the time frame you are trading, you can anticipate the markets and plan accordingly. When you are ready with trades that are appropriate for the most likely scenarios, you are in a better position to pull the trigger when the market gets to a go/no go level and finally shows its hand.
To Shadow Traders,
When learning a new trading approach like "The Dalton Approach" or "The Shadow Trader Approach", it is extremely easy to get lost in the details and lose site of the Big Picture. What follows is how I have tried to maintain a Big Picture perspective when it comes to overall Market Logic.
Per James Dalton, the financial and commodity markets function as a two way auctioning process which matches buyers and sellers. The markets auction higher to find sellers and auction lower to find buyers.
How you view the auction process will depend on the time frame you are trading. A day time frame trader breaks the auction process down into 5, 15, or 30 minute auctions/candles on intraday charts. A long term investor views the auction process via monthly auctions/candles on monthly charts, an intermediate term trader looks at weekly auctions/candles on weekly charts, and a short term trader looks at daily auctions/candles on daily charts.
No matter what time frame you are trading, James, Peter, and Brad, remind us that we should always be trying to answer the following questions:
1) Which way is the market trying to go? --- Attempted Market Direction
2) Is it doing a good job in its attempt to go that way? --- Market Confidence
Our read on market direction in a particular time frame, is done by comparing the high and low of current candles to prior candles. Are current candles taking out highs or lows of prior candles (trending) or are current candles being contained by prior candles (balancing)?
Our read on confidence in a particular time frame, is done by comparing the body size and tail length of current candles to prior candles. Are current candle bodies larger with smaller or no tails (higher confidence) or are current candle bodies smaller with longer tails (lower confidence)?
James maintains that markets are visual. The most visual reference levels on the monthly, weekly, and daily charts are prior highs and lows which represent resistance and support go/no go levels.
James uses a top/down approach, which he shared in his interview with Peter. He uses the monthly, weekly, and daily charts to find important resistance and support go/no go levels, and determine whether the monthly, weekly, and daily charts are trending up or down or balancing. When you combine this market information with the determination of the Ruling Reason, you get the ongoing Market and Trading Narrative that James, Peter, and Brad are always talking about and updating. Throw in Trade Location and you have the Market Context, which provides the basis for making trading decisions.
Once you know whether the market is trending up or down or balancing in your particular trading time frame, then you monitor for change. If markets are balancing, change looks like coming out of balance or a breakout. If markets are trending higher, change looks like an excess high. If markets are trending lower then change looks like an excess low. Remember, that if longer time frames are not involved, then change can also be indicated with a lack of excess (high or low).
As far as James is concerned, the two best types of trading opportunities in any time frame are coming out of balance and after an excess high or low.
Examples of important resistance and support reference levels which represent go/no go levels.
1) Prior session -- high and low
2) Overnight -- high and low
3) Prior session close -- unchanged
4) Prior session POC's (fairest price to do business)
5) Prior session afternoon rally high or pullback low
6) Balance areas -- high and low
7) Spikes -- base and top or bottom
8) Gaps -- top and bottom
9) Current session open
10) Current session half back
11) Prior session double distribution ranges
12) Prior highs and lows from trends daily, weekly, and monthly charts
13) Prior highs and lows from balances areas on daily, weekly, and monthly charts
What you will notice is that most of the references listed above are shorter term references. Part of what makes shorter term trading so complex and difficult, is the fact that there are so many references to keep track of. In fact, when you are trading intraday, you need to be aware of all the shorter term references as well as longer term references listed above.
No matter what time frame you are trading, when the market approaches a resistance or support go/no go level, market logic boils down to three scenarios:
1) If the market cannot penetrate a go/no go level, then odds are higher the market will reverse
2) If the market penetrates a go/no go level and is rejected, then odds are higher the market will reverse
3) If the market penetrates a go/no go level and is accepted then odds are higher that market will continue in the direction of breakout
Go/no go levels on longer term charts have higher odds of more significant price moves because they affect more time frames and therefore more overall participants.
1) Long term investors, intermediate term traders, short term traders, and day time frame traders react to monthly chart reference levels
2) Intermediate term traders, short term traders, and day time frame traders react to weekly chart reference levels
3)Short term traders, and day time frame traders react to daily chart reference levels
"The best trades often fly in the face of the most recent market activity, and never lose sight of the bigger picture." This is a quote from James Dalton's book Mind Over Markets.
What often makes it difficult to pull the trigger on a trade is because we are so focused on what price is doing and we lose site of the big picture. What makes market logic so powerful is it takes our focus away from price and gets us focused back on the bigger picture and how markets work.
For example, when the market is trending higher:
If the market can't take out the prior high, then the market will probably reverse and go lower.
If the market takes out the prior high and price is rejected, then the market will probably reverse and go lower.
If the market takes out the prior high and price is accepted, then the market will probably continue higher.
When you understand market logic and know the important go/no go levels for the time frame you are trading, you can anticipate the markets and plan accordingly. When you are ready with trades that are appropriate for the most likely scenarios, you are in a better position to pull the trigger when the market gets to a go/no go level and finally shows its hand.
