The Glass Bead Game
To Shadow Traders,
The Glass Bead Game was written by Herman Hesse and was first published in 1943. It was Herman Hesse's last literary work and earned him the Nobel Prize in Literature in 1946.
The story takes place in the future and is about the journey and rise of the main character to "Magister Ludi" (Latin for "Master of the Game"). To play the game well required years of hard study of music, mathematics, and cultural history. The game required a synthesis of everything the players had learned in the arts and sciences. The game proceeded by players making deep connections between seemingly unrelated topics.
The process for becoming a "Magister Ludi" in the The Glass Bead Game (years of hard study, synthesis of everything learned, and making connections between seemingly unrelated topics) is applicable to many worthwhile endeavors in life including the mastery of the Trading Game.
James Dalton is the first to admit that trading is indeed a game. When it comes to short term and day trading, there is no other place where there seem to be more games played than at Market Go/No Go Reference Levels. It is the trade location where traders have the most opportunity as well as the most risk, when it comes to being on the right side of a trade.
Why is price action at the Market Go/No Go Reference Levels so unpredictable?
It is the battleground where market direction is determined. The reason price action is so unpredictable is because there are so many opposing market factors that are interacting simultaneously.
To Review:
Buyers and sellers in the markets are matched up via a two way auction process.
The hallmarks of the two-way auction process are:
1) Markets must auction up to find sellers and auction down to find buyers.
2) Markets must auction too high to know if prices are perceived to be above value and must auction too low to know if prices are perceived to be below value.
Market logic at a Go/No Go Reference Level comes down to three scenarios:
1) Market looks beyond Go/No Go Reference Level and is accepted - Breakout Trade Setup
2) Market looks beyond Go/No Go Reference Level and is rejected - Reversion to Mean Trade Setup
3) Market is rejected at Go/No Go Reference Level - Reversion to Mean Trade Setup
Since market direction is so unpredictable at the Market Go/No Go Levels, the trader needs to be prepared:
1) By knowing the overall market context and the odds of the market going higher or lower
2) With trades for each of the three scenarios
3) To pull the trigger when market patterns indicate trade entry
4) To monitor for continuation once in trade
Some of the factors that impact the odds of the direction and size of market moves at the Go/No Go Levels are as follows:
1) Stops: Number of profit, protective, and entry stops layered in front of and behind the Go/No Go Level which are against versus with the attempted move.
2) Time Frame of References: The longer the time frame of the reference, the more participants and stops that will be involved, and the larger the possible move.
3) Time Frame Participants: If longer term timeframe participants are in control, then there are higher odds of acceptance of a breakout. If day timeframe participants are in control, then there are lower odds of acceptance of an attempted breakout.
4) Overall Market Development: If the move is with the longer term trends, then there are higher odds of acceptance. If the move is against the longer term trends, then there are lower odds of acceptance.
5) Day Type and Confidence: If the day is a higher confidence trend day, then there are higher odds of acceptance of a breakout. If the day is a lower confidence rotational day, then there are lower odds of acceptance of an attempted breakout.
6) Returning to Important Go/No Go Reference: If it is the first time returning to an important Go/No Go Level, then there are higher odds of a bounce. The more times a Go/No Go Reference is tested the higher the odds of acceptance of a breakout.
7) First look beyond a Go/No Go level: The first look beyond a Go/No Go Level has lower odds of acceptance due to stops being tripped. The second time beyond has higher odds of acceptance since many of the stops will have been cleared. The question then is has the market been able to work its way to the entry level stops in the direction of the break out.
8) Volume & Internals: The higher the volume and stronger the internals, the higher the odds of acceptance of a breakout.
9) Tempo: If the tempo is slowing going into a Go/No Go Level, then there are higher odds of a bounce. If the tempo is too fast going into a Go/No Go Level, then there are higher odds of breakout failure.
The list above is not meant to be a complete list. For more complete lists see the 3 prior posts related to Market and Profile Patterns that affect odds for today's trading session and tomorrow's trading session.
The fact that market logic boils down to three scenarios makes the situation seem simplistic, however it is anything but simple. At any Go/No Go Level, the success of a move above or below is always due to a combination of many of the market factors listed above rather than any one market factor. So from a trading standpoint it is best to wait for the start of the move and see whether it is being accepted. According to James it is usually better to trade a little later rather than a little early because it allows you to base your trade decision on more market information. The exception being when the markets are displaying high confidence, when you should trade sooner rather than later.
This is the point where James invariably gets the question "How do I know if a move is being accepted?" James answers by talking about the concept of value building in the direction of the move. Which finally elicits the question "Where do I get in and where do I get out?" And James as a "Magister Ludi" responds with "I don't know" and follows up with "Trading is an art not a science" and "There are no exact answers in trading". Which all mean that at a certain point each trader needs to find their own answers through actual experience trading the markets.
Epilogue:
The "Magister Ludi" is satisfied because he knows that he has helped many become better traders. He also knows that only a few will put in the years of market study, will be smart enough to synthesize all they have learned about trading to the point where market logic and intuition work in harmony, will be able to make the deep connections between the seemingly unrelated pieces of market information to become one with the markets, and therefore be able to anticipate the markets. The select few who reach the status of "Magister Ludi" will pass on their knowledge of trading as well, and yes everyone will live happily ever after.
The End
To Shadow Traders,
The Glass Bead Game was written by Herman Hesse and was first published in 1943. It was Herman Hesse's last literary work and earned him the Nobel Prize in Literature in 1946.
The story takes place in the future and is about the journey and rise of the main character to "Magister Ludi" (Latin for "Master of the Game"). To play the game well required years of hard study of music, mathematics, and cultural history. The game required a synthesis of everything the players had learned in the arts and sciences. The game proceeded by players making deep connections between seemingly unrelated topics.
The process for becoming a "Magister Ludi" in the The Glass Bead Game (years of hard study, synthesis of everything learned, and making connections between seemingly unrelated topics) is applicable to many worthwhile endeavors in life including the mastery of the Trading Game.
James Dalton is the first to admit that trading is indeed a game. When it comes to short term and day trading, there is no other place where there seem to be more games played than at Market Go/No Go Reference Levels. It is the trade location where traders have the most opportunity as well as the most risk, when it comes to being on the right side of a trade.
Why is price action at the Market Go/No Go Reference Levels so unpredictable?
It is the battleground where market direction is determined. The reason price action is so unpredictable is because there are so many opposing market factors that are interacting simultaneously.
To Review:
Buyers and sellers in the markets are matched up via a two way auction process.
The hallmarks of the two-way auction process are:
1) Markets must auction up to find sellers and auction down to find buyers.
2) Markets must auction too high to know if prices are perceived to be above value and must auction too low to know if prices are perceived to be below value.
Market logic at a Go/No Go Reference Level comes down to three scenarios:
1) Market looks beyond Go/No Go Reference Level and is accepted - Breakout Trade Setup
2) Market looks beyond Go/No Go Reference Level and is rejected - Reversion to Mean Trade Setup
3) Market is rejected at Go/No Go Reference Level - Reversion to Mean Trade Setup
Since market direction is so unpredictable at the Market Go/No Go Levels, the trader needs to be prepared:
1) By knowing the overall market context and the odds of the market going higher or lower
2) With trades for each of the three scenarios
3) To pull the trigger when market patterns indicate trade entry
4) To monitor for continuation once in trade
Some of the factors that impact the odds of the direction and size of market moves at the Go/No Go Levels are as follows:
1) Stops: Number of profit, protective, and entry stops layered in front of and behind the Go/No Go Level which are against versus with the attempted move.
2) Time Frame of References: The longer the time frame of the reference, the more participants and stops that will be involved, and the larger the possible move.
3) Time Frame Participants: If longer term timeframe participants are in control, then there are higher odds of acceptance of a breakout. If day timeframe participants are in control, then there are lower odds of acceptance of an attempted breakout.
4) Overall Market Development: If the move is with the longer term trends, then there are higher odds of acceptance. If the move is against the longer term trends, then there are lower odds of acceptance.
5) Day Type and Confidence: If the day is a higher confidence trend day, then there are higher odds of acceptance of a breakout. If the day is a lower confidence rotational day, then there are lower odds of acceptance of an attempted breakout.
6) Returning to Important Go/No Go Reference: If it is the first time returning to an important Go/No Go Level, then there are higher odds of a bounce. The more times a Go/No Go Reference is tested the higher the odds of acceptance of a breakout.
7) First look beyond a Go/No Go level: The first look beyond a Go/No Go Level has lower odds of acceptance due to stops being tripped. The second time beyond has higher odds of acceptance since many of the stops will have been cleared. The question then is has the market been able to work its way to the entry level stops in the direction of the break out.
8) Volume & Internals: The higher the volume and stronger the internals, the higher the odds of acceptance of a breakout.
9) Tempo: If the tempo is slowing going into a Go/No Go Level, then there are higher odds of a bounce. If the tempo is too fast going into a Go/No Go Level, then there are higher odds of breakout failure.
The list above is not meant to be a complete list. For more complete lists see the 3 prior posts related to Market and Profile Patterns that affect odds for today's trading session and tomorrow's trading session.
The fact that market logic boils down to three scenarios makes the situation seem simplistic, however it is anything but simple. At any Go/No Go Level, the success of a move above or below is always due to a combination of many of the market factors listed above rather than any one market factor. So from a trading standpoint it is best to wait for the start of the move and see whether it is being accepted. According to James it is usually better to trade a little later rather than a little early because it allows you to base your trade decision on more market information. The exception being when the markets are displaying high confidence, when you should trade sooner rather than later.
This is the point where James invariably gets the question "How do I know if a move is being accepted?" James answers by talking about the concept of value building in the direction of the move. Which finally elicits the question "Where do I get in and where do I get out?" And James as a "Magister Ludi" responds with "I don't know" and follows up with "Trading is an art not a science" and "There are no exact answers in trading". Which all mean that at a certain point each trader needs to find their own answers through actual experience trading the markets.
Epilogue:
The "Magister Ludi" is satisfied because he knows that he has helped many become better traders. He also knows that only a few will put in the years of market study, will be smart enough to synthesize all they have learned about trading to the point where market logic and intuition work in harmony, will be able to make the deep connections between the seemingly unrelated pieces of market information to become one with the markets, and therefore be able to anticipate the markets. The select few who reach the status of "Magister Ludi" will pass on their knowledge of trading as well, and yes everyone will live happily ever after.
The End
