Monthly Archives: September 2013

Don’t Confuse Knowledge with Knowing

“You can know the name of a bird in all the languages of the world, but when you’re finished, you’ll know absolutely nothing whatever about the bird… So let’s look at the bird and see what it’s doing – that’s what counts. I learned very early the difference between knowing the name of something and knowing something.”

… Richard Feynman (1918 – 1988)

And that quote just beautifully sums up the difference between me and most of the “pattern” traders.

You may be able to recognise and name a pattern, but do you really know what is happening within the market? The pattern is just the footprints of the past. The future will depend on the way that trader sentiment and decision making drives future orderflow.

Are you really understanding price movement?

Or are you just assigning names to it? And then reacting in mechanical fashion to the name?

An excerpt from theYTC Price Action Trader:

A better way to trade is to understand the CAUSE of price movement.

Understanding CAUSE allows you to identify potential moves as or before they occur.

Understanding CAUSE allows you to enter a price move earlier.

Understanding CAUSE allows you to understand why a price move is occurring.

Understanding CAUSE allows you to assess when a move is likely to continue and when it’s likely to end.

Understanding EFFECT only, means that all you can do is react to what has already occurred, usually well after it has already occurred, and then simply hope that sufficient profit potential is still available in the move.

I’m asking you to take three steps!

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Candlestick Pattern Q&A

Email Question:

Hey Lance,

Thanks, I believe some of your knowledge held in trading is very wealthy to your students and viewers. I have a few questions on Candlestick Reversals please.

1. Some candle patterns like Hanging Man and Hammer are same in body form but different in which trend they appear, how should we recognize them a bit more, is a different colour to each reversal necessary?

2. Do Indicators play a key role with these phenomenal reversal candlesticks say like e.g. VOLUME, to tell you how much pressure that particular candle has given off for extra assurance along with where the next bar will close afterwards for traders to take action?

3. As Volatility is very important to traders from all sides, does it matter at which time or part of the day a Candle Reversal may appear and how valid is it before a news release?

4. You have not mentioned this in your videos and with due respect, can we say Piercing Patterns are both Bearish and Bullish Reversals with slight candle changes and appearing in a different trend?

Response:

Thanks for your email and your great feedback. I’m glad you’ve found value in my candlestick video series.

Before answering your questions, please let me address one point that you may or may not be aware of. There is a common assumption in the many emails I receive that I trade candlestick reversal patterns as an integral part of my trading strategy. This is not true at all. I teach candlestick reversal patterns (and similar price bar reversal patterns) simply because they are a useful stepping stone for people in learning to perceive the shifting sentiment within price movement. Candlestick patterns allow us to examine a small sequence of price movement (1-3 candles) and discuss how the sentiment shifts from bullish to bearish, or vice versa. If you desire to be a professional trader though, I highly encourage you to move beyond this information, to learn to see shifting sentiment within ALL price movement, not just those short sequences that fit a textbook candlestick pattern definition.

You will have mastered the lesson of candlestick patterns, only when you no longer need the candlestick patterns… and instead have learnt to read shifts in sentiment within all price movement.

Some articles that touch on this, from the top of my head: (there may be more if you search through my article archives)

 

See also the YTC Newsletter signup bonus ebook, “The LOST Files – 150 Lost YTC Blog Posts” for the following post: “Breaking the Pattern-Mindset”

And of course the concept is also a feature of the YTC Price Action Trader, so if you want to explore it further then check it out here: http://www.ytcpriceactiontrader.com/

Now, having said that, please let me address your questions:

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Staying Ahead of Price

Never let price action take you somewhere your brain didn't get to five minutes earlier.

Keep your awareness ahead of price with a clear idea of expectations and a plan of action for whatever eventuates.

In conducting your analysis, think several candles ahead.

  • Where is price going?
  • How is it likely to act? Why?
  • Will that provide trade opportunity? What will it look like if my analysis is correct?
  • What will price look like if I'm wrong? What else could it do?

This is not prediction. This is simply forward planning… developing "IF-THEN" scenarios based upon your assessment of the likely future price action.

If your "read" of price movement proves correct, you will have trade opportunity. If it proves incorrect, you stand aside and reassess.

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Taking Profits – Adjust to Suit the Environment

Reader Question:

I've got a question related to taking profits. I'm having some great success with entries (finally) but am always torn between taking profit at 1:1, 2:1 (which I've found to be more common lately) or holding out until the next S&R.

I know you take 1 profit off the table at 1:1, move your stop to B/E & hold out for larger gains. From your experience was there any other methodology or have you found yours to be the most profitable?

I'm trying to read the price action after entry and it doesn't give too many clues, other than in hindsight.

Response:

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Bar-by-Bar Analysis via One Simple Question

There are various analysis tasks that must be completed upon first arriving at our charting platform each day – examination of higher timeframes to create a support and resistance framework; examination of market structure in order to identify the potential environment (trending or ranging); and examination of any pre-session data that may be significant to our upcoming session (trend and bias).

But analysis does not end there.

Ongoing analysis requires a bar by bar reassessment of our previous analysis, as more price action unfolds on the right hand side of our chart.

New data will arrive, one candle at a time. Each new candle being a source of information; most of which will offer nothing new or relevant; but some of which will alter our analysis, either strengthening or weakening our assessment of market sentiment and future price direction.

Every new candle is potentially significant.

Failing to monitor price with each new candle means we will be forced to be reactionary – surprised by price action developments and chasing setups and entries after they've become obvious to the crowd.

Ongoing monitoring ensures we maintain focus and maintain situational awareness – staying ahead of the current price action – assessing where it's likely to travel, how that will impact upon decision making of other traders, and where that will create trade opportunity.

Ongoing price action analysis can be conducted on all timeframes, however our main interest will be the trading timeframe. We question EVERY candle to determine what it means with regards to the shift in sentiment between the bulls and the bears; and whether or not it changes our expectations for the future.

Bar by bar analysis as I do it is a four-step process, and is outlined in the YTC Price Action Trader.

But if you want a basic technique that allows you to somewhat achieve these aims, the following single question can help.

After each candle or bar is complete, ask the following:

  • Will a break above this bar's high or low be significant in any way?

What do I mean by significant?

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