The following is some reader Q&A following publication of Advanced Candestick Analysis (Part 1 of 2).
Great article and of high value, I am impressed man.
Only one thing if I have problem from time to time with is: BIAS.
My trading suffers whenever I form any BIAS whether its for gap fill, target or still worse in a given direction (including of trend).
Psychologically speaking BIAS is something hard for me to change and remains in my thinking overruling, the current right side of the chart. Undermines my objectivity while trading.
Whenever I remain BIAS free, I manage to exit on time from the market and also do not try to impose my thinking of BIAS on the market.
What I have found is to have Preference till the prices allows you to have, supported by volume (no demand or spike).
Test of ones own Preference with price and confirmed by volume OBV (I use Moving Average 3 of OBV(9) for the eminis).
For me then its easy to prefer the trend & remain with it, but when direction differs (retracement or pullback) then the price and vol action would invalidate my preference and allow me to be in neutral state of both position & mind.
As trend most often continues than not, I allow myself to be aggressive in prevailing trend direction or conservative with change in direction & of existing trend. The neutral position to observe how easy the candle bodies are formed on which side is also quite important.
I use Haikin Ashi candles on the lower time frame chart for this purpose.
Higher time frame head wick and tails with lower time frame candle pattern and vol action is quite rewarding. But during Trends this patterns are also formed when prices/direction are working through an area or popular fib levels (trend continuation) giving misleading but weak signals (vol) in opposite direction.
Thanks for your email. I’m glad you enjoyed the recent article.
Yeah, this is a tough part of trading, which is why many educators will simply say to trade without a bias at all times.
My opinion on this topic (which probably should form the basis of an article one day) is that having a bias for price movement is a good thing ONLY when we’ve developed the ability to rapidly change that bias as new and conflicting information comes to light.
The problem for many traders is exactly as you mentioned – the inability to change their bias. When we become stuck in our opinion of market direction, and then filter new information through that opinion, we either fail to see the information that should be alerting us to a change of bias, or see it but place too little importance on that information. Imposing our bias on the market, rather than adjusting our bias, we typically find ourselves on the wrong side of the price action.
The human brain is wired to form an opinion very quickly, but it finds it very hard to change that opinion.
The difficulty I have with the common advice of simply ‘trading without a bias’ is that I don’t believe it can be done. The human brain sees the patterns, and whether we like to accept it or not, I believe that we cannot avoid forming some degree of opinion about market direction.
The way forward then is to either (a) develop the skill to change this opinion, or (b) to implement objective rules which limit our trading to certain directions at certain times (trying to objectively align our trading with the higher probability direction, which is typically the prevailing trend).
I think I’ve got to the point now where I’m reasonably comfortable with approach (a), although it hasn’t been easy, and I know I have much more learning and development to go. It’s a never ending learning process. I still have many bad days, and typically they’re as a result of not being in the flow with the market bias. There’s no techniques I can guarantee which will help people get to this point. Largely it’s a skill developed over time through experience, in making LOTS of mistakes until you accept that the market can do anything at any time. The market doesn’t care about which way you think it’s going to go. When you really understand this, you will eventually get to the point where you’re able to change your bias quickly. There’s no more ego involved in defending your original opinion. It’s no longer a wrong vs right issue – how could you ever be right or wrong if there’s no way of knowing what the future will bring. It’s just a decision, which will either be supported by future action, or will need changing. So, the key to working with a bias, is the ability to risk manage the downside when you’re wrong, and realign your bias with the new information provided by the market.
It’s easier said than done though.
Denise Shull http://traderpsyches.com/blog/ has some great material on these sort of trading psych issues, in particular how your feelings and emotions can act as an indicator to alert you to an incorrect bias. In particular, I find feelings of frustration to be a great trigger, alerting me to the fact that I’m fighting the market, and my ego is once again probably trying to defend it’s previous opinion, instead of allowing it to change.
The other approach (b) is one that you appear to have mastered quite well, if I understand your method correctly. By defining market bias through objective rules of price and volume, as you have, you’ll more often than not place yourself on the right side of the market. Provided you can trade in accordance with your rules, rather than imposing any bias you feel onto the market, you’ll likely do very well.
Thanks for your email. It’s raised a really important topic. When I write part 2 of the current article this week, I’ll have to be very careful how I discuss my changing market bias. The last thing I want is beginner traders trying to trade just based on ‘feel’. They’ll typically get it wrong.
All the best,