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Price and Volume: Practicum

. . . the experience of the past few years has emphasized the value ofdisregarding all considerations except those which relate to pricemovement, volume and time. If one is endeavoring to realize profits from

the principal swings in prices of stocks, it is my opinion that he shoulddisregard fundamental as well as corporate statistics relating to thestocks in which he is trading, stick closely to a study of the action of themarket and become deaf and blind to everything else.

-- Richard D. Wyckoff

This effort is centered around the Law of Supply and Demand and how it's manifested inprice and volume. It's not about tactics per se. Understanding the law comes first (thoughone can, of course, trade without having the slightest idea what supply and demand are).Once that law is understood, there are many, many sets of tactics that can be employed toprofit from what one has learned, not only with regard to entry and exit, but also withregard to trade management.

The charts used for illustration employ a 5m bar interval. However, the principles of supplyand demand, support and resistance, and trend apply regardless of the bar interval,whether 5m, 60m, daily, weekly, etc. I should add, however, that, even though thesecharts use 5m intervals, it's important to consult at least one chart with a larger barinterval, at least 60m in this case, if not daily or weekly, in order to get some idea of thegeneral or "macro" trend. It's also important to consult at least one chart with a shorter barinterval, e.g., 1m or 2m or even a tick chart, in order to see what's going on within eachcandle or bar, particularly the long ones (if using a daily chart, one would want to bracketit with, for example, a weekly chart on the one hand and maybe a 15m or 30m chart on theother).

Before opening our booklets, however, it becomes necessary to address some basicprinciples (laws, such as the Law of Supply and Demand are absolute;principles are not).Otherwise, it is unlikely that the trader will know what he's looking at. The most importantof these principles has to do with support and resistance.

But first a housekeeping note. It is very likely that after finishing all this, you will want tofind something in particular without having to scroll back and forth, back and forth. If andwhen that comes to pass, press the Ctrl and F keys on your keyboard to bring up the Findbox. Type in whatever word you want, such as support, and you'll be transported to allinstances of that word in this document. Ain't technology wonderful?

Now.

Support (S) and resistance (R) provide those zones at which or in which one expects to seesome action. To trade without regard to support and resistance can mean a lot of littlestopouts and a lot of breakevens, called amongst the more lurid traders a "slow bleed".

Essentially, support and resistance levels can be found at those levels or zones in which arelatively large number of trades took place. These trades need not have occurred on onlyone occasion. In a base, for example, when "big money" is accumulating shares, thesetrades take place over an extended period of time over a narrow range of prices. Therefore,all told, many trades have taken place even though volume has been low.

Many trades can also occur in a broader range over a period of time which may be shorteror longer than an accumulative base. For example, if a given level is hit repeatedly andprice is "supported" there by professional demand, that level becomes strong support, eventhough the number of shares traded during any one occurrence are not impressive.

Ditto all of this for resistance. There will be a level at which shares or contracts or whateverare repeatedly sold, though the reasons for the sales may be difficult if not impossible todetermine. These sales can take place in a "zone of distribution" (see the Demand/Supply

pdf). Or they can take place over time when a particular level is repeatedly tested.

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Support and resistance, then, can be found in a swing point or the top or bottom of areaction (see Trendlines), but it is highly unlikely that the support or resistance foundthere will be important as it doesn't represent enough previous trades. In other words,there just aren't enough traders who care about it to make it important.

For the same reason, whatever support and resistance seem to be found with indicators ortrendlines are most likely coincidental since these other lines don't represent previoustrading activity. In fact, they're constantly moving.

The term "law of reciprocity" or "principle of reciprocity" is sometimes applied to the

tendency of support to become resistance when it's penetrated, or vice-versa. However,"law" and "principle" are a bit high-toned to apply to this concept. There is nothingabsolute about S/R. In fact, S/R can be quite soft. For example, if a given level is testedrepeatedly as support, those holders who bought there may eventually begin to becomeconcerned over these tests and over the fact that whatever they bought isn't goinganywhere. Some of them may decide to sell some of all of whatever they bought if andwhen another test occurs. In this way, support fails.

Even "failure", however, may not be as important as first thought. S/R isn't, and need notbe, rigid. In fact, it is quite flexible. A level or line can be penetrated to what seems to bean intolerable degree, but if price rebounds to that level or line and finds S/R there yetagain, then that level or line can become even "stronger" (more important) than it wasbefore, which is why it's better to think in terms of S/R "zones" than of specific prices.

S/R may, in fact, be too soft for some traders to fool with. However, if one understands

that correctly-drawn S/R lines represent levels or zones in which a large number of tradestook place, and that one can expect important action to take place at important S/R("important" defined earlier), he can then avoid wasting his time on relatively trivial tradesand prepare himself to take advantage of more potentially profitable opportunities. Asalways, it's best to put a face on principles so that one has a deeper understanding ofwhat's going on (i.e., what traders are thinking) rather than just busy himself with onlylines and calculations.

Below is a monthly Naz chart with S/R zones and levels drawn in.

The first step for a trader is to determine the current trend of the market.

Thesecond step is to determine one's place in the current trend.

The third step is to determine the proper timing of one's entry into whatever it ishe's trading.

-- Richard Wyckoff

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Note at "1" that price, for whatever reason, who cares, bases for at least six months. That'sa lot of trades. Thus, when price finally begins to move, then corrects in July '96, it finds"support" at that base. Why? Because a hell of a lot of people are holding shares at thoseprices and aren't willing to be rattled out of their shares. At least not yet . . .

One then winds up with a zone between 1 and 2 in which a lot of trades have taken place.In this timeframe, with this bar interval, that becomes potential support that may becomeimportant on the way down.

Between 3 and 4, there's another base, this from six to seven months. When price movesout of it, it doesn't come back just to 4, but all the way back to 3 in August '98. This willmake the area between 3 and 5 a formidable block on the way back down, particularlysince 5 had its own 4+ month base.

6 and 7 represent another zone, though not as long as the others. However, it's longenough to retard the decline in December '00 and January '01. Note also the volume ("A")that accompanies this temporary halt.

As for the rest of it, I probably don't need to go into detail as to why prices have behavedthe way they have. There is an assumption, of course, that "holds" do expire, and thattrades that were made years ago are perhaps irrelevant. However, as can be seen, thesezones continue to affect current trading. One can, for example, formulate a number ofhypotheses regarding why we are levelling off at this particular point.

Next is a weekly chart of the Naz, easier to understand within the context of this monthly

chart.

Here now it may be easier to see why, in the context of the monthly chart, the descent

began to slow at 1560 and 1192 (noted also on the monthly chart, though the numbersthemselves are not as important as the zones in which they are found) in preparation for abottom. The increase in volume can also be seen on the weekly, whereas it's buried on themonthly.

But, again, as briefly as possible, we reach a bottom, make a higher low (which occursbecause of demand), then draw a tentative demand line. The ascent accelerates, rests atprevious R at 1500, then takes off again, pausing at fairly predictable levels.

The "supply" line, dotted, is drawn parallel to the demand line. It has a number of usesapart from helping the trader to predict those levels or points at which he can expect tofind supply. For one thing, if price fails to reach it, there is an indication that the dynamic ischanging (ditto if price penetrates it). In Oct '03, in fact, price does regularly fail to reachthis line, and one can rotate it downward to reflect the change in momentum, the first clueof a potential top.

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All of which is at least in part to explain why 2000 is such an important zone and to helpunderstand the current decline. The levels at which buyers are encountering supply havebeen falling. However, they haven't been trying too hard, either, as evidenced by theslackening of volume. Yes, we could bounce here and, yes, we could make a new high.However, momentum has slowed, the uptrendline has been broken, and there is a hell of alot to work through. If nothing else, this ought to serve to temper one's enthusiasm andapproach the daily charts more objectively. In reference to Wyckoff's three steps offeredabove, the first is that the trend is sideways, the second is that we are in the big middle ofit, and the proper timing of an entry -- the third step -- may be trumped by the wisdom ofstanding aside until these issues resolve themselves. In other words, the proper timing of

an entry may be not to make one at all.

By "supply line", do you mean volume, and "demand line", price?

Sorry, no.

In an uptrend, the "demand line" can serve as a trendline, i.e., that line at which one mightexpect, as a result of previous price action, demand -- or buying pressure -- to show itself.The demand line, however, is not always a trendline, as explained below.

The "supply line" is drawn above the demand line, across those points at which supply, orselling pressure, again as a result of previous price action, can be expected to appear. Thisline is often parallel to the demand line forming what looks like a channel. But before onethinks "oh, yeah, channel", the "channel" itself is largely irrelevant. What matters is the

supply line and what it represents, again, selling pressure. If and when it no longerrepresents those points or levels at which selling pressure manifests itself, then it no longerhas any use. If possible, a new one must be drawn. If, for example, selling pressure beginsentering the market at earlier stages, the supply line can be drawn at an acute angle,suggesting a loss of momentum.

The demand and supply lines differ from trendlines in that they can be horizontal, e.g.,marking the boundaries of a trading range. Using these terms rather than "support" and"resistance" helps one to be clear about just what it is he's looking at and for and referringto with regard to these trading ranges.

In a downtrend, the "supply line" can serve as a trendline, just as the demand line can inan uptrend. The demand line, then, is drawn below the supply line and represents thosepoints or levels at which one can expect to see buying appear and is generally parallel tothe supply line. Everything else said earlier applies here. Just change up to down.

All of this may seem nit-pickey, but "support", "resistance", "demand line", "supply line","trend", and "trendline" all have specific meanings, though they may also overlap and evencoincide. What this specificity does for the trader is help him to think differently about whathe's seeing, particularly within the context of price and volume behavior. For example, onedoesn't expect price to bounce at $ because there's a line there, but because demand hasrepeatedly appeared there. If the quality or nature of that demand changes, the line maybe irrelevant. Many traders, however, have a lot of trouble letting go of that line, and thatleads to problems.

A Note About Color, and an apology:you'll note that up lines and down lines are notalways consistent when it comes to color. This is largely because all this began as a casualexercise, and when it was done, I couldn't face doing all of them over to make themconsistent. So don't get too attached to the idea of "blue" being "up" or "down". The line'sthe thing, not the color of it.

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We're used to the idea of strong volume being "good" if it's on the upside and "bad" if it'son the downside (assuming we're long). But volume in and of itself has no good or badconnotations. All volume signifies is number of shares (or contracts or whatever) traded.Only by relating the volume to the bar does the volume carry any implications.

Here, for example, there's a nice, strong volume bar at 10:05, and if we were using"color-coded" volume, it would be green. But all is not well in VolumeVille. Notice that theprice bar closes well below the high, signifying a shift in balance between buying pressureand selling pressure, and the news ain't good for the buyers. Hence, the volume bar is not"good"; it just signifies a lot of activity. You have to look at the price bar to figure out thenature of that activity.

Similarly, that long, strong volume bar at 11:00 would seem to give heart to sellers. Butthat much activity often points to a "selling climax" (SC), which results in eitherconsolidation or reversal (the same is true for the "buying climax", BC; for furtherinformation on buying and selling climaxes, see the Demand/Supply pdf). Note that afterthe SC, trading activity -- as recorded by the volume bar -- trails off rapidly anddramatically, and so does the downward progress of price. It waffles around for a halfhour, but then buying pressure gains the upper hand, and trading activity increases. For awhile. Shortly the activity trails off, but the selling is pretty much done, so price can drifthigher without a lot of "volume".

You're going to have to look at a lot of charts before this becomes clear to you, much lesssecond nature. But if you remember the first time you looked at a chart and had no ideawhat all those lines meant, you'll have some idea of what it means to learn a particular wayof seeing, or of perceiving reality, much less of creating and developing a concept of it.

Incidentally, PD means Previous Day, so PDC/H/L means Previous Day's Close/High/Low.

OH/L means Opening High/Low. NH/L means New High/Low. FT means Follow-Through.BO means BreakOut. TL means TrendLine. (You already know what S/Rmean.)

Figuratively speaking, . . . the small trader should imagine himself as a hitch-hiker in themarket. For the ordinary hitch-hiker, someone else supplies the car, chauffeur, oil and gas.When he thinks the car is about to go in his direction, he jumps aboard and rides as far ashe thinks the car will go. When he notices the machine has been stopped by a red light, oris about to turn a corner and go in some other direction, or that the car is running out ofgas, or the brakes failing to work properly, he steps off and figures he has secured about aslong a ride as he may expect. All he has supplied in this transaction is a modest commissionand whatever brains were necessary to observe and recognize the opportunity when to geton and off.

--Richard Wyckoff

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The PDH is, of course, the Previous Day's High, which you can see for yourself by scrollingup to the previous chart. Price finds R there, fails to make a New High, volume trails offindicating a lack of interest in the whole thing, each attempt at a high is lower than thelast, it doesn't look good for the buyers.

Finally, Wham! and we have a potential SC* already, forming a hammer at Support fromthe Previous Day (the Opening High, tested at 14:00). And the downward momentum isretarded, though not ended. Price takes an hour to decline just a few points. Sellers aren'tdesperate to unload, but buyers aren't exactly on fire, either. So though we end the daysix points lower, it's all mostly a sideways drift.

So how was one to profit from all this? Focus on the balance between buying and selling

pressures. Note first the successively lower highs mentioned earlier. Note also that thebars get shorter and shorter as the buy/sell balance reaches equilibrium during the first 2+hours. Then, at 11:55, it all lets go, to the downside, as if price had eaten a bad taco.

Where to sell? Up to you. Price continues to make lower swing highs until late afternoon.

*The "climax bar", in and of itself, in isolation, may be only a warning of a change in momentum(a "yellow light"). Which is where S/R come in. Hitting S/R is like running into the park and scatteringthe pigeons. Do traders scramble or don't they? What looks like a climax bar in real time may just be

an "indicator" of an overbought or oversold condi tion.

(And by "overbought" and "oversold", I don't mean indicator settings. I'm referring to the originalmeaning, i.e., buying or sell ing exhaustion, at which point there are no more buyers or sellers,

whichever the case may be.)

But unless that bar occurs at some important level, such as S/R of some sort, it's less likely to ignite the

greed or fear that is required for a decent bounce, not to mention a sustained reversal.

Therefore, assuming you've found all your S/R levels before the open, look to what you think is a climaxbar as a clue. Monitor the buying and selling pressure, i.e., the pace of trades, or, if nothing else, thepace of shifts between the bid and the ask, even if price just sits there. Collect the evidence you need todetermine whether this is just a pause, a continuation of the previous move, or a reversal. What lookslike a climax may just be a preliminary "climax", or brake (I realize that, li terally, a climax is either a

climax or it isn't, but you get my drift).

And don't hurry. The market's here, open for business every day, and for every missed opportunity,there are several waiting in the wings, and a lesson learned.

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How are we to know in advance why and to what extent someone else is prompted to buyor sell? We cannot know; it is impossible for us to foretell what actuates all of those whoseorders are poured into the vast intake of the Stock Exchange machinery during the day'ssession.

But if we study the action of prices; the responses; the speed of the ticker, indicatingurgency or the contrary; the intensity of the buying or selling, as indicated by the volumes;and the intervals when the volume is heavy or light -- all these in relation to each other --then we gain insight or the design and the purposes of those who are dominant in themarket situation for the time being.

All the varying phases of stock market technique may thus be studied and interpreted fromthe buying and selling waves as they appear on the tape. From these we form a conclusionas to the balance of the probabilities. On this we base our commitments.

-- Richard D. Wyckoff

We're not into "hinges" yet, but notice how the buy/sell balance begins to see-saw towardequilibrium from around 11:20 to 13:00, the bars getting shorter and shorter, workingtheir way toward 1462 mas o menos? The longer this buildup takes, IFthere's very littletrading activity, the more energy it stores. The more energy it stores, the more energy itreleases (if a lot of trading activity occurs during this balancing act, then a lot of thatenergy is dissipated, meaning that it's not available for thepush). This is only 90m long.Even so, trading activity has been extremely light. Therefore, there's enough energy therefor maybe 8 or 10 points if you know what to look for and recognize it in real time, but

that's about it. It's not 20 points. It's not 30 points. But 8 points is 8 points. Don't begreedy.

Trading with confidence has to do with having a method which you have proved yourself,and which you know will win over time if you follow it consistently. That means being ableto recognize the conditions which allow you to trade, and only trading when they are all

present. This is comparatively easy with hindsight: when we're actually there, we can seewhen all the pieces fit. But beforehand, we don't know that all the pieces are going to fit: sowe trade because we're impatient and fear that this maybe is the best we'll get. Well,somehow we just have to get to be patient. Let's face it, it calls for great discipline.

--John Percival

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Wyckoff considers TL (TrendLine) breaks to be warnings more than anything else. It's notthe break; it's what happens at the break. Does the price just slide through, or does allhell break loose?

Many people consider a TL break to be a sign from God, a harbinger of impendingcalamity. However, if price reverses back through the TL, that recovery reinforces thestrength of the trend, which is one more reason why TLs shouldn't be considered as sourcesof S/R. They have enough to do just pointing the way.

In this case, after price tests the Opening Low and begins an uptrend, the first TL is brokenat 11:35, but only marginally, and the direction of price is still up. The angle is lessmuscular, but the direction is the same. Only when price reaches the swing high made by

the first effort (to 1474) does it stall, then consolidate. If this TL were extended, it wouldnot be broken decisively until after 15:00.

Exceeding the Last Swing Low (or High) is a similar issue. You have to be alert to morethan just crossing this or that line. Wyckoff would more likely be out at a lower high (suchas around 14:30) since he was so good at detecting trouble in advance. I doubt that he'dwait for a break of the last swing low from around 13:55 (though we haven't had coffeelately or anything). He was real good at standing aside if the picture was the least bitmuddy.

Therefore, it's extremely important for a trader to know exactly what he's going to do,ahead of time, when faced with each of these scenarios. Is he going to exit at a specificprice target? Is he going to exit at a TL break? Is he going to exit on a lower high? A dropbelow the last swing low? If he wants to be discretionary, that's fine. But he better have avery clear idea about just what it is he's going to be discretionary about.

(If you have a burning curiosity about trendlines, you may be interested in the Trendlinesfile; for any other sort of burning, you'll want to consult your physician . . . )

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The concept of "air" (or the climax run, ramp, death spike, etc.) is difficult for a lot ofpeople to grasp, much less trade, though the "aggressive" will try.

And here a note about "aggression". You've read that such and such is for "aggressivetraders (investors) only", or that such and such a tactic or strategy or approach is"aggressive". What the hell does that mean? Usually you're told that if you're going to be"aggressive", you should risk only money that you can afford to lose. This ranks amongthe dumbest advice you'll ever receive. There is no such thing as "money you can affordto lose". To entertain the notion that there is such a thing diminishes the respect that youdamn well better have for every dime if you're going to become involved in the stock

market (if you have no respect for money, go to Vegas).

"Aggressive" ought to mean that you are at least experienced, profitable, disciplined,quick, well-prepared, and that you manage your trades exceptionally well (and ifdaytrading, a great broker, an exceptionally dependable trading platform, and a rock-solidinternet connection). "Aggressive" is not a test of manhood. It is not swimming in rawsewage or eating slugs or shoving scorpions down your pants. "Aggressive" requires anextraordinary amount of work. It is not ignorant bravado. If you don't want to put in thehours, stick to the safer course. Odds are that you'll end up with more money in the bankanyway.

Now back to "air". Yes, there's a lot of effort being displayed here: just look at thosevolume bars. And, yes, there is an impressive result: price is going through the roof. Whata terrific illustration of the dynamics of demand and supply. Gotta have me summa dat.

So why is it so hard to trade in real time? Because there's "too much". Too much volume(i.e., too many trades), too much movement in price, too much excitement, too muchamateur trading. When you get that much trading activity and that much price movement,the pros are done, or very near to it. They didn't become professionals by being stupid.And they know that a lot of amateurs are being sucked into this cyclone and that thoseamateurs will be the first to dump their shares when things turn sour (though not all ofthem, of course; some will hold until price falls all the way back to where it was to beginwith and probably lower).

The extent of the price move also creates big problems with regard to support andresistance, i.e., there isn't any (a sort of "'toon physics" problem in which you find yourselfrunning off the cliff, pausing in midair while you ponder the situation, then plummet,flail ing, to earth). Price has moved so far so fast that even though there have been a lot oftrades, there aren't very many at any given price level. Therefore, when price makes aU-turn, there's very little to impede its retreat. If there was even a tiny consolidation onthe way up, there might be a brief pause on the way down. But if price looks like theTransAmerica building or the Eiffel Tower, the way down is probably going to be just as

slick and slippery as it looks.

Now about that pre-market hammer . . .

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Is there a rule of thumb, as to how long a tail is in relation to the body, for acandle to be considered a " Hammer" or a "Shooting Star"?

I don't really care about all the hammer/doji/butterfly/spinning top blah blah jargonbecause none of that really matters. What does matter is that (a) the hammer -- or ahammer-like candle -- forms in the first place. That alone tells you something. Whatmatters further is (b) HOWit forms. Price was at one point, plunged, then recovereddramatically to get back at, near, or even higher than it was in the first place. How far it

gets and where it ends up (below the open, at the open, above the open) tells yousomething about demand. How far price dropped before it was driven back also tells yousomething about the players and how passionate they are. WHEREprice bounced is alsoimportant, which is where support and resistance come in.

Therefore, to say that if price makes it back higher than the midpoint of the candle, it's ahammer, and if it doesn't, it's not, is beside the point. Or to say that it has to get backwithin a certain percentage of the high. Or that there can't be an upper tail. Etc. Etc."Hammer" is just shorthand for a certain sequence of behaviors.

You're being told a story about a struggle. The story is continuous, even though you maysegment it with bar intervals and timeframes. Your task is to learn the language in whichthe story is being told, which is largely the language of greed (or its first cousinonce-removed, hope) and fear. If you imagine the effort that it takes on both sides tocreate that hammer, you'll have a better idea of what to do with it. Not every hammer hascosmic significance. Most don't amount to a hill of beans. If price falls out of a range,

forms several down bars, then hits support and forms a hammer with a long tail, thatcarries more significance than a hammer which begins in the range, falls just barely out ofthe range, then closes right back in the range again as if nothing had happened.

The hammer/shooting star (one is the opposite of the other) shown in the chart for032604 (far below) is pretty and is the type most likely to be used as an illustration ofwhat this sort of candle looks like. But the hammer in the chart above (at 09:10) is moretypical of what you'll be dealing with since it comes up much more often. This hammerstarts in the range, forms after several downbars, has a hell of a long tail, and isaccompanied by pretty decent volume. But it hardly leaves the range. So why thesubsequent move of 30pts? The hammer mentioned earlier in the 030204 chart (at12:05) falls out of its range and forms after two downbars, and the accompanying volumeis even stronger. Yet it fails immediately. And decisively. How come?

Part of the answer, again, may lie in where the hammers form. Note that the first one --030204 -- forms at 1483. There are several swing highs at this level from 02/26, 02/27,

and 03/01, the day before. Are these important? Or at least important enough? Thehammer in the above chart forms at 1460. What's that all about? Note that 1460represents the lows of 0226 and 0227. And on 03/03, while price does drop just below thatlevel, it quickly pulls back above it and stays above it. Something's up with 1460. What?Who knows? But it doesn't cost anything to draw a horizontal line across the lows duringthose few days.

So did price bounce so violently off 1460 because it represented a more important S levelthan did 1483? Is it worth going long off both hammers with a stop just under each?Compare these to the "hammer" at 11:45 in the above chart. If that looks like as good abet as either of the other two, you probably shouldn't trade hammers for the time being.

And what about the hammer at 10:55 (also the above chart)? It forms after two downbars,even though there's a little tweenie in there. And the bottom tail is decent, even though itisn't terribly long. And the volume is nothing to get excited about. But it is, after all, ahammer. Sort of. Depending on how stupid you feel for having missed the move in the

first place and on how much revenge you want to take on yourself for not having had theguts to take the trade you should have taken.

So you ignore the fact that price made more than thirty points in no time at all and that theonly people who are going to be suckered into this "pullback" are those who were toocowardly or too ignorant or too sleepy or too unprepared to have taken the trade they weresupposed to take, which of course are the same people who are going to be the first topanic when things go wrong, which is what happens two bars later. But you've alreadybought it and made yet another tuition payment. And it isn't even lunch yet . . .

So you take that hour to sit back and ruminate on the meaning of life, or at least themeaning ofyourlife, and you try to decide whether or not you ought just to say the hellwith it and get a real job. And eventually you decide to stick with it for at least a littlewhile longer. However, you also decide to punish yourself in future, not by jumping intotrades that you have absolutely no business jumping in to, but by sitting on your handswhen you've failed to act appropriately and "in a timely fashion". You decide to call it The

Preclusion Rule: you don't take any trade that you wouldn't be taking if you had takenthe trade you should have taken in the first place (you may add something like "you stupididiot", if you like.)

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To achieve a state of objectivity you need to operate out of beliefs that allow for anything tohappen, as opposed to beliefs that allow only for the market to express itself in a limitedfashion. If you operate out of a belief that anything can happen, then whatever doeshappen won't be threatening to you in any way . . .

However, you do have to have some belief or expectation about the future or you wouldn'tever put on a trade in the first place. To be objective, you [must] have no commitment toany particular outcome. You just observe what is happening in each moment as anindication of what will probably happen next.

-- Mark Douglas

Never be in a hurry to do something stupid.

-- Lee Richartz

The fact that the TLs can be "fanned" tells you that momentum is slowing. No momentumindicator is needed. A lot of people, of course, would try to "catch the bottom" at severalplaces, mostly because they trade what they think, not what they see, what they believeshould be, not what is.

The action of the whole market tells you when the selling is better than the buying and viceversa. You do not care why insiders are buying or selling, but you should care a lot aboutthe action of their stock on the tape, for that is what tells you the truth.

-- Richard Wyckoff

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In the market environment, the decisions that confront you are as endless as the pricemovements you intend to take advantage of. You don't just have to decide to participate,you also have to decide when to enter, how long to stay in, and under what conditions toget out.

There is no beginning, middle, or end -- only what you create in your own mind.

-- Jesse Livermore

As Livermore says, above, you don't "just" have to decide to participate. But you do have

to decide to participate before making all the other decisions he lists. And far more oftenthan not, deciding notto participate is exactly the right decision to make (you don't haveto be "in" to "win"; more often than not, being "in" may mean losing your shirt).

The chart above provides a good example of what it means to "get real". The previous daywas about as perfect a trend day as one could want in this life: opened at the high, closedat the low, and nary a bump along the way. And it also provided a "range expansion"; infact, the range for that day was nearly double the average daily range (there won't beanother one of these until the middle of the next month). Therefore, while a continuationon the following day was certainly within the realm of possibility, to expect one would be"hopeful" in the extreme. In other words, "get real".

An opening at the Previous Day's Low would encourage the hopeful to hope for acontinuation. The "rally" to that brief congestion zone around 1445 and the stall theremight strengthen that hope. And if one were to short that little "triple top", he mightactually pick up a few points. But unless he had some specific, near target in mind (which

he wouldn't if he were looking for a continuation to the downside) and kept tight stops, hewould more likely have his head handed to him on a platter. The fact of those wide bars onboth the downside and the upside, accompanied by heavy volume, screams a warning thatyou probably have no business being here whatsoever. Price then forms a doji at 11:05and a bear spike (a shooting star but not outside the range) at 11:10, suggesting thatselling pressure is still very much a factor. When the subsequent attempt at a new highfails rapidly, the downside looks good. But what about all that heavy buying pressure thatsent price up to the opening high in the first place? The "downside" ends quickly, in ahammer, and here you are in "chop".

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Beginners often want to know how to determine in advance whether or not they are goingto be in chop, or at least to be able to detect the chop before it grabs them by the neck anddrags them into the barn. First, show Hope the door and tell it to find someplace else tohang out. Second, expect nothing. Assume nothing. If you are not yet at the point whereyou can engage the market without expectations, then assume that the day after a trendday is going to be choppy. They nearly always are. And look instead for signs that it won'tbe. Third, if you do not yet have specific criteria for detecting and trading continuationsand reversals, then go to the zoo. Or the library. Or the movies. Don't even watch it,much less paper-trade it, because you'll be tempted to do something with it. Or about it.And you're not ready for this yet. Fourth, if you do have the aforementioned criteria, take

great care not to sink too deeply into the micro. If the downside has been rejected by thebuyers, and the upside has been rejected by the sellers, a bell should ring, or a light flash.After all, if both the upside and downside have been rejected, that puts you back into therange with a bunch of traders who have lost their way and don't have the power to pushprice either one way or the other out of that range. If you're going to hitchhike, you don'twant to thumb a ride with somebody who's lost. And if you start making lower highs andhigher lows, as you do here (at least until late afternoon, and even that is rejected), thenyou're in even bigger trouble. It's easier than this. Take some time off. Get a good night'ssleep. Try again tomorrow.

As traders, we cannot afford the luxury of wishing and hoping because it puts us in apassive relationship with the markets. When we wish and hope, we are shiftingresponsibility on to the markets for making something happen instead of confronting theconditions and doing something about it ourselves. If we find ourselves wishing and hoping,it is an excellent indication that we don't know what is going on and as a result need to getout of the markets until we do.

-- Mark Douglas

And here it is tomorrow already, and see how your maturity and self-control and patiencehave been rewarded. This one opens just above the Previous Day's Low, bumps its headagainst R at the Previous Day's High, and try as it might for more than a half hour, it can'tbreak through. The "bozo" (short for marubozu, a longish bar with little or no tails)suggests serious selling pressure since volume is high and the bar closes at the low. Thishypothesis is strengthened a couple of bars later, when buyers attempt to push pricehigher, also on strong volume, but either the buying pressure is insufficient, or the sellingpressure is just too much. Or both. In any case, a long upper tail forms, indicating failureon the part of buyers, and we drift for more than an hour. Given that volume is drying up,one needs to be prepared for either an upside or a downside breakout. At 13:05, sellinginterest is tested, but buyers push price back to the base. Unfortunately, they don't havethe necessary muscle. Selling interest is tested again in the next bar with much the sameresult. Buyers don't got it. So, another bozo to the downside.

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Note that sellers aren't particularly aggressive. After each of these two bozos, price drifts,first for 90m, then for nearly two hours. The problem is that buyers just don't have thenumbers to push price higher. All they can do is keep it from falling, albeit temporarily.When they try to do more than that, they get "slapped", and price either falls back into thebase or another bozo is formed. The pressure is clearly on the sell side, but sellers aren'tpanicked or desperate (if they were, they'd be offering substantially lower prices). Butthey're strong enough to prevent buyers from getting anywhere.

This day starts off well, apparently finding S at the PDL and launching itself from there.There's a nice almost-bozo at 09:50 with good volume, and trading volume increases a bit

in the next few minutes resulting in a "doji" (the tug-of-war is swinging back towardsellers). However, trading drops off dramatically in the next bar (10:00), suggestingenough continuing selling pressure to push price down, but not so much that price dropsbelow the low of the almost-bozo. Trading volume is even less in the next bar, which onemight think is a "bad thing". But the fact that sellers aren't pressing their advantage isinstead a "good thing". This lack of selling pressure results in a higher price and a whitebozo at 10:05. Trading volume then increases again, but price stalls, suggesting thatselling pressure is once more rearing its ugly head, and a downbar follows. Then anotherattempt on lesser volume and no progress. Why? Perhaps that long base at 1430 from theprevious afternoon. Do we hear the sound of chop?

Sellers aren't especially aggressive past 11:00, apparently content with their 15pts. Andthey offer little resistance to buyers when the latter impose a higher low (whack?) and pushprice back to R. However, when the time comes, there's no "real" demand, i.e., not enoughto break through R, so price drops back (and there's that whacking sound again, chop

chop). Buyers give it the old college try one more time and sellers wake up (note thehigher volume) and toss buyers back into the moat. Volume increases to the downside,suggesting that buyers have said the hell with it, confirmed when volume declines, butprice continues to fall.

But if you feel like a real schmuck for not shorting that triple top shortly after 14:00,thinking that chop was going to be the order of the day and deciding to run errands ratherthan waste your time sitting in front of your computer, consider the following quote:

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What was the last thing you traded? Look at its 1 year, 6 month, 1 month, and 3-5 daycharts. Can you see all the opportunities where you could have made a profit? Should havegone long there, shorted here . . .. You're assessing "opportunity" based on price activitysubsequent to the point at which you believe the opportunity existed, which means thatyou're working backward to identify that point of opportunity. This type of thinking willcause a trader to make trades when no real opportunity exists.

Looking at the charts again, try to identifyforward-looking opportunities, where youconsider only each price point and the price patterns before it. You'll find that it's now farmore difficult to spot the winners, but those are the opportunities that you need to identify

and then appropriately act on in order to be a successful trader.

-- Innerworth

In other words, everyone's a genius in hindsight. Beating yourself up for missing anopportunity that you didn't plan for is not productive, though if it prompts you to look forsimilar opportunities and commonalities among them that might result in a new setup, thenthe opportunity you didn't take advantage of turns out to be an opportunity that you'retaking advantage of after all.

Which is probably as good a place as any to get into finding and profiting from theseopportunities. Books have been written on this subject (manybooks), and the subject hasbeen addressed by me in several other places, such as Rectangles and Bottom Fishing,so I'm going to try my best to avoid repeating what's already been said (otherwise, thiswould get way out of hand real quick). What I'm going to do instead is cut to the chaseand make this as simple as I possibly can. If you are sabotaging your own progress due toobsessive-compulsiveness or night terrors or uncontrollable rages, I'm afraid you're goingto have to take care of that somewhere else, some other time.

The easiest way to make money in the market is to trade in whatever direction the marketis going, i.e., buying if the market is going up and selling - or shorting - if the market isgoing down.

Simple? One would think so. But an extraordinary number of people have an

extraordinary amount of difficulty following these two basic guidelines, perhaps becausethey cannot believe it is so simple, or perhaps because they are congenitally disposed tobeing clever, and in their efforts to avoid being part of the herd, they end up wandering,lost, in the weeds. (There is also the problem of all sorts of advisers with their ownagendas trying to convince you that you cant tell the difference between up and downwithout their help.)

And here we come to a Guiding Principle: contrary to what youe heard, read, been told,the herd is always right. Except at turning points. Yes. Always. Their buying drives theprice higher. Their selling drives the price lower. The professionals may nudge the buyingor selling in some way (see Demand/Supply), but its the herd that drives price (everwonder who the big moneyreallyis? Its you). If the professionals attempt to stand inthe herds way, they will be trampled. Only when the herd exhausts itself, at turning points(see Tops n Bottoms), can and will the professionals make their influence felt in its mosteffective way, turning the tide, trapping the stupid and the greedy, igniting the herd's fear,and reversing prices direction. Therefore, if you want to make money the easy way, youllfirst want to figure out whether price is going up, down, or sideways (see Trendlines).

Once youve completed that step, its time to start thinking about what strategy youll selectto take advantage of these price movements, and there are three: breakouts,retracements, and reversals. These are covered most succinctly in Rectangles but arealso addressed in Demand/Supply, Bottom Fishing, The Big W, Trendlines, and Topsn Bottoms. And once youve decided what strategy youre going to employ in a givensituation, the rubber meets the road: you have to determine exactly what tactics youregoing to use to put this strategy in play.

Now you may have heard or read that there are many different strategies to choose from.Truckloads of them. Mountains of them. But just as there are only a handful of basic plotsfrom which all movies, plays, books and so on are derived, so there are only the three basicstrategies listed above. Knowing that, and remembering it, will enable you to go a longway toward maintaining your focus and raking in those profits that everybody so gliblypromises. Eventually, youll want to create at least one set of tactics for each strategy andbe able to employ whichever of the three is most appropriate to whatever situation yourefaced with. But rather than work on all three simultaneously, choose one, become familiarwith it, develop the enabling tactics for it, get comfortable with the process. Then youll beable to earn as you learn.

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One could argue that your three choices are really only two - or two and a half -- since aretracement has to be preceded by a breakout. After all, in order for a retracement to takeplace, there has to be something to be retraced, and that something is a directional move,and that directional move occurs subsequent to a period of non-directional - or sideways- movement. So one can trade breakouts without necessarily concerning himself withretracements, but he cant trade retracements without at least being aware of the fact ofbreakouts since retracements cant exist without them (breakouts, that is).

Having become the student of market behavior that you are now, you understand thatwhether or not a retracement caterpillar becomes a continuation butterfly depends entirely

on (a) whether or not traders are interested in it and (b) if so, howinterested. After all, iftraders arent interested in this retracement, its going to turn into a reversal rout, a failedbreakout, a return to the womb of whatever sideways non-directional limbo from which itcame. On the other hand, if they are interested, then the retracement becomes nothingmore than a pause, after which the price continues on its merry, directional way, makingthe retracement a successful entry opportunity.

There are several other elements which will influence the success or non-success ofwhatever tactics you develop to stage your strategy. Effort and result, for example, is aconcept worth storing in your frontal lobe, where it is always hovering, maybe not thecenter of your focus, but present and available (if you're still having trouble translating myshorthand, the first notation says "A little effort on the demand side leads to big results,suggesting little selling interest; this was confirmed by the lack of follow-through on eachdownmove").

Nothing happens unless either buyers or sellers make some sort of effort. If the effort is

half-assed on both sides, then there won't be much happening as a result of it. On theother hand, if a great deal of effort is being made (lots of volume), one has a right toexpect quite a result. If there isn't any, or if the result is barely noticeable, then one canconclude -- at least for the time being -- that buyers and sellers are pretty evenlymatched.

Notice here that volume after the test of the opening low is not all that impressive, yetprice rises like a birthday balloon. Not much effort, substantial results. This suggests thatthere's little or no selling interest. Yet. (If there were, then either volume would be higheror price would have more trouble rising.) But when price finally gets to a point wheresellers are irritated, trading activity increases (volume rises), and you get a big, honkingbear spike (long bar with price closing at or near the low). This spike, however, is theextent of the "result", suggesting that sellers, while annoyed, are primarily interested inkeeping buyers at bay, and not so much in rallying the troops for an all-out offensive. Afterthat, efforts decline, and the result is drift. After 14:00, effort picks up again, but results

aren't impressive, suggesting yet again that sellers are in charge of this little puppet playand that buying into this "strength" is likely to be a long row to hoe.

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Wide Range Bars are a nice illustration of the dynamics of effort and result. Lots of energyis being expended on creating these bars, i.e., lots of disagreement between buyers andsellers as to what price ought to be, but the net result is zip. There are people who lovethese bars and love playing them, but doing so is not what one would call a "conservative"tactic. A more worthwhile tactic is to allow this energy to be stored, as in a lengthy base,then enter the eventual breakout. If the bars in the base are short and the effort to movethem has been minimal (i.e., as little energy as possible has been expended in the base),then one can reasonably expect the breakout, when it comes, to bring about a very niceresult. On the other hand, if the bars are long and there's lots of volume, i.e., all theenergy is being crapped away in the base, then the result after the breakout is more likely

to be what one might call disappointing (but, again, never assume; being trapped in a WRBcage may further rile one side or the other to the point where an eventual breakout is morethan satisfactory, like poking a tiger in a cage with a stick, through the bars).

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The "bams" refer to the efforts of sellers to push price through that congestion zone thatwas created the previous afternoon between 1412-13 and 1406-08. Here it hits 1412 againand again and again. Bam. Bam. Bam. Buyers try at 11:20 to pull themselves out ofthis, but they're wearing ankle weights. They just don't have it, and sellers finally breakthrough with a bozo.

It's impossible to predict what might have happened here if it hadn't been for the FOMCmeeting that day. In fact, more than a few people don't trade on FOMC days simplybecause there's too much going on that has little or nothing to do with normal buyer/sellerbalances.

As for trading the news, some people love it and some people avoid it like the plague. Idon't recommend the tactic for beginners, simply because it's not necessary. Whether onepursues this course or not has less to do with "guts" and more to do with whether or notone can come up with a tactic that's definable and can be tested to determine theprobability of success. Giving in to an urge to gamble is not productive.

This day starts off well. Lots of effort, nice result. And when the price declines, so doesvolume ("V"), i.e., trading activity. However, price appears to find R at the highs from the11th and 12th, i.e., the previous Thursday and Friday. The "why" doesn't matter so muchas the fact of it.

Ordinarily, one would expect a pretty nice "result" from whatever breakout might occur outof this base, even though it's a titch wide. Unfortunately, as noted on the chart, this is thesort of pattern that's noted by every trader on the planet, and the breakout is nipped

quickly.

Does this mean that a BreakOut from this sort of base should not be taken? Notnecessarily. But one should at least be prepared for the failure and keep a tight stop,particularly since it's so very late in the day.

Incidentally, "Nice effort, str result" means "nice effort, star result" as in shooting star orbear spike. In other words, all that effort resulted in a failure on the buyers' part, so asubstantial portion of that effort was on the part of sellers.

Trigger-happy traders are prone to shooting themselves in the foot.

-- Brad Barber and Terrance Odean

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Hindsight trendlines can be a bit confusing. The first was drawn when the first "swingpoint" was created at 10:25/30. When that trendline was broken an hour later, no new linecould be drawn until price either made some noticeable upward progress or made a newlow. When it made that new low at 12:05, the next, longer trendline could be drawn(across the 11:35 swing point). This in turn was broken at 12:50, and no new low wasmade thereafter.

This isnt the first example of an intrarange trend thats been provided, nor is it the firstexample of a breach or "break" of such a trend. But now that you have effort and result on

the brain, the difficulties encountered when considering something like this to be abreakout should be more apparent. Yes, some effort is required to halt the trend. Yes,further effort is required to break the trend. And even more effort is required to reversethe trend. The result of all this effort, however, can be problematic when swimmingagainst what had been the current, which is why thinking of these as breakouts can bebefuddling when the end result is that you're still trapped within the day's range. What youhave instead is a series of reversals.

A breakout emerges from congestion and the back-and-forth and the wranglng therein andruns for daylight. If price can squirm out of its shackles, any retracement is an excellentsecond opportunity to enter. However, a reversal turns back toward that same congestionand tries to power its way through. The dynamics and the challenges are completelydifferent.

Therefore, keep breakouts (and their companion retracements) and reversals separate,including the amounts of effort required for each to achieve what is for you a result that

makes the trade worth taking in the first place.

031904

The 19th was a quadruple-witching expiration and I have nothing wise to say about it.Therefore, I'm instead providing a "guest analysis" which illustrates reversals.Unfortunately, I don't recall where I got this and I neglected to jot down the author.

Note that this is not a schematic for buying here, selling there. There are no cutesy namesfor setups. It's just an observation of and study of price behavior, the first step in thechoice of strategy and in the development of tactics.

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The story plays out on the 3-minute chart. The open . . . dropped down to the low ofyesterday afternoon. The first down arrow on the chart shows a wide range bar closing onits low on very increased volume (compared to the prior bar). Selling was clearly swampingthe buying. Volume increased on the drop, but fell off on the retest of yesterday afternoon'slow, signaling a potential bottom. Look at that bar on the low. It closes well off the bottom.

And the volume has shrunk. Selling is no longer dominant (though confirmation is stillneeded). The next bar has a nice range up and closes on its high. Volume has dropped off,and that is good for the bulls. That and the next bar -- also an up bar with increasedvolume -- confirms the change in direction.

Note that the volume falls off on the pullbacks. This is decidedly bullish. Volume expandswith price as the market moves higher and contracts on pullbacks. Also, look at the pricebars on the pullbacks. Their range also contracts. So, you have price bar range expansionwith up closes on expanding volume and price range contraction coupled with volumecontraction on the pullbacks. Note also where the closes are on the pullback bars --midrange, for the most part, rather than on their lows. Selling is weak on the pullbacks. Allthis action is bullish behavior.

Look at the first down arrow in this up trend. It occurs around 10:30. It closes on its lowand volume increases! This is the first hint that selling is coming into the picture. The nextbar is up and volume increases, but then look what happens. Volume is heavy but the priceaction is showing weakness. With that increased volume, if this was still going higher, youwould expect the bars to expand in range and close on the highs. But you get just theopposite. Range is contracting, the close is poor, and it occurs on increased volume. It canmean only one thing: selling is swamping the bulls' boat.

Next, we move up to the high of the day. This is right into the 935 resistance area from thedaily chart. Look at the volume and price action here. Volume expands for several bars, butthe price won't go higher. That weakness we saw earlier starting with that first down bar onincreased volume at 10:30 is now coming into play. Also, the average volume is lower aswe make a new high. So, background weakness in the form of (1) the 10:30 - 11:00

price/vol action and (2) the overall volume/price divergence is seen clearly in the details ofthe individual bars.

Note where I labeled the "No Demand" bar and its accompanying volume. We get a higherclose on low volume. There is no demand or buying to drive prices higher. The no-demandevent occurs again later.

The noontime countermove starts right on time [NB: the lunchtime reversal is not asreliable as it used to be; stay tuned]. Look at the bar and volume at the turnaround. Likethe waves, monotony is good.

The market moves up a bit, but then goes into a lot of chop. Although there is an upsidebias, volume is very low and the price bars are contracted and few close on their highs. Allbearish action.

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Look at the last 3 bars in that area occurring around 1:00. They try to push it higher(probably gunning for stops), but volume isn't with them, and the buyers get swamped.

Another no-demand event.

Just before 2:00 there is another attempt to rally. But you can see the price and volumeaction shows weakness. The first bar highlighted by a down arrow shows a midrange closeon increased volume. If they were going to take it up, that increased volume should haveresulted in an up close. Compare this attempt with the rally that occured in the AM.

As the market falls, the average volume increases. On the bars where price expands to the

downside, volume expands, showing a consistant relationship. Note the two pullback areasin the downtrend (highlighted by the down arrows). Both the price action and the volumecontract. This is nice bearish action.

The bottom of this move is reached at the AM low. The price action and volume is a repeatof what we have been seeing, as is the push into the resistance at the 925 area ...

Meanwhile, back at the ranch . . .

The next three days provided an interestinginterlude to the market action, screwingtraders on both the short and long sides. Bythe time quadruple-witching occurred onFriday the 19th, price had been drifting

sideways for more than a week. So whentraders awoke on Monday and discovered thatprice had gapped down, they were expectingbig things.

But what the hell? Price drops only a lousy 14pts before screeching to a halt. This is muchless than the Average Daily Range during this period (the average of the daily ranges fromhigh to low during normal trading hours over the previous 10 days). Not only that, itmounts a substantial rally. Granted, it eventually makes 20pts (which is still less than theADR), but it takes all day to do it, plus it rallies back to the midpoint of the days range bythe close.

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So, next day, it gaps up, bulls justifiably emboldened by what seemed to be a show ofstrength the previous day. But this time, price never even gets out of the gate, failingalmost immediately and sliding instead into an unterrupted downtrend that reaches theADR by lunchtime (which is also, by the way, the level of the PDL). Bulls mount anoffensive and stage a very nice rally. But they run out of steam after 20pts, create a littledouble top at 1390, then get tossed by sellers into the moat.

Buyers and sellers appear to be making all this up as they go along. As previously noted,sellers expected big things from the drop down on the 22nd, but S asserted itself,

apparently, at 1372. Why? Who knows? Play the hand youre dealt. Then, on the 23rd, Sat 1372 was confirmed, and a rally seemed to be in the cards. But the rally failed, andprice dropped back to 1372 again. Given the lack of predeterminable S, traders seemed tobe trying to find it as they went.

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This effort continued on Wednesday. Price opened at 1372 and would you look at theWRBs! But S, wherever its coming from, is confirmed again and again and again. So pricetakes off from there, stalls at the reaction high (or "swing high") from the Previous Day,and reaches the ADR on the upside, again at lunchtime. It eventually forms a double topand retraces some, but this time from the upside, and this suggests a certain strength onthe bull side, at least for the time being.

Focusing on price and volume doesn't mean analyzing every single bar pair. Nor does itmean obsessing over the volume trend. A lot of people, for example, think that volume hasto be consistently rising in an uptrend, but as I pointed out in Demand/Supply, that's notthe case. As long as price is rising, the demand/supply equation is working in your favor,regardless of what the volume is doing. It's only when you begin to see shorter bars andlonger tails and little TL breaks that you need to become concerned. And if volume doesn'tcome in accompanied by a higher price, then you may have a problem. If volume doescome in and price just sits there, then you're looking at distribution, and you may want tobeat a hasty yet dignified retreat.

Therefore, volume was, in a sense, today irrelevant. What mattered was where we began,at the PDH. Then that we stayed there. If it were going to fail, it would probably fail fairlyquickly, at least testing the PDC. Instead, it steps aboard the escalator and embarks on atrend day, and very elegantly, I might add. And not only a trend day, but a rangeexpansion day, leaving behind this peculiar little 3-day nipple.

The only potential stumble in this stairway to the stars occurs at 09:50/:55. The firstcandle is very bullish, and would ordinarily encourage the buyer to press on. However, itsimmediately followed by what most would consider to be a very bearish candle, whichwould discourage the buyer from pressing on. And if you were to blend them (i.e., mergethe two candles into one, as shown, just as theyd look on a 10m chart), theyd look evenmore discouraging.

But this is a nice example ofThe Dog That Didnt Bark, i.e., awful things are supposed tohappen because of whats going on between buyers and sellers. Or, at least, what seemsto be going on between buyers and sellers. And price does in fact drop a couple of pointsin the next bar. But look at how that bar winds up, closing very near the high, and wellinto the previous bar, and on good volume, too. Instead of a plummet into the PDR, youhave a nice rally, and that sets the tone for the day (if you still haven't figured out "what'sthis?", it's a bozo). Given where we are, this is the charting equivalent of a cannon. Whenprice comes back on light volume, stays in the upper half of the bozo, and no sellingpressure is to be found anywhere, there should be no equivocating about what to do.Anything else is really just distraction.

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Unfortunately, a lot of people -- i.e., those who have trouble determining the existence oftrend, much less its direction, which is a hell of a lot more people that you'd imagine --would try to short this all the way up ("it's too high"). They'd note, perhaps, that volumetapers off after the first hour, suggesting that buyers aren't as enthusiastic as they shouldbe. However, these traders ignore the obvious, that price is rising. The declining volumesuggests nothing more than that sellers are allowing price to rise rather than make buyersfight for it (if buyers had to fight for it, volume would be higher; if buyers weren'tinterested, the price wouldn't be rising). These same traders, if price were going in theopposite direction, would try again and again to "catch the bottom".

The market always tells you what to do. It tells you: Get in. Get out. Move your stop. Closeout. Stay neutral. Wait for a better chance. All these things the market is continuallyimpressing upon you, and you must get into the frame of mind where you are in realitytaking your orders from the action of the market itself from the tape.

Your judgment will become poorer from the very time when you decide that you know moreabout the market than the market is telling you. From that moment your results will beunsatisfactory, for in this trading business the tape is the boss. You must learn to obey itsorders, doing exactly what it tells you. When you can accomplish this, you are on the highroad to success in your stock trading.

-- Richard Wyckoff

Therefore, in order to avoid becoming one of these pitiful creatures, learn how todetermine

(1) whether or not there is a trend (do you have higher highs and higher lows, or lower

highs and lower lows, or is there no discernible pattern?)

(2) if so, the direction of the trend (up or down)

(3) the strength of the trend (what is the angle of the ascent or decline; is it becomingmore or less severe: note the examples of "fanning" here and in Trendlines)

(4) a change of trend (i.e., from up/down to sideways)

(5) a trend reversal (a move above the Last Swing High or below the Last Swing Low: seeTrendlines; note here that price breaks the TL shortly after 14:00, but doesn't drop belowthe LSL)

Think about buyers and sellers and the prices they're paying and the pressures they'reputting on each other. If price begins to advance, then pulls back to what had been the oldhigh without falling back into the range, then resumes its advance, then there is serious

intent here.

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If you don'thave that "stairstep" look where each pullback comes back only to the lastswing high before resuming the advance, then you may be looking at a slowing ofmomentum or even a trend change, if not a complete reversal. The trend can continueupward, but it will be a much slower "grind", and it will be increasingly difficult to placestops (sometimes this grind establishes itself from the very beginning and one finds himselffaced with what is called "creep", difficult to play without wide stops and all the additionalrisk they entail).

Therefore, don't get trapped into looking at all of this as lines and angles. Think of thetraders involved and what they paid and when they'll be profitable and when they'll be

underwater and where they might be trapped into taking the wrong side of the trade. Thatis, after all, where all these movements come from. Gauging their strength by theirmovement will tell you who's got the upper hand and where the intent is likely to lie.

Never forget that markets are made up of people. Think constantly about what others aredoing, what they might do in the current circumstances, or what they might do when thosecircumstances change. Remember that whenever you buy and hope to sell higher, the

person you sell to will have to see some opportunity at that higher price in order to beinduced to buy.

-- J. Peter Steidlmayer

This is not an unusual chart for a post-trend day. Price opens at the PDC, drifts until theConsumer Sentiment report comes out (re the note, V=Volume and P=Price). Then, aftereverybody bounces off the walls, they fall asleep for three hours. After a wimpy attempt bybulls to push price into a new high which instead results in a double top, there is asubstantial selloff, much more substantial than one might expect given the length of thebase underneath that double top, but an excellent reminder that electing not to take atrade due to expectations, even though the setup may be included in ones trading plan, isnever a good idea: you never know whats going to happen. And wouldnt you be ticked ifyou hadnt taken this?

After studying enough charts, one begins to feel the weight of dj vu. There are only somany twists and turns that price can take, after all, and, eventually, one asks:

Now what?

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Youve studied price action, you know what support and resistance are and where theyremost likely to be found, you know that there are three primary strategies to explore, andyoure beginning to play with a few ideas on tactics that might be employed to profit fromthese price movements. And I sincerely hope you love a challenge, because testing thesetactics can be frustrating to the point where you want to run into the street, screaming.

To begin, keep the following five elements in mind at all times in order to avoidgetting lost:

Demand/Supply

Price/Volume

Support/Resistance

Trend

Breakouts/Retracements/Reversals

But first, drive out any notion that the point of all this is to find some pattern somewherethat no one else has found and that is going to provide you with the riches that youvealways felt that you deserved. Youd have an easier time finding the leprechauns pot of

gold.

Nope, if youre going to make money at this, youll do it by working harder, being morefocused, being more disciplned. Youd be surprised how many traders trade with no plan atall. By developing one, testing it, and following it to the letter, remembering all the whilethat losses are inevitable and accepting them as an inescapable fact, youll be in a farbetter posiiton than most to profit from your efforts and reach your goals.

To get you started, lets look at retracements, which many consider to be the easieststrategy since they are by definition preceded by breakouts, and breakouts prompt the kindof excitement that moves price. In order for a breakout to be a breakout, however, it hasto break out ofsomething, and while there are many spots that price can break outof(e.g., the high of the previous bar), the more significant the breakout, the more excitedtraders will get over it, and the greater number of excited traders there will be.

Which is why rectangles are so popular. There are several examples in Rectangles, along

with examples of retracements, some of which work and some of which dont. One canenter these retracements in real time and hope for the best, but the trader who likes tostack the deck in his favor will ask himself some questions first, such as how forceful doesthe breakout have to be, how far above R does price have to get, what should theretracement look like (e.g., how wide or narrow should the bars be, how many of themshould there be, does it matter if the retracement forms a nice cup or not, does it matterhow shallow it is, etc.), how long can it go on, how deep is too deep (and what are thechances that it will attempt to advance then drop back a second time before resuming thebreakout move), does it matter whether volume contracts during the retracment, and, if so,does it?

To answer these questions, or at least begin to find answers to these questions, go back sixmonths or so and work your way backwards, finding at least twenty examples ofrectangles. Come up with some preliminary answers and put together a few setups. Then,beginning at the point at which you started looking for those rectangles, work your wayforwards and find new rectangles. Apply your setups and see if they work, and, if so, how

well. What sort of profit targets are reasonable? How wide do your stops have to be?Does being more precise on your entry enable you to keep your stop tighter? Are therecertain movements that you are going to look for that will tell you that your trade iscorrect? Or are you going to set your stop and do nothing more, waiting for the market toprove you wrong?

Once you have all of that and youve made whatever modifications were necessary,continue your forward-testing, only this time scroll through your charts bar by barrather than study the timeframe in its entirety. This is not the worlds best substitute forreal-time trading since youre in control of time, i.e., you dont have to sit there for sevenhours to get through a day; you can scroll through a day in a half hour or less. However,its a good intermediate step if you dont lose touch with just how close - or distant - thisis from the reality of trading in real time (and if youre wondering where to get scrollingcharts, look at TC2000, which offers a free data disk with its software; you neednt updateit or subscribe to the data service, just play with it in order to experience scrolling throughcharts rather than seeing them presented whole on a platter).

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Next, move on to paper trading. This does not necessarily involve the use of asimulator, nor does using a simulator mean that youre paper trading. Using a simulator toget used to the pace and to the feel of whatever platform youre using is certainly a plus,but its not paper trading. The purpose of paper trading is not only to find out if the resultsthat your testing suggested do in fact pan out in real time, but also to record your thoughtsand the feelings that occur at the time of the setup, execution, and throughout themanagement of the trade.

Therefore, write down what you see and why you think it does or doesnt fit thecriteria youve established for your setup (they look very different in real time than

they do in hindsight, even if youve scrolled through the charts; you may have to makedecisions based on only a few bars, and the pace may throw you well off your game).Write down the doubts when price doesnt immediately do what you expected it todo (and none of this Oh, yeah, I would have taken that thirty seconds after the tradeproves itself to be a success but you didnt act). Remind yourself of whatever rule applies(if no rule applies, jot down a reminder to investigate one). If youre following a ruleexactly, note that. If youre breaking one, note that, and why. If you have what youthink is a good reason for doing something out of system, note that. If you cant write allthis down at the time, consider using a longer bar interval to give yourself time to do so(5m ought to be enough). If thats not practical, use a tape recorder (though the likelihoodthat youll transcribe all that is slim). But it is essential that you have these notes, since allof this will be a fog soon after. At the end of the day, go through all of it again. Thinkabout what helped you make the right decisions and what was of little or no help at all. Ifinstead you made bad decisions, what were the enablers? And if they're enablers, why doyou have them?

Be very clear, however, that the purpose of paper trading is not to determine thatyour system does work but only that it mightwork. It is all the emotions that rise tothe top when youre trading real money real time - the fears, doubts, anxieties, the hopes,the desperation, the panic - that will in large part determine the success or failure of yoursystem, no matter how outrageously successful it may be on paper. Its normal for yourheart to beat faster and for your respiration to change, even for you to get dizzy, when youbegin trading for real. The notes that youve made while paper trading, the post-tradeanalyses that you've done, and the adjustments that youve made as a result of all this willmake it possible for you to get through this stage and move on to a more relaxed andproductive state. If you ever show a consistent profit via paper trading, try it for real withsmall amounts of money. If you cant show a consistent profit paper trading, you surearent going to do so trading for real. So redefine your setups and start again.

Trading with confidence has to do with having a method which you have proved yourself,and which you know will win over time if you follow it consistently. That means being ableto recognize the conditions which allow you to trade, and only trading when they are all

present. This is comparatively easy with hindsight: when we're actually there, we can seewhen all the pieces fit. But beforehand, we don't know that all the pieces are going to fit: sowe trade because we're impatient and fear that this maybe is the best we'll get. Well,somehow we just have to get to be patient. Let's face it, it calls for great discipline.

--John Percival

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There wlll be losses, of course. You do know that, dont you? No matter how wonderfulyour system might be, no system can guarantee a win every time out of the gate, and ifyou allow those losses to immobilize you, you may as well hang it up right now.

Losses should not destroy you, if youve done the work. A loss, after all, is really just a tapon the shoulder, a reminder that not every trade can be a winner, no matter what. On theother hand, that tap on the shoulder is also a reminder to analyze the trade and determinewhether or not something went wrong that might have been prevented, e.g., youinterpreted the setup incorrectly, or you didnt place your stop correctly, or you freakedwhen price didnt do what you expected it to do, and you didnt trust the results of all that

work you did, or you neglected to check the schedule of reports, one of which threw themarket for a loop. If you made an error, make a note to avoid making that erroragain. In a very real way (not a rah rah you can do it way), the failure helps to moveyou closer to success, unless youre completely screwed up and making every effort tosabotage yourself by making the same mistakes over and over again.

In this business, you never stop learning. Let me put it another way. If you stop learning,you're on your way to going out of business. Wall Street is a tough teacher but also a goodteacher. If you have any weakness -- arrogance, laziness, stinginess, cowardice,

procrastination -- the market will zero in on that weakness and make you pay dearly.

-- Richard Russell

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And again . . .

In order to profit from trading price and volume alone, one must forget nearly all of whichhe thought was true, and that presents an insurmountable obstacle to a great manypeople.

If, for example, one insists on focusing on how he can make it "work" withmathematically-derived indicators (stochastics, MACD, CCI, OBV, blah blah blah), then he

blocks the process through which he would otherwise understand it and profit from it.

If he focuses on where and how to make mechanical entries and exits rather thanunderstand the dynamics of demand and supply, then he blocks the process through whichhe would otherwise understand it and profit from it.

If he focuses on setups and patterns as gimmicks rather than as manifestations of changesin the balance of buying and selling pressure, then he blocks the process through which hewould otherwise understand it and profit from it.

Hire yourself to do a job. The job is just to sit there and watch the bars form, to watch thebuying and selling waves, the pokes and prods and feelers cast by buyers and sellerslooking for a trade, not to create or test a strategy, not to make money, not to learn the"secrets" or the "tricks", just to develop a sensitivity to buying and selling pressure. Noindicators, no MAs, no nothing but price bars/points and volume bars.

Make notes of what you see and what you think you see. Don't rush to drawconclusions. Throw away your crutches and focus on what the auction market is really allabout. The market is not out to get you. The market is not out to trick you. Buying pressureis buying pressure. It lasts as long as it lasts according to who wants what. Ditto for sellingpressure. Rather than focusing on avoiding getting screwed, focus on the pressures and theimbalances between them. Don't trade. Don't conclude. Just watch.

When you get tired, stop. Come back. Begin again. When you're done, review your notes.Look for those areas in which change took p

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