0992283001357063132 trading price action trends by Brooks

Author:Brooks
Language: eng
Format: epub

Although you do not need to look at volume when deciding whether to place a trade since it is so unreliable, it is often huge at key turning points, especially at bottoms. Every trade is between one or more institutions buying and one or more selling. The major buyers at a market bottom are the profit taking bears and the new longs. Why would a firm ever sell at the bottom tick of a bear market? Every firm uses strategies that they have carefully tested and found to be profitable, but all lose money on 30 to 70 percent of their trades. The firms selling at the low tick are the ones who were selling at the low tick all the way down in the bear, making profits on many of their earlier entries, and they simply continue to use those strategies until it is clear that the trend has reversed. So, yes, they lose on that short at the final low tick of the bear, but make enough from all of their earlier shorts to end up profitable. There are also HFT firms that will scalp for even a single tick right down to the low tick of the bear.

Remember, the low is always at a support level, and many HFT firms will short a tick or two above support to try to capture that final tick, if their systems show that this is a profitable strategy. Other institutions sell as part of a hedge in another market (stocks, options, bonds, currencies, etc.) because they perceive that their risk/reward ratio is better if they place the hedge. The volume is not from small individual traders, because they are responsible for less than 5 percent of the volume at major turning points. The reversal at an overshoot happens because it is such an entrenched part of institutional trading psyche that it has to happen. Even if institutions do not look at charts, they will have some other criterion that tells them that the market has gone too far and it is time to exit or reverse, and this will invariably coincide with what price action traders are seeing. Remember, price action is the inescapable footprint of what is happening to price as a huge number of smart people are independently trying to make the most money they can in the market. In a big market, the price action cannot be manipulated and will always be basically the same.

One final minor observation is that the slope of the final flag of a trend often provides an approximation of the slope of the new trend. This has limited value to a trader because there will be other much more important factors involved in the decision leading up to placing a trade, but it is an interesting observation.

Figure 14.1 Testing a Trend Channel Line A trend channel line points in the direction of the trend but is on the opposite side of the trend from the trend line.

Extend it to the right and watch how the price acts when it penetrates the channel line.

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