The Nature of Price Action

BarrosViews: The Nature of Price Action

I was listening to an interview of S James Gates Jr. During the interview he said (more or less): “Many believe science is about truth; that is a misconception. Science is about providing the best possible explanation of what we observe”. The assumption is the explanation is based on the current state of our knowledge. As our knowledge increases and is refined so too does our explanation vary and change.

This ideas resonates strongly with me. It is an apt, fundamental explanation of how I trade the markets. I carry in my head a model of how the market (price action) behaves. I call this model the Tubbs Model after Frank Tubbs, not because he created it (he probably did not) but because I first saw it in his Tubbs’ Stock Market Correspondence Lessons.

Figure 1 shows the model. It is my believe that, so far as trading strategy is concerned, everything we need to know is contained in the model. The model itself is based on a number of critical ideas that found their best expression in Pete Steidlmayer’s Market Profile:

  1. That the market is  an auction process. This means that under normal conditions, we seek to sell highs and buy lows; and under exceptional circumstances, we buy new highs, sell new lows. This means that the market must go too high to have gone high enough and too low to have gone low enough.
  2. That the main purpose of the market is to be efficient. And the best expression of efficiency is the bell curve. The bell curve in the markets is found in congestion. Thus the main purpose of the market is  to seek congestion.
  3. The second purpose of  the market is to facilitate trade i.e. the market will do what is necessary to generate the maximum participation. Hence the relationship between volume, range and direction provides a reasonable indication whether a market is likely to continue or change its current direction.
  4. Finally, it is the context i.e. the current dominant structure that defines and gives meaning to the patterns we seek to exploit for profit. For example, in a sideways market, a lack of volume and range in the middle of congestion is different to a lack of volume and range in upmoves in an uptrend that has been in place for sometime.


FIGURE 1 Tubbs Model

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