BarroMetrics Views: What It Takes To Succeed VI
Well, we are that point: we’ll be examining the various elements that go into a discretionary trading plan.
Remember our goal is to define when the probabilities favour a trade and when they favour an exit and the plan does this for the timeframe we are trading. For the plan to be effective, it needs to be one that suits our personality. For example, I process information with a visual-kinesthetic process. So, it’s natural that I would migrate to technical analysis augmented by my intuition. Now, Damasio would say that no decision is possible without emotional input, and I would agree. The question is how much input and with what tools. The answer is determined by who we are and how we process info.
OK, let’s now put that issue aside and turn to the next step of a plan.
The market bombards the trader with a tremendous amount of information. To make sense of it, the trader needs to create a framework. Here is where a model like Wyckoff’s or Steidlmayer’s come in – the models structure information in a way as to make enough sense so that the trader can come to a conclusion. Figure 1 again shows the Wyckoff model that sees a trend change from down to up:
- After a sustained downtrend, the directional starts to lose momentum.
- Finally, we see an end of the move down. This end is characterised either by larger than normal volume or volume that shows divergence with the prior swing low, i.e. the final low has lower volume than the previous swing low.
- The market then goes sideways until a breakout occurs (accumulation).
- Following the breakout, we see a retest. If the retest is successful we’ll see a markup phase that ends in distribution and a downtrend.
Figure 2 shows the 2009 low and how well the Wyckoff identified the possible low …..More tomorrow.
FIGURE 1 Wyckoff Model
FIGURE 2 Cash S&P March 2009