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Before we leave this section of the manual, I want to make one thing very clear. When an envelope breakout occurs, I anticipate a reaction. This reaction may take place as soon as the envelope is penetrated, or it may take place a few periods later. I am not averse to taking first time through breakouts of the envelope. ( trade at very low commissions, and am almost always able to cover costs, and even realize a small profit on these breakouts. However, most traders will do well to wait for the reaction to the breakout and enter the trade at that time. The reaction may be sufficient for prices to reenter the envelope. If they do, trade the subsequent breakout of the envelope. Often prices will retrace to the original trading range lines. There, they will test support which was the prior resistance. As soon as prices appear to turn around in the direction of the breakout enter a trade in the same direction. At other times prices will retrace, but not all the way back to the envelope. In that case, enter the market via a Ross hook or enter via an established trend. Both techniques wil! be shown later in this manual.
Trading By The Book - Part 11 CHAPTER 1 Market Harmony
I have tried to bring in the various approaches to the markets as needed, weaving them together with trading wisdom, repeating where necessary in order to get the point across.
! also firmly believe that a picture is worth a thousand words, as will be shown. But first I have to write my thousand words.
The philosophy behind my method of trading is this: Within reason and as ascertainable by the human mind, markets will follow the natural order of things. I want to be in harmony with the natural order of the markets.
Until proven wrong, I will aisojbelieve that with few exceptions, and for the most part, traditional technical analysis is wrong for most traders and that fundamental analysis is a waste of time for all but the very large traders and the commercials.
Why do I believe this? Because there is a tendency to make a god of this approach. Unfortunately, technical analysis turns out to be a false god. Lets look at technical analysis.
Technical analysis looks at the market action. It tries to reduce to numbers and make objective certain things that are not really reducible to numbers and are somewhat subjective in nature. It tries to measure such things as:
Momentum, how fast or how forcefully a market is moving.
Price, where it is today relative to where it was some number of days ago.
Trend, trying to fit a mathematical curve to the price action to see if a market is going up or down.
Thrust, moving averages, volatility, statistical incidence and a whole slew of other things are measured and graphed as oscillators, point and figure charts, smoothed averages, moving averages, stochastics, relative strength indexes, percent of range indexes, overbought/oversold indexes, and various combinations of those things.
Unless the technical tools utilized are thoroughly understood as to what they mean what they depict, what their strengths are, and what their weaknesses are, they shouldnt be used. In this manual I will always try to clearly define the technical tools i use.
There are even more ways to do technical analysis than I have mentioned, in what seems to be an infinite and ongoing attempt to predict what WILL happen in the markets, or what SHOULD happen in the markets.
Unfortunately, none of these methods is able to directly measure the emotional human reaction to price movement.
Technical analysis will work of the time in some of the markets, but there are no absolutes, no perfect systems. There are far easier methods to follow than technical analysis that yield as good or better results.
I know of no human being now or past who, unless under the direct inspiration of God, can predict the future. It is not within the power or the realm of man to do so, so why waste time trying? Why strain at an exercise in futility?
Fundamental analysis tries to take into consideration such things as the weather, plantings, inventory on hand, production rates, inventory in process, labor situations, political events, or any known fact that might affect the supply or demand of a particular market.
This is done mostly by the targe commercial houses who have a vested interest in obtaining such information, and by some of the largest traders for the same reason. They can afford to do it.
I have not the time or the resources to compete with them in the search for such fundamental knowledge. By the time I read or hear about these things they are no longer "NEWS", they are "OLDS", their effect on the market has already been taken into account in the price.
To trade in the futures markets, I have to realize that for me there is only one major reality - PRICE! Open Interest and Volume are secondary only and are in the "njcgjo know" category. By the time I get them they are too old to be of much value.
The best way to trade markets is by learning how to harmonize with observable market phenomena. That is what I will be trying to show in this manual - how to get in step with the OBSERVABLE PHENOMENA. 1 am reminding myself about harmony, rhythm, and being in tune with reality.
I have come to realize that the price of a futures that I see on any given day, at any given moment, is the only usable reality. Even it is not necessarily true, due to the nature of the reporting.
As an interested party in futures markets, t wil! be tempted by a!! manner of technical and fundamental considerations. I must develop and maintain the discipline and willpower to ignore all of what 1 hear from the outside, I must develop the self-confidence and the self-control to ignore al! of the experts and what they are saying, doing, and/or advising. The only reality that I can work with is the latest price information that I have.
1 must not give in to my human nature, which will cause me to try to find a system that will beat the markets, I must not give in to the human tendency to want to reduce everything to numbers in some kind of magical "holy grail" formulation. If I give in, i will only end up a loser. I must remember that at ail times only ten percent of those vvho trade futures end up as winners, the other ninety percent are losers. I can succeed at the expense of the losers, but only if I DO NOT DO what they do.
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