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Leave it to you to come up with the sophisticated stuff
I hope to see you posting your group and sector stuff here. Given the behavior of the Dow and the non-participation of the ES in all this, there should be some interesting cross-currents in the coming weeks.
Can you help answer these questions from other members on NexusFi?
Just checking to see what the neighbors are doing.
Interestingly, this is a mirror of the change in the uptrend angle that the ES took two years ago. This is not to say that the ES can't rally, but this is also characteristic of the topping process.
The dashed upper limit is drawn as a result of a supposition that that first swing high was an overbought condition, given that price settled into a steady, lower upper limit thereafter. Either way, the Dow is weak, and has been for months.
Danger Point. Sounds like something by Tom Clancy. Or Michael Connelly. Richard Wyckoff coined the term nearly a century ago to call attention to that point or level or "zone" at or in which the trader would be in "danger", i.e., in danger of losing money, the level at which the market would poke him in the ribs and suggest that he might just possibly – or probably – be wrong about his trade. The purpose of this construct is not to demonstrate to the trader what a loser he is but to keep him from becoming one.
When one enters a trade, he quite naturally expects price to move in a certain direction, though how far is pretty much unknowable. If price instead moves in the opposite direction, this in itself may not doom the trade, but if the trader examines his reasons for having entered the trade in the first place, he will also be able to determine the danger point. For example, if the trader sees what to him is a double top and enters a short just below that double top, his danger point is that level just above the double top. If instead of falling price rises and makes a higher high, the trader can't escape the fact that he was wrong about the double top. The chief consideration, though, is to prevent the trader, via a stop, from having to suffer simply because he is experiencing an unavoidable loss. The construct also applies to the opposite: a double bottom, below which is its own danger point.
Danger points also apply to other commonly-used SLA/AMT entries: above or below the 50% reaction/rally level of a previous up or downmove, above the upper limit of a range or trend channel, below the lower limit of a range or trend channel, above a lower high, below a higher low, above or below the apex of a hinge.
Given that losses are inevitable and unavoidable, placing hard stops at or just outside the danger points does not prevent the loss itself but does prevent it from becoming much worse than it would otherwise be.
Should it appear that your commitments are started right and your stops reasonably well placed, then the frequent catching of stops should be taken as a warning that you are not operating in harmony with the trend of the market. Thus, if you persist in selling stocks short in a rising market you are bound to expose your stops to the danger of being touched off on bulges. Conversely, if you repeatedly buy on what you believe are reactions only to discover that your stops are consistently caught, this should be taken as an indication that you are operating on the wrong side of the market — the trend is down and those presumed "reactions" in reality are waves of liquidation. Such errors of judgment sometimes lead students to abandon the use of stops. Nothing could be more dangerous. (Wyckoff)
Danger points, however, also serve an unexpectedly valuable function to the trader who prefers retracements. A common question asked by such traders revolves around "Where (exactly) do I enter? Do I enter a tick away from the top/bottom of the retracement? Two? Three? More? Do I enter a tick away from the highest/lowest inside bar? Two? Etc?" If, however, one instead looks at danger points and enters N ticks away from them, the fact of the retracement is there, but the details of its structure become irrelevant. This tactic also avoids the press of waiting for a retracement to complete itself before transmitting the trade, only to find out that there isn't enough time to do so. This tactic is also useful in modified form when entering reversals, the advantage here being that the danger point is known well in advance due to the structure of the range.
And if price keeps running over your stops like a rogue truck?
After you have traded for a while, if you find that your stops are being caught too frequently, it will mean that you are not careful enough in starting your trades. Thereafter decide to use more discrimination. Refuse all but the best opportunities. Wait for them. Take your positions as close as you can to the danger points, as shown on your charts or on the tape. Place your stops [at or just beyond the danger points]. Study your mistakes and profit by them. Know every minute why you are starting a trade, why you are holding it, and why you should close out. (Wyckoff)
If you look at every top we’ve lived through, they each have certain ingredients -- internal market deterioration; rationalizations and lulling; using up buying power even though you used to know better; and waiting and waiting for the bell to go off, which proves in hindsight to be rather more of a little tinkle that you thought you heard but weren’t sure enough of to act upon. The one eternal aspect of every market top is that it occurs before we’re ready for it.
Someone came by the office the other day to try to sell a particularly sophisticated computer software program -- at $1,900 per month. Up on the screen went what the salesman thought was the most useful, or eye-catching, or maybe even terrific, part of his demonstration. "It compares," he launched his pitch enthusiastically, "the this with the that, and down here you can see the relative strength whatzis compared to both of them" and so on. There may have been half a dozen windows on the screen for various comparisons all at once. Seeing me standing there with my arms crossed on my chest, he hesitated, and then finally blurted out: "Isn't that terrific?"
"Now what do I do?"
"What do you mean?"
"I mean, having looked at all those nice pictures, how does it, where does it, tell me something useful?" Then I felt I'd better elaborate. "Do I buy the relative strength? Or do I decide to buy the weakness instead, on the theory it'll catch up? What do I do? maybe you've got a button to push that'll give a signal."
"Oh, sure," he said, warming up again from that bewilderment. He threw another set of windows and zigzags up on the screen, and demonstrated that one roller coaster had just started scooting across its zero line. "There's the action signal for you."
"But I don't want that signal," I said. "How many inputs did it take to get it across that line? I want the message that told some guy to buy back down here as the roller coaster was coming to the low of its ride and arcing upward. He's probably rubbing his hands with glee to sell to your guy who is going to buy because of your signal."
I don't know that it's that so much as believing or beginning to believe that we're smarter than our own plans. And this step onto the wild side is common. Some of us have done insufficient testing. Or we don't trust our own competence …