Transcript for:
Price Action and Trading Psychology Insights

so what i will do is i will speak for 40 minutes till it comes up to the hour to the full hour and then i'll take a break and we can assess the uh we can assess the the mood because the the presentation that i have is quite a lengthy one so the topic of today is price action and that falls into several categories i have i want to talk about day trading in the context of i want to talk about price action in the context of day trading and i also want to talk about scalping and i i think those two they can support each other in your understanding of price action and i also want to talk about patterns that are pertaining to the day of the week one of the the patterns that was incredibly beneficial for me last year and in the past has is is a pattern in stock indices whereby if during the friday's trading session the normal trading session where the stocks are traded if during that session the market is incapable of getting above the highs of the previous day i.e if friday's high is lower than thursday's high then i researched that 10 years back so you know 10 years or 52 weeks of trading so 520 samples now it's not every single one of those samples that will have that particular pattern but when it did happen when friday was lower than thursday's high in an index like the s p 500 and in the dow jones index of all the samples that i found 95 of those produced lower prices on a monday so i want to take you through that as well because i think things like that could be incredibly beneficial when you're swing trading so much of the material that i will be presenting to and by the way you will see me turn my head this way that's because i will have open positions going on right now i am i'm short the the nasdaq and i wonder if i could i imagine that i can i wonder if i can show it anyway i am i'm short the nasdaq and it's it's going very well i'm i'm incredibly bearish the market and that has cost me a fair bit i actually lost money in january because i pursued the short side and well so far february has started well but you know the month is still young what i want to talk about is price action in the context of stock indices that's not to say that you can't use this for foreign exchange or commodities but i focus a much of my time on stock indices which i find easier to trade what you're seeing here is a graphical representation of the percentage gain or the percentage loss from the dow jones index over the last 30 years so what this means is that the vast majority of of of trading days will oscillate around you know a small gain for the day or small loss for the day and then you'll have the outlier days like not that 1987 is is on this but for example during the 90s and the crisis of 2008 and 9 you had some horrific down days in the dow jones index and and likewise during the good days often in bear markets when you have the snap back rallies you'll have some tremendous good days but what's interesting about these seven and a half thousand observations is that they're more or less split down the middle and what that should tell you is that when you're trading and starting stock index when you're looking at the dow jones index over the last 30 years or seven and a half thousand observations you'll find that that 50 50.6 of all trading days in the dow jones index finished in plus and 49.4 of all trading days finished in minus so even though that the dow jones has grown tremendously over the last 30 years or the last seven and a half thousand trading days the outcome of any given individual day is 50 50. when the trading day starts from a from the point of view of being in a bull trend or being at a bear trend bull market a bear market the the the percentage chance of the odds of the dow closing up for the day or closing down for the day and this obviously also applies to the s p 500 because of its direct correlation with the dow jones index is 50 50. and that's an advantage to us because then when we go into the trading day we may as day traders be somewhat biased of what has been going on yesterday the day before but the reality is irrespectively of that day before the two days before being a bull trend or being a bad trend the odds of the market closing either down for the day or up for the day is 50 50. now when i when i it says here my teaching style but what it could also say is my training style um i am uh when i give a presentation like this on a via web seminar or in person at a conference or show i noticed that other speakers will often show you the full picture so they will show you the full chart and then they will say and i sold there or i covered my short position there or i sold short there and then they'll explain to you why my job i feel is not to act as a disservice to you i don't believe that that way of giving a speech or training or even training myself is particularly conducive to efficient training my my job that i see it here is to i i see myself as making you aware of things on a screen my job is to point things out to you but if i point that out to you with the benefit of hindsight i.e if i told you and that's why i'm selling short here well your eyes are deceiving machines and they will already see what comes next so you will almost invariably go to the to the cheat sheet which is the rest of the chart but that's not my job my job is to train your eyes and make sure that you're not giving the answers so i'm going to train you in an entirely different way where you don't get the answer to the outcome and that means that that puts an incredible strain on your eyes not physically but mentally but through that strain you're also building new neural pathways to seeing the market in a different light now i want to ask you a question depending on the broker that you're trading with you can go to virtually any broker's official website and you will see that their risk disclaimers will state that 79 80 of all their clients are losing money so i just grabbed a couple of uh a couple of brokers risk disclaimers this one is 79.6 this one is 79 but here's the thing this seems to be the norm it's normal that people lose it's one of the reasons why trading is in the limelight of many regulators and legislators because they feel that trading is akin to gambling and that many being let down the garden path without really having a fighting chance of making money and trading so what i want to ask you is can we use this information to our advantage because it seems to me that this is the norm losing money in the market is the norm this is normal so i like to ask you well what's not normal what do the 80 continuously do what do the 90 continuously do and and what do the 10 that aren't losing what are they doing because it seems to me that normal human behavior can be directly attributed to the large percentage of losses that we are seeing in the trading industry so show me the face of not normal because if this had been a school and the school had a failure rate of 80 90 this school wouldn't be in business for very long i think we can agree on that so why is this industry so cursed why is it that trading is so fraught with difficulties is it because of the markets is it because of the information that is at our disposal or is it something entirely different and there's no shortage of information available to us absolutely you you could you could spend yourself a fortune on trading courses on trading information on trading books on tutoring etc and having spent all that money you could be every bit as close or every bit as far away from successful trading as you'll ever be because the sad truth is that the more that we engage in books on talks and courses the less we are likely to give the necessary contemplation to what the real problem to trading is and the sad truth is that many educators globally are no better traders than you are they haven't cracked any kind of code because there isn't a code to crack and and i'm hoping that by you inviting me to give you this talk that i would be able to give you a different perspective to what trading can be all about because if everyone is engaging in this kind of purchasing cheap courses and expensive coaches and courses and engaging in price action and engaging in fibonacci and engaging in macd and rsi etc etc etc if we're all engaged in the same thing and the vast majority of our losing money anyway then it stands to reason logically i feel that maybe the answer is not found in the in the tools that we're using the human tendency is to believe uh anything that gives us comfort and deny anything that gives us discomfort and that's the way our brain is put together we want to avoid uh discomfort and we want to embrace pleasure and i've tried to illustrate that with some funny cartoons what spending 10 years on the trading desk taught me was that many people love to find a place in a downtrend and buy it so if the market is trending lower it seems to be in our it seems to be in our dna that we prefer to buy something that is falling because it gives us the uh impression of it being cheap but what's so perverse about the industry that we are conducting ourselves in is that wow the market is falling this is brilliant that's what i like when you're short you're happy when you see the markets fall we seem to be attracted to things that are on offer if you go to the supermarket on a saturday morning to do your shopping the supermarket knows that in order to attract the likelihood of the of you going through their particular set of doors as opposed to another supermarket is to make things cheap for you so they will they will try and lure you with a special two for one uh or if you or half price so and so it's perfectly natural it's just the way that the human mind works but what i observed over the 10 years on the trading floor uh observing people trading was that when the market was falling they liked to be the one that stuck their hand out and tried to grab that proverbial falling knife and it was sad to see because many people actually failed to make money using this strategy another thing that people love to do was they love to take part profits now the thing about taking part profit say that you have shorted uh the market at at at 90 and the market is now trading at 80 and 70 and 60 and you're beginning to you're beginning to feel a little bit uncomfortable because the profits are racking up so in order to appease your troubled mind and your troubled soul you will begin to take parts of the position off now you may not have a particular reason for doing so or not one that you that you consciously understand but subconsciously your mind is trying to um negotiate with your logic it tries to negotiate with you saying well look if you take half off at least you've locked in that profit now am i saying there's anything wrong with that yes i do because this is what the 80 90 of people are doing and what i need you to understand is that if you want to be a profitable trader a successful trader that makes a lot of money trading unfortunately you need to hold a mirror up and say well am i the 10 or am i the 90 and if you engage in that kind of behavior you are invariably belonging to the 90 group but if you don't engage in that behavior at least not we can all have that moment in time where we feel i have got i have got to take some profit home we're not talking about what we do every now and then we're not talking about an anecdote we're doing what we're talking about what we tend to continuously do if if we can continuously provoke a behavior in our self where we are not tempted to try and and and and uh buy something that's falling and rather we're thinking well it's falling maybe i should sell short and if we could stop trying to take partial profits well then you're beginning to act like the ten percent you may not be rewarded for it immediately but over time you need to trust me that you will another and final behavior trait that i wanted to discuss with you is that one of the things that larry passavento taught me was and he's probably going to say oh you're giving me too much credit but i don't think you can give someone like that too much credit him and another gentleman called dr david paul taught me the value of adding to winning positions now adding to a winning position is a particularly difficult segment of trading especially day trading where our time frame tends to be quite short and narrow adding to a winning position is much easier if for example your investor you buy a share at 100 and it goes to up to 150 while you buy a few more shares that's adding to a winning position but most people get that back to front they will add to a losing position over the 10 years that i spent on a trading floor observing about 50 000 people 50 000 retail accounts i could probably count on one hand the amount of people that added to a winning position whilst the behavior of adding to a losing position well pretty much everyone else added to losing positions now i'm not gonna i'm not gonna sit here and be holier than thou and say i've never added to a losing position because of course i have i'm a human being and i am not going to say that i always add to my winning precipitation because i don't it's also a question of well what is my mood on this particular day if i was a robot i would probably always add but we're not robots we are human beings so are aspiring traders so different to say people who want to lose weight you know we we have the uh the overweight individual that will then go through a transformation at least hopefully and but very often tends to after the transfer variation to go back to where they were and it's a little bit like that we are learning about trading we're doing well and we have transformed ourselves but then we go back to our old behavior and so which is akin to putting on the weight again so now we feel that we need to buy more books more courses we need to change systems we need to engage in gan bollinger brands fibonacci etc which is akin to people swapping from atkins diet to slimming world to weight watchers to whatever it may be and a little personal story here when kobet 19 broke some year ago wow it's been a long time when covert 19 broke one of the early warning signs whether you would catch the disease or not was whether you you were overweight or not and it at least it was publicly informed to us that if you were overweight and you had a weight problem you were more likely to be harder hit by covet 19. so i set in motion a a a regiment to losing weight because i was at least from a a conventional framework i was overweight i'm not so sure that i passed was as overweight as the as the scale suggested because i'm tall and and muscle ten at muscles way more than fat but nevertheless i lost about 12 kilos which is about 24 pounds and the way i did that was not in that in that crash slimming you know pursuing a uh a particular diet like atkins or keto or whatever they are called but actually understanding well what do i need to do in order to lose weight and i approach trading from the same vantage point i think well what do i need to do to understand trading what do i need to do to be a successful trader well one of the things that i need to understand is that you can't expect to win every single day and if you think that trading is linear i.e that you can simply tap a line thinking well i'm gonna mix i'm gonna make a hundred dollars every single day or whatever it may be well then you're doomed for failure because you're not going to just win a hundred dollars a day some days the market will give you thousands and thousands of dollars if you will let it and some days you couldn't organize a a knees up in a brewery i everything you hit just goes wrong but if you are aware of the randomness of your rewards in trading your job will then circulate around oscillator around you simply following the same procedure irrespectively of the outcome you see that's the best that we can do the late mark douglas he was a great advocate at look you need to stick to your strategy come come rainy days or sunshine days because that's what's the hallmark of a winning trader is now i know this is about price action and and don't and and don't worry i haven't forgotten about this we're getting to that now but it's so important that you understand that trading is so much more than chance because if it was just about charts everyone would win in trading now what i want to talk to you about now is the deception of charts because your eyes they will seek out the information that confirms the fact that you are seeking or the bias that you have already established for yourself so if you are negative the market well you're going to gravitate towards or your eyes will seek out the things that confirm the negative bias so let me give you an example here here you have a a downward sloping trend you have a series of lower highs but when you connect the lower highs you have a beautiful looking trend line now imagine that you are sitting doing all your research and you're concluding wow isn't this amazing this has got to be the easiest way in the world to make money look at this the market i simply draw a simple trend line from these series of lower highs and i project that out in the future and at that point where the market goes above my trend line i enter into a purchase order and look at the result i mean this is like a money machine isn't it that's the deception of eyes because what your eyes haven't picked out from this simple chart is that you also have a very simple trend line connecting this high with this lower high with this lower high and here you also have a trendline break but your eyes didn't pick that out for you and the reason why it didn't do that is because he could see that this didn't confirm with the bias that you had so here you want to be a buyer you want to believe that trend lines are working but if if if you don't do your homework and you're not aware of how your eyes are deceiving you then you're going to you're going to base your trading strategy on a false premise and we really don't want to be there trendlines always look easy and compelling after the fact and i'm not disputing the appeal of trend lines not at all but i'll tell you this trend lines don't work much more than 55 60 of the time anyway that means that if you execute 100 trades you're gonna have 60 good trades and you'll be happy with that but are you mentally equipped to deal with the 40 because what i noticed in my 10 years on a trading floor is that people are perfectly capable of having a trading strategy that produces more winning trades than losing trades easy virtually every single client one more frequently than they lost yet overall almost all of them were losing traders so you need to get a completely new appreciation for how important it is to lose well i wrote an article about this which i'm more than happy to give to you if you email me it's called best loser wins the man or woman who takes the loss is the best is going to be the one that run away with the price at the end it's a 5 000 word uh piece of article so i can't just you know dish it out to you and you need to read it for yourself but i i hope you will so with all this in mind having spent 20 minutes just talking about psychology i don't want to show you one completed chart after the other so let's make it difficult let's make this a an exercise in truly training our eyes to see what's going on in the market and this quote here you can read it in your own time but it's a particularly beautiful quote about how we as human beings tend to avoid heartache even though it's probably one thing that shapes us better than anything else see here you don't know what the answer is now you have to deal with it bar by bar just like you would when you're sat in front of the computer and the screen during a trading day starting from the first candle we have a series of candles here they're all bull candles candle one two three four five well one two three four bullish candles then on candle five we actually feel above the the prior bars high and the market falls back a bit but bar five and six don't look particularly ominous it's not until that we look at bar number seven when i see bar number seven there's certain things about bar number seven that suggests to me this is uh the the the tune of the music has changed first of all the length of the bar is significantly longer than the prior bars it's even longer than this very bullish bar that we see here on bar number four the second thing i notice is that there's virtually no tail there's virtually no wig on the bar that means that during this time frame here there was a uniformity in the market the sellers press the market all the way down to the close of this bar now when we're price action traders isn't i can hear someone uh are we taking a break or is everything okay everything's fine here john okay all right it was just that all of a sudden i heard something okay i'll carry on for another eight minutes then we can just assess the situation does that sound good sharif thanks okay perfect okay so bar number seven closes at its lows but is it so incredibly important when we are price action traders that we have context we need to take context in mind so what do you do in this scenario what is context in this scenario well this this bar that we're seeing here this is a five-minute bomb let's go and look at what happens on the daily bar here you see the dax being a downtrend pulls back for three days another eight days down go up down down here it actually makes a higher low that gets confirmed once we take out the prior the prior tops high so this sets in motion and new uptrend up here we have a very steady uptrend and then we have a big push-up we have a double top we have a failed attempt above this top here now we have a very very negative bar and we now have a three days contour trend so this number that you're seeing here is going to be important it's 11 270. this is what we saw here this bar number five has a price level of eleven thousand two hundred and seven so that's where we are right now so now we have the context the context is that we've been in an uptrend we had a very sharp reaction down technically speaking this shouldn't change the course of the trend it should actually still be upwards but let's have a look now before we carry on there's something that i want to bring to your attention when you are looking at a chart you will most likely be using your brokers charts and that's absolutely fine but that does present a problem and i want to show you what this problem is here you're seeing dax for the last five days so with that i can i can hear someone having their microphone on is there any way that we could turn that off what you're seeing here is the dax simply during the trading day from uh european time eight o'clock in the morning till 4 30. this is when the stock market is open and at 4 30 it closes and then it reopens the day after but many brokers almost all brokers they will have a 24 hour service so what you're seeing here in yellow is what happens outside of the market opening hours and you can see how if you are taking what's going on in the yellow into consideration during the trading day you may actually get a false picture of what has been going on you may be swayed one way or another i'm not arguing that this is always the case but i'm saying please be mindful that a stock market is open from 8 to 4 30 or in the europe it's open from 2 30 in the afternoon till 9 o'clock at night for the u.s markets but what happens outside of the our market hours you need to be a little careful when you're looking at the chart because your broker chart will have that in on display as well okay so now we got the context the context is that the market has been trending up but with a reversal bar like this what do you think that you would do now i'll give you 10 seconds just to consider what you as a trader would do a a bar like bar number 7 up here to me is what i call an extended bar an extended bar is a bar that is longer than the prior bars and in particular a good extended buy is one that closes right at its low or the flip side right at its high when i see a an extended bar like this one this issues a sell signal for me this means that i need to find a place to sell short so let's what i apparently before the the sound went what i've asked you to do is what do you think is going to happen from here what would you do if you were confronted with this pattern the following bars shows the beginning of a downtrend in any given downtrend you will see counter bars so here you see a counter trend bar here you see a counter trend bar but what's important is that none of these counter trend bars are going above a prior bar and in particular and listen very closely now that it doesn't close above a prior bar from my point of view as a price action trader i find it invaluable to notice when a prior bar high is being exceeded by the current bar so when you're looking at this series of bars here at what point do you see the current bar closing above the prior bar you don't see that until here this is the first example over 1 2 3 4 5 6 7 8 9 10 11 12 13 14 bars that the market manages to close above a prior bars high this often sets in motion in in terms of a a downtrend a series of short covering bars so when you are confronted with his current chart here what would you do while you're thinking about that let me let me tell you something to trade well to make money from trading you need to have a mindset that enables you to read a chart without emotion it it's no good that you are reading a chart and you get a sensation of fear or excitement in your stomach because you are afraid of missing out or you're getting a simon show it's okay to be exciting but excited but you're actually better off if you can look at a chart completely rational and cool as a cucumber and simply just reflect on both sides of the equation i think that i think it's incredibly important to have a trading philosophy that you are true to when you are trading i call it a guiding principle how you want to trade are you the kind of person that will try to make money every single day or are you the kind of person who will go for that one every one day every every five where there's the trend day and you are adding to the decision all the way up or adding to the position all the way down uh i'm i'm not the person to tell you what your trading philosophy should be but if i was confronted with a chart like this then i would say i would like to short this market the reason why i would like to short this market is and of course you can accuse me of knowing what happens next and that's absolutely true but what i'm trying to do here is to train you one bar at a time and i don't see anything here that suggests that the trend has changed that means that any counter trend move is an opportunity for me to sell short now this is this what you're seeing right here is the reason why i have lost money in the month of january because every single time that market had fallen hard and it made a counter trend move up i was shorting here but what has happened so much in the last month or so is that the market just bulldozed higher uh because it's a very strong bull market one that i'm struggling to believe in would you believe it so looking at the next chart what are you seeing now what has happened now that also happened here what has happened here is that the up here the market closed above a prior bars high and here we have closed below a prior bar's low in a downtrend which to me suggests that this is an opportunity to sell short right here in what i call market unclosed sell order you're waiting for the bar to complete and if there's no discernible tail in the market on the sorry if there's no discernible tail on the candle or the bar whatever you use i'm i don't mind whether you use a candle chart or a bar chart doesn't make any difference to me same information just the candles perhaps a little easier on the eye than bar charts are this would be a sell signal for me are you ready for the next one so what i want to discuss with you is what scenario weighs the highest here what risk is associated with each scenario so there's this there's the bearish scenario this is an area where we are saying the market is in a downtrend we just had a little counter trend and we're headed lower but of course there's also this idea here that well the market filled a gap perhaps and now we're headed up again and this bit here is just a buy opportunity before we're headed even higher so you can see that you can address this from both sides point of view and every chart is ambiguous you will never have a debt cert chart you need to accept that you will never have a debt search situation so if you are using this as your low and you want to be a buyer loyal then you're probably going to have this as your stop loss stop and you're hoping that we're going to go up to the old high whilst if you are selling short here well you can have a stop loss here you can have a stop loss here you can have a stop loss anyway in between but but let me tell you something about stop losses stop losses is simply just a reflection of the risk you want to take on board so if you're selling short here and you're having a stop loss here your stop loss is going to be tiny your risk is tiny but your risk of being stopped out is big if you have a stop loss up here your risk is big but the risk of being stopped out is tiny do you see that this is simply just a an equation between risk and reward the bigger you make your stop loss the smaller the risk of being stopped out but if you are stopped out much greater loss and that ladies and gentlemen is something that every single trader will need to embrace every single day because i tell you this to believe that the perfect trading setup exists and that somehow it could be bought from a software package it's just blatant lie it doesn't exist there is no such thing as a sure thing it doesn't matter whether it's gan or fibonacci or price action or trend lines or bollinger bands or macd rsi stochastics no such thing as the sure thing that means that the sooner that you embrace that in order to be a profitable trader you need to learn to lose well the better you will significantly shorten the learning journey and arrive at your profitable destination if you embrace the idea of taking losses larry pasavento he says quite poetically he says take care of your losers because the winners they'll take care of themselves a colleague of ours in the industry his name is rodriguez he worked for a fx broker i think it was called fxcm but you know i could be wrong they investigated 25 000 of their clients and over a 15-month period where these 25 000 clients had executed 43 million trades now 43 million trades in the fx market you know euro dollar stirring dollar dollar swiss dollar yen euros then and or you know all those pairs but predominantly in euro dollar now i'm gonna give you 20 seconds to think about this and whilst you're thinking about it i'm going to take a sip of water out of those 43 million trades how many of those trades were winning trades the percentage please you have 10 seconds to think about it cheers i hope that you got an answer in mind now the answer is 62 of all trades 62 were winning trades i.e 38 of all trades were losing trade so that's a pretty good hit rate isn't it now when they won they won 48 pips on average now i need you to once again put your thinking cap on and answer this how many points did they lose when they lost you got an answer here we go 60 percent of all trades were winning trades when they won they won on average 48 odd pips but when they lost they lost about 80 odd pips is that a winning strategy no it isn't even though you have more winning trades than losing trades now to me ladies and gentlemen that's normal behavior what you're seeing right now on the screen that's normal that's a normal person trading more winning trades than losing trade but when they're faced with a losing position they are incapable emotionally to take a loss normal behavior conducts normal traditional technical analysis they will study candlestick patterns and technical analysis murphy's everything that we have been told to study but it's simply just not enough if this was enough you wouldn't have a losing percentage of 90 of all people you just wouldn't so i want to engage in the well what's the not so normal behavior and i think this is perhaps a good time just to throw the microphone back to the organizers of this website this web seminar and ask them is everything okay are we on track am i okay to carry on talking all perfect all perfect thank you thank you so much okay thank you so let's talk about the not normal behavior i put this into a little format the i like is this is the universe talking here there's the action there's the reason and then there's the reaction but i call this the subconscious reason i'm letting my loss run why am i doing that well i'm telling myself that it is because i'm hoping the market will turn around but the real reason why i'm letting my loss run is because i want to avoid pain another thing is that i'm telling myself well this indicator ratio price action etc is telling me that the market is going to turn around soon the real reason is i want to avoid paying or i'm taking my profits now i'm telling myself you can't go broke taking a profit but the real reason is i want to avoid the pain of seeing some of my profits disappearing or it could be i'm taking my profits i'm telling myself if i take my profits now i'll make up for the last three or four losing trades so i'm back to break even for the day the real reason is you want to avoid pain and you want to balance pain you want to get back to feeling good about yourself another thing is and this is what 99 of people do is that when they're winning instead of betting more they're betting less i'm winning so i'm reducing my stake size uh why well i'm telling myself i want to take it easy now the real reason is you want to avoid pain of losing the money that you have bet have you ever been confronted with a psychological experiment whereby you're given the choice between two outcomes so you could for example have i'm going to give you ten thousand dollars right here right now or we can play a game of hits and tails hits you get twenty thousand dollars tails you get nothing the vast majority of people who are confronted with this experiment will say i will take the uh i will take the certain ten thousand dollars but now when you flip the experiment around and you say hey you owe me ten thousand dollars but i'll let you pay for it heads or tails heads you owe me nothing tails you owe me twenty thousand dollars a disproportionate amount of people would game you for the loss i.e they would take the certain profitable position but they would gamble to reduce their loss it seems that human beings tends to become risk averse when we want to take a certain profit or certain outcome but we become far more risk inviting when we want to avoid the pain of having to say take a loss or paying back someone who we owe ten thousand dollars and this is taken from an area of psychology called behavioral psychology it wasn't necessarily reflected to traiting as such it was mere a a an an illuminating experiment how human beings tend to act in its own uh in its purportedly wanted to act in its own best interest but in reality is doing exactly the opposite why are they doing that because they want to avoid the certain pain and they would embrace the uncertain pain maybe this is explains why ninety percent of everyone is losing money trading if you want to have a fantastic insight into the mind of a trader i recommend that you get hold of this book here it's written by wiley or published by wiley written by fallon william d fallon is about a legendary bond trader called charlie d you can even find a youtube uh video with him but from the late 80s early 90s where he's giving a talk about trading in his biography by fallon charity says the time you know you become a good trader is that first day you were able to win by holding on and adding to a winning position and there's many people in here and he's talking about in this group of floor traders that he's addressing at the time there are many people in here in the pit that have traded for a long time and who have never added to a winning decision and that is unfortunately the the nature of the human condition we want to cut our winnings we want to bring home the harvest so if i bought a six and i can get out of seven get me out but i am not so quick if the if i bought a six and the market goes five and four because then one of the the differentiating conditions between animals and human beings is that we have hope we hope that we're somehow going to get out of this that's human nature it's human nature to ride the losses but when you are a good futurist trader everything you do hurts everything you do becomes uncomfortable when you are a good trader so you gotta fight your inert humanness unless there are reason to do what you want to do based on what you see in the market so i want to repeat that when you're a good trader everything you do hurts everything you do feels uncomfortable it feels uncomfortable to buy a storming rally up the pace it feels uncomfortable to go short the market that has already fallen it's so much more appealing to buy something that's fallen because it feels a little bit like i'm going down to the supermarket on a saturday morning and i see that the price of beef philly or or milk or butter has fallen in price and who wonder what who wouldn't want to buy butter at half price unless of course you're vegan so people tend to be fearful when they should be hopeful and people tend to be hopeful when they should be fearful they've got it the wrong way around and part of my warm-up process for any given trading day is to make sure that my mind is straight when i do that that that contemplation and the the warm-up practice i trade so much better than when i just go in cold and i've just looked at charts so let's go back to the the scenario here which one weighs the highest here and what risk is associated with each scenario well we already answered that we already discussed the having a stop loss down here or having a stop loss here depending on whether you're long or short and my argument from a price action point of view is that this was a counter trend in a downward trend and i need to sell short here the moment this bar closes here so let's get some more information price action is meant to help us understand what's going on so the back so the box to the right is enhanced snapshot of the last seven bar so what you're seeing here i've highlighted over here what are we seeing here well we're seeing the market attempt to get above a prior bar's high but the moment we got up there the limit sellers immediately stepped in this is something that i use extensively when i'm scalping i will observe a five minute bar and the moment a market gets above a prior bars high depending on trend or prior bar is low depending on trend i will do the opposite so i would sell short here i would buy here but that's from a scouting point of view what we're doing here is we are day trading or precision trading and whenever you see a market make this particular pattern where a bar is rejected above the high of a prior bar this is a prior about high when you see a market being rejected above here you can be quite certain that the market at least will go down and test the area below certain but never complacent okay let me just see where we are here we are so market goes down makes a new low here and now the very next bar the market closed above the high of the prior bar low what would you do now at this point i got two scenarios to select from i can buy a double bottom where the market has closed above the prior bar's high now that strategy has paid off before just trying to find those here and here so it looks like a double bottom risk is probably small because if i'm a buyer right here i don't have to have a stop loss much further down than here so my risk is really small and i could probably look forward to a market going back up to the old highs so this is my reward this is my risk that looks like a pretty good risk to reward ratio and you also have the opportunity to add to your winning positions as the market confirms the trend higher or you can sell short and if you sell short it's because you're believing well this is just a trading a a slight trading pause but we're going to be headed lower you will have a a more difficult time if you're selling short here because you need to have a stop loss having a stop loss here is silly because it's too tight a stop loss then you can have a stop loss here but that's almost the same as having a stop-loss here so really a meaningful stop-loss needs to be above here or at a minimum above here why well because this is a signal bar a really a significant signal bar and if the market can make its way back above an important bearish bar well it also means that whatever bearish forces has been absorbed by the polish forces so depending on stop the odds of success is probably 60 for short position but you need to have a bigger stop loss and 40 for a bullish position but with a tiny stop loss okay my philosophy when i'm trading from a price action point of view is keep pressing the trend how many how many fortunes have been lost trying to catch a low now if i was to catch a low then let it at least be a low where there was a double bottom or a double top if i wanted to short i'm going to continue for another eight minutes and then i'll take a break and we'll see where we are okay john yeah thank you so in this particular case here the market once again closes below a prior bar's top but we do have a risk of a double bottom here it's probably a small risk because we close quite negative but let's see what happens but before we do let me give you an opportunity to assess the situation let me give you 10 seconds to figure out what would you do here okay sorry i was just checking my positions following this new low down here the market actually stages three bull bars they're not particularly convincing bull bars they're very small in in in in length and they haven't so far managed to get above the the the bear bar breakdown so when a market has a fair degree of overlap bars within the context of a bull trend or bear trend and the market makes a new high on new low based on what we just see have we seen in lulu it's for me one of those times when i would carry on pressing the short side of the market i don't for one second believe that the market is about to turn around now i i can read bars like you can as well i can see this is a fairly tight bare channel but i don't believe that there's a reason to be bullish yet and this is one of the things that i noticed many people at the brokerage get themselves into hot water over and over is that the moment there was just the slightest little bit of reprieve in a trend being a bull trend or in this case a bear trend they would immediately interpret this as whoa the market's going to go back up again but i don't believe that that's the case but let's see what would you do here let's see what happens so what i feared would happen actually happened the bulls actually managed to build on these three bull bars and is now pushing higher with this in mind if i was in a fair position i would probably be somewhat concerned about what was going on on here depending on where my my entry was if i was not in a position i would be thinking well hang on we just managed to close above the last one two three four five six seven bars we managed to close above this congestion here and this is actually the highest close that i can observe for 1 2 3 4 5 6 7 8 9 10 11 12 13 some 13 bars if i'm buying here where would my stop-loss be well my stop-loss could be either here the risk of being stopped out are big but my risk is small all my stop-loss could be here if i'm selling short here where would my stop loss be well if i'm selling short here i would have to have a stop loss up here i would probably lean on the sh on the long side here basis on this pattern here so you will notice that i don't use any indicators no moving averages absolutely nothing i simply just interpret bar by bar i don't think that the trend has necessarily changed because the market seems to be that the downtrend seems to be lasting a lot longer than the short burst of the page so for example here we were going up one two three four four five bars perhaps whilst we've been going down one two three four five six seven eight nine ten eleven twelve thirteen one two three four five six seven eight nine ten eleven twelve thirteen fasts don't read too much into the fact that they were both 13 bars duration it is common that downtrends last for about 12 to 13 bars because it's equivalent to about an hour i think maybe has something to do with automated trading i can't be certain okay have you decided what you're going to do now that's the answer so what i want to do now is i want to give you an opportunity to judge for yourself what you would do here some of you will have established a long position here somewhere you will with the stop loss down here some of you will have an established a short precision patch with a stop loss up here what would you do now here comes the next chart what's significant about this bar here is that it closes below the low of an inside bar after the market failed to break out above a four bar congestion what would you do would you buy with a stop loss here or here or would you say well we're still in a downtrend to me i don't see anything in particular that makes me think that the downtrend has changed here comes the next job so as jay as a trader our job our job description is you might as well just say you are risk traders you know you you need to take risk how are you going to manage that risk if i sell now i could have a stop loss up here in my observation many people would be reluctant to sell something that has already gone down for nine or ten bars i think that's a mistake i noticed this behavior in clients during my brokering days that people were reluctant to sell something that had already fallen they were also reluctant to buy something that had already risen for quite some time what is about to happen is a real mind bender because what you're seeing is i don't know if you noticed this but this is about launch hour in europe and the market settles into the most painful of congestion zones something that can be very boring to look at and difficult to deal with if you got a big position going and then the market breaks out oh sorry i couldn't draw a straight line so price action is not particularly helpful when market is in a congestion you you you i don't think that you can necessarily say well we closed above this one here or we we close below this one here because we are in a congestion and every single one of these bars is pretty much the same length so it's probably fair to say that we are simply just in a trading range and a pretty painful trading range of that as well the market then attempts to break out it's brilliant it does that for three or four bars but now we have an interesting bar what's interesting about this bar here well when you look at the size of this bar there is a tail much more of a tail than there was here but this bar here this bar here this bar here this bar here and this bar here and more so over here because it's in the earlier trading it stands out because it's longer in length so i once read in a market wizard book it was the interview with paul trudeau jones he says that the market has been ranging and all of a sudden the market is you know using with some force moving out of the congestion you need to pay attention because this is a market trying to tell you something in this case here a bar that is the longest bar that you've seen in one two three four five six seven eight nine i in this case quite a few bars it's probably trying to tell us something so what do we do well let's evaluate risk if i sell short here my stop loss will be up here if i want to be a buyer here which is not something i would do here because it's a negative bar i would probably have to have a stop loss here but more realistically down here because the odds of buying here and then being stopped out here are high might make for a low loss but it will also make for a really bad odds have you decided what you're going to do now okay let's go to the next chart the market carried on lower so we actually took out this low we took out this low here so what does that tell you what are you going to do now you're going to press the low so you're going to add to your winning trades have you closing your long position and you're gonna flip short are you concerned about this low here see what happened the last time we had this kind of length bar so what i have attempted to do over the last hour is to combine trading psychology with price action i don't use indicators because they're worthless to me everything i need i can get from studying the naked chart now we are on slide 61 out of 237 slides so there's plenty more to come let me just uh finish this off to me this is a far more realistic way of training your eyes than it is just looking at the finished jar because if i gave you this chart about an hour ago you would have said yeah i'm just going to sell short there because it's a 61 ratio or whatever it may be or oh i'm just going to buy this double bottom here or i'm going to sell this double top here but here by doing it bar by bar you're forced to make connections in your mind in your trading mind that you probably hadn't done before and take it from someone who trades very big stake size where your concentration is um you know i wish i could show you this but i'm currently short about 50-yard contracts in the nasdaq and i'm losing a fair bit of money because i'm still on the wrong side but when you're trading big size you are so much more focused i mean let me offer you an analogy you're cruising down the motorway and you're doing um 50 mile an hour well when you're doing 50 mile an hour not saying you should but you can probably take a phone call or you can converse with your fellow passenger and you can think about oh what a nice weather it is and you know give a little thought to your current life situation and what you're going to do this week and watch for dinner but if you're not doing 50 miles an hour but you're doing 100 miles an hour you're a little bit more focused maybe a little reluctant to take a mobile phone call et cetera you shouldn't do it anyway but if you're doing 150 miles an hour i can pretty much guarantee you that you don't have time for anything else but the motorway straight ahead of you that's really where you want to be in trading you don't want to be trading in a size that doesn't mean anything to you i'm not saying you should get reckless but you do need to push your trading size up to the point where you are fully focused and concentrated because if you're not the results are going to be thereafter right this is transmissions i have obviously many many more examples let me just make a note that we on slide 66 the next presentation i have is after this little i have a shorter example in the dax is scalping but what i suggest and this is for the benefit of your viewers is that perhaps we should do this next week the the scalping presentation is really long and it goes into all the different statistics that i use for scalping and the different kind of orders that i use for scalping it's a very very long stretch and everything i've just flicked through now i'm still only on slide 140 and then we come to patents for the day and the week where i go through various different uh scenarios under certain days again in stock indices such as the one when friday is lower than thursday then monday will have a very high odds of being lower than friday's low so all of this is uh yet to come so i think i would oh i would probably say um that perhaps it's that that time where we make a note of how far we got and if you are still interested in this and you think that i haven't bored your ears off and you haven't left the screen already then we could continue this and next week it would be the greatest migraines the pleasure but i think i'll leave that to the moderators and take their guidance yes tom perfect yeah because you know it's long and obviously you know me and i know you very well you can do as many sessions as you like and break it down into digestible pieces yeah no problem at all i think it would be a good idea and also i have a bit of a headache today i i don't know why but i think i i exercised too hard yesterday and my neck is really painful so i would be very happy if we could continue this next week and i think we're given good we've given good content now for the last hour and a half yes something for them to digest and also tom um while you are here and i think is here um i was talking to quite a few and i mentioned and i hope you don't mind me mentioning it i wanted you to basically confirm that not all traders are traders and not all bookkeepers are books for example i give them an example of when you and larry uncle larry had after writing some expo or something with a gentleman we won't give the name father of candlesticks brought it to the western world you ordered a meal and you asked him about the intraday pattern and he said i don't trade it's a sad story and you're right i don't want to be exposed myself to libel so i have to be careful what i say but a very prominent uh individual had written extensively about candlesticks i think i can say that and obviously as a trader larry and i were curious about certain aspects and the individuals simply said that that he wasn't engaged in in in trading and to me that felt wrong i i'm not saying i i use an analogy here and that is that you can be a really good uh coach for a football team like alex ferguson alex ferguson he he was from your part of the world is nizarif yes yeah now he was an exquisite coach that led manchester united to two decades of of dominating football but all but alex ferguson oh he's a great football player but he wasn't anywhere near as as good as say some of the people that he was coaching like david beckham roy keane ronaldo etc but you don't need to you don't necessarily need to be a great football player to be a great coach and i don't think that you need to be a great trader either to to have something of value to give on to people but as a as a bare minimum trading shouldn't be an academic exercise because look at a different kind of uh analogy there are many golfers in the world and there's many golfers who are what we call scratch golfers meaning they can go through a golf course with past zero but there's a very big difference to be putting for uh for the augusta championship over in california or you're just putting with a few friends on a weekend run around and i i believe that as traders i wouldn't be able to stand sit here and talk to you with the same kind of authority if i wasn't actually trading myself and you know i don't mind saying that i had a losing month in january i don't mind saying that right now i'm losing an absolute minor fortune in nasdaq right now because i am but i also know that every single loss that i've ever taken every single profit that i've taken has taught me something and i'm trying to pass that on i don't try to glamorize trading i'm not trying to portray it into something it is not because i tell you this it's a brutal business it's brutal because it exposes all the frailties that we have in our psyche so if you want a good place to do a little bit of self-evaluation then come to the financial markets they'll teach you a thing or two about yourself that's what larry always taught me so it's so important that you constantly reflect well what am i bringing am i bringing my divorce am i bringing my argument with my girlfriend am i bringing fatigue am i bringing over enthusiasm what am i bringing to the equation because any old fool can read a chart true true and the other question wanted to ask regarding books yeah um tomahawk you don't obviously don't mind me asking again and letting folks know for example um we say they call it the bible of trading maggi am i right in that there were journalists uh talk yes you're right edwards and mcgee were i think it was i think it was edwards who was he was the cousin of richard sharpaca and i don't know who told you this i don't even know who told me this maybe it was tepid too but yeah i'm not saying that edwards and mcgee didn't do a good job of bringing technical analysis to the to the to the world but it's also incredibly uh uh sterilized way of of arguing that trend lines will always work on moving averages will always work i think it's far better suited for investors than for day traders i think day traders we're dealing with an entire different beast and so much of what we are doing today is competing with automated trading and we have to be ever mindful of that that means that we can never rest on our laurels ever and it can be incredibly humbling to be a trader because you know just when you think you sussed it the market throws you a curveball and you're starting all over true true same like that ltcm they've got the nobel laureates and i know we need into the ground yeah yes is larry still with us um uncle larry that is mike is on um but i don't know uncle larry are you here no anyway uh i don't do many seminars or web seminars so uh you kind of got me out of my inertia i want to thank you for that i would do something for you absolute pleasure and you know saying all your on those time of days seminars i attended and really we had good fun yeah the good old days the good old days yes well it's still good old days my friend this is we're a little older a little wiser but it's still good days older and bolder yes great great great yeah so yeah we will do again and i also asked all all the folks as well to send the list they can do is send a honest uh feedback testimony and i will collect it all for you tom and i will make it into a pdf and send to you as well right kind of you yeah because no it's at least they could do it because you've taken time off uh live running market and i know the size of it i've been trading yeah i've just been losing the best be a good loser kind of thing but i know the size that you trade from past years and enough to drop down a herd of elephants yeah yes yeah i need i need good deodorant at times you know the chinese proverb about financial trading um if you eat like a like a bird you cannot um sorry to use this word like an elephant it can make a butt dude do an elephant one you know you know uh i wanna i wanna can i show you something sure sure okay one second i just need to grab something okay one sec because this is what i want to show you one sec so um this this book here can you see it um yeah i can't read it though no kids okay it's not so much the book it's written by larry passavento and and larry gave me this book it's called profitable patterns for stock trading but it's not so much the book that is is why i if i am i'm holding on to this so dearly it is what he wrote inside the book and i'd like to read it to you please if you want to sail big ships you must venture out where the water is deep to me that just set in motion the idea that if i ever wanted to trade big i have got to take on the risk you can't have one without the other so i'm forever grateful for larry for writing that you want to be great you got to get out there where the water is deep thank you so much okay so i will hang up now i'll stop sharing take care guys okay you're trading thank you so much yeah thank you thank you so much really well and truly appreciated thank you bye okay bye for now okay so folks i hope you all enjoyed this um tom and uncle larry you know top class and i know uncle larry doesn't like me to call him a legend but they are legend of legends legend legends are made from from them