FOLLOWING THE AUCTION – GRIND

This week in our series, Following the Auction, covering terms from our glossary, we’re looking at recent market action to illustrate Grind.

Grind … we sometimes refer to a market slowly moving in one direction as a grind. The recent 10% market ‘correction’, has rebounded to new S&P market highs, leaving us in uncharted territory. In the last four weeks since the correction low, we’ve seen three impulse moves of 50+ points, followed by shallow retracements, followed by the market slowly moving in one direction in a grinding manner, with last week showing slowing progress.

The weekly ranges since the correction have contracted from the initial 93 points to 89 points to 72.25 points, to last week’s grinding 38.25 points.

On this chart, from the last impulse move, the market has tagged the 61.8 extension at 2030.75, with the 100% extension at 2052.75.

Notice the volume profile (in gold) has an upper distribution (dashed red arrow) that spans 1887 to 2000, with 1987 to 1993, and 1960 to 1964, two prominent high volume areas below, (solid red arrows).

Coming into this week, will the market continue to grind higher to fulfill the 100% extension statistic?    Or has the rubber band stretched too far and it’s time to snap back? Please click on image to enlarge chart.

Key references to start are the OVN all time high, 2033.50, Friday’s low, 2021, the previous all time high, 2014.50 and last weeks low of 1995.25.

What’s coming up this week? Check in Monday morning for Pat Tabet and Lewis Borsellino’s updates for some key  market analysis. Trade smarter not more often! Have a great week!

 

 

FOLLOWING THE AUCTION – VPOC, MODE, AND THE MEAN

In this series, Following the Auction we’re looking at several terms covered in our Glossary, found through the link on the home page.

This week we’ll look at VPOC, Mode and Mean. These terms are often confusing because of their similarity. The Mean is synonymous to the middle. It is the mid-point and has no relationship to a profile other than the mathematical 50% of whatever range is being considered. Many day-traders are very keen on observing ‘half-back’ for acceptance, rejection to initiate, close or manage positions. VPOC is the Volume Point of Control. It is the price that has traded the most volume for the period or session being analyzed. The Mode is the value that appears most often in a set of data, so in essence the mode and the VPOC are the same. A VPOC can be found in a 5 minute time period, or as shown in this chart, for the year. VPOC is an attractor, a magnet, and the tractor beam for Friday’s late rally. The chart shows the following information.

• The years open, 1815.50, high 2014.50, low 1709.75, 10/24/14 close 1960.50.
• 3 major balance areas,
  • 1^st, Jan 1 through Feb 14, VPOC 1809
  • 2^nd, Feb 14 through May 23, VPOC 1850.25
  • 3^rd, May 27 through October 10, VPOC 1961.25
• Fibonacci retracement from low of year (in green) to high of year and note the 61.8% retracement is 1826.25.
• Fibonacci retracement from high of year to pullback low (in red) and note the 76.4% retracement is 1967.

The yellow circle is the intersection at the current correction low and contains the following data points.

• VPOC, 1809, from the year’s opening balance area.
• The 70% value low, 1822, of the 2^nd balance area, closing open VPOC, 1850.25
• The 61.8% retracement for the low to high of year, 1826.25. Click on chart to enlarge.

Now that we’ve hit the VPOC magnet to the tick, what’s next??? Be sure to tune in early Monday morning for Pat Tabet’s Pre-market update for MOM’s proprietary analysis. You can also read Charles Cochran’s commentary on the es, zb and 6e. Then pre-opening bell, Lewis Borsellino will post a ‘Morning Call’ video with the latest update and his plan for trading the day. Updates are posted on an as-needed basis. LAST WEEK THIS TEAM WAS ON FIRE!!! SIGN UP AND CLEAN UP!!!

 

Following the Auction – Week of October 6th Pre-Market Review

This week in Following the Auction we’ll look back over the week via our Pre-Market Updates and note where the Bull/Bear line was for the day as well as support and resistance and any special notations in the pre-market related to bias.

Coming into each day the registered trader can read Pat Tabet’s Pre-Market update. The bull/bear line is an important tool for planning the trading day. Please note, looking over the past week, selling rallies when price is below the line and buying pullbacks when price is above the line were the highest probability trades on any given day.

 

Monday Pre-Market Bull/Bear 1963

Bias lower

 

 

 

 

 

Tuesday Pre-Market       Bull/Bear 1954.25

Bias lower, possible test of 1931.25

 

 

 

 

Wednesday Pre-Market Bull/Bear 1930.25

Unlikely to fall below 1918 today, 1926 could provide support for a rally. Expecting active buyers around 1919-1918.

 

 

 Thursday Pre-Market    Bull/Bear 1957.50 to 1955.75

Bias, fill in singles from prior day’s short-covering rally.

 

 

 

Friday Pre-Market  Bull/Bear 1924

Bias, DETERMINED TO TEST 1900, BELOW 1900, COULD PUSH TO 1894.25

 

 

 

Remember to prepare each morning starting with the Pre-Market update to mark your charts. Lewis Borsellino will update users at the open and during the day. Have a great week! Trade safe… always use a stop!

 

MOM’S TRADING RULE # 10 – THE UNBREAKABLE RULE

Here we are at Rule # 10, the last rule! It’s been a journey through Lewis Borsellino’s self-made commandments. Based on nearly 20 years of trading experience as the top local in the S&P pit and many more years since on the screen, his rules provide guidance for the common mistakes all traders encounter at some point in their development. Behavioral changes, both to build successful trader routines, as well as suggestions aimed to combat the many psychological pitfalls traders experience, rounds out his holistic approach. 

“You can break a rule and get away with it once in a while. But one day, the rules will break you. If you continually violate these rules of trading, you will eventually pay for it with your profits. That’s the unbreakable rule. If you have trouble with any of them, come back and read this one. Then read it again.”    Lewis Borsellino      

Challenge # 10 – How do I pull all this information together?

Lewis’s approach is holistic. We looked at his rules one at a time moving through body and mind, covering both psychological and conceptual trading paradigms. He notes trading is 90% psychological. Yes, you need risk management, good analysis but without the right mindset, the other 10% doesn’t matter. This is why all of Lewis’s rules contain a psychological component, making his ‘10 Rules of Trading’ a timeless classic. “One thing is for certain: Where there is a market, there will be a trader. Where there is risk, there will be a hedger. Where there is opportunity, there will be a speculator.”  These rules will be as true and insightful in 20 years as they were 20 years ago.

Lewis says “I became a successful trader because I knew myself. I understand both my strengths and my weaknesses. I mastered myself with cast-iron discipline that allowed me to stomach risk and handle failure.”  Inexperienced traders think they are making a commitment to a business; what all traders who survive and then thrive discover is that the process of becoming a successful trader is actually much more than a business decision and more of a journey of self-discovery. While anyone can participate in the business of trading, only a small percentage will find success as traders.

Lewis says he can handle failure. Imagine one of the most successful pit traders in the world explains his success in trading partly because he had the ability to handle failure. This seems to be a common trait among successful people, whether it’s Michael Jordon, “I’ve missed more than 9,000 shots in my career” or Thomas Edison, “I have not failed. I’ve just found 10,000 ways that won’t work.” Successful people are not afraid of failure but rather see failure as a necessary part of success. Can you handle failure in order to achieve success?

Solution # 10 – Understand moving from novice to expert is a process.

There is a learning model I studied while at Rush University Medical School that details the psychological states involved in the learning process and is as applicable to becoming a successful trader as it is to becoming successful in any endeavor.  There is a natural progression from novice to expert. The novice doesn’t know a problem exists, the expert has mastered the problem and no longer thinks about the process.  Below are the stages we either become mired in, falling short of our goals, or work and progress through to achieve the goals we set out for ourselves. You will learn all the rules of trading while in level 1, but you will not have fully integrated their essence until you’ve reached the highest levels.

Level 1 – Unconscious incompetence, you are not aware the problem exists.

Level 2 – Conscious incompetence, you’ve become aware of the problem. Making mistakes is part of the learning process at this level.

Level 3 – Conscious competence, you find the solution for the problem. Heavy concentration is required for the steps in executing the solution. Practice is repeated.

Level 4 – Unconscious competence, you are living the solution. The solution has become ‘second nature’ and is easily preformed.

A later addition to the model is the 5^th stage and refers to an overall mastery where instinct and reflex is all that’s needed for execution, as the holistic integration of the parts results in the successful trader.

Next time you sit down at your computer to trade your plan, remember, it’s a learning process and it’s not over till you are satisfied you have reached your highest level of competence.

We hope you’ve enjoyed learning Lewis’s 10 Rules of Trading and found them helpful. Be safe, use a stop… and happy trading!!!

Resources – The Day Trader, From the Pit to the PC by Lewis Borsellino is a totally inspirational and enjoyable read with great trading wisdom found throughout the book. Why will you enjoy this book? As Lewis says and every trader I’ve polled can confirm, “It’s what I call ‘trader empathy‘. Nobody can understand the exhilaration of the win or the agony of the loss like another trader.” In Lewis’s own humbling way he tells his story of achieving Stage 5.

Here’s a website with hand signals used in the pit. Pretty cool stuff.

Sign up for FREE to get market updates from Lewis and team!

 

MOM’S TRADING RULE # 9 – AFTER THREE LOSING TRADES IN A ROW, TAKE A BREAK.

In Rule # 8 we learn true discipline is not letting your losers or your winners affect you negatively. In Rule # 9 we tackle the work ethic problem many retail traders find challenging, coming from other careers.

“This is not the time to take on more risk, but rather to become extremely disciplined. Sit on the sidelines for a while. Watch the market. Clear your head. Re-evaluate your strategy, and then put on another trade. Losses can shake your confidence and tempt you to become emotional (fear/greed). But if you take a break, you can gather your wits and regain your composure more quickly than if you become very emotional and angry at yourself and the market.”    Lewis Borsellino

Challenge # 9 – Stop working while I’m working?

Trading isn’t like most other jobs. You can work hard all day, all week, and wind up owing the boss money at the end. Lewis tells us from his experience, STOP after 3 losing trades in a row. Why NOT keep working? Most retail traders have had other careers prior to their trading careers and in most careers the common work ethic is to continue to work till you have achieved your goal. If you’ve applied this to your trading, you may be experiencing stimulus overload, making your trading job possibly much harder than it should be.

We group things in 3’s because scientific research tells us for the majority of our population, our brain remembers 3 things quite easily, but 4 or more things to remember produce diminishing results. Examples are numerous. The concept of 3 is utilized early starting with nursery rhymes of “The Three Little Pigs” and “Goldilocks and the Three Bears”. We size clothing small, med and large. We award our athletes Gold, Bronze and Silver. We define elements as earth, wind and fire. Even our ice cream flavors started with Vanilla, Chocolate and Strawberry. Airlines tried to hide 3 classes by naming them, First Class, Business Class and Economy. I know when Starbucks came out with 4 drink sizes, small, tall, Grande and Venti… I asked for a medium. The human brain either does not care or does not remember what is beyond third. Everyone can probably name one of the three first astronauts to walk on the moon but can you name the fourth astronaut? Knowing there is nothing more important to our success than being able to learn from our mistakes, trading beyond three losses without breaking; we diminish our ability to internalize corrective behavior by exceeding our brains ability to effectively remember exactly what we need to know!

Solution # 9 – Work smarter not longer.

There are 3 key reasons as traders we want to incorporate Rule # 9 – 3 Losers in a row, take a break.

• Helps preserve the account. Questions? Go to Rule # 5 and review the R multiple concept.
• Gives the trader time to regain composure and is a tactic to avoid slipping into the emotional response, triggering negative patterned behavior that will impact trading decisions.
• Gives the trader the best odds of learning from his errors based on our brains natural ability to process information, without overload.

Make the break useful. While you don’t need to stop working, just trading, the disciplined trader has a list of things to do during this unexpected break. Lewis tells us to re-evaluate our strategy. While there can be any number of reasons why three consecutive trades fail, a common trader challenge is being caught in a larger time frame aggressive re-pricing move while trading the most recent tempo. The concept of top-down analysis helps address this issue. Successful traders start with the larger time frame and work down to the time frame they will be using to enter the trade, this keeps them informed about the larger time frame trends, if any. Too much time spent at the micro-level makes it hard to see the forest for the trees.

A trading break also gives the trader time to re-evaluate what isn’t working today. Much like the triathlete needs to be competent at 3 different sports, traders also have 3 areas of competency to be addressed. As retail traders, we wear 3 hats, the analysis hat, the trade manager hat and the self-coaching hat. Use this downtime to reflect on which ‘team member’ didn’t show up for work today! Success rarely exists without all 3!

Resources – Maybe you are new and need to find a broker or maybe you are dissatisfied with your current broker. There is something special, something actually different that is available to you. Stage Five is a unique brokerage. This team doesn’t come from the brokerage side of the business but their shared vision is to use their talents to make a difference in their client’s lives and they are doing this in 3 steps. First, they provide regular free focused education, not just a bunch of webinars with other shops selling their worthless crap. Second, they promote paper-trading and doing trading homework! (Remember, they don’t make money when you aren’t trading.) Unlike many brokerages that expect a swift ‘turnover’ with retail customers (that’s short for blowing out one’s account), Stage Five wants you to be around for a long time and they are doing their part to help! Third, Stage Five is actually changing the way their clients interact with the markets, improving their overall results. Give Anthony Giacomin, Managing Partner a call, he really understands the needs of the retail trading community and has an intense passion for your positive results.

Read more about the power of three.

MOM’S TRADING RULE # 8 – LOVE YOUR LOSERS LIKE YOU LOVE YOUR WINNERS

In Rule # 8 we’ll discuss keeping a long time-frame perspective on the review of your trade management. Those daily stats you’ve been keeping are a great start for the micro view of individual trades. Periodic review of your statistics from a macro-view can help reveal patterns of trading behavior that can be shaped and improved.

“Losing trades will be your best teachers. When you have a losing trade, it’s because of some flaw in your analysis or your judgment. Or perhaps the market simply didn’t do what you thought it would. When you have a losing trade, something is out of sync with the market. Examine what went wrong – objectively – then adjust your thinking, if necessary, and enter the trade again.”   Lewis Borsellino

Challenge # 8 – Staring at yourself in the mirror.

Human nature at work… we hate taking the losing trade. Also human nature, disassociate from that event. It wasn’t me. I didn’t mean to do that, next! Anger or embarrassment, are common reactions. The result is you may not be taking advantage of what you paid for… your best teacher.  The market generated results of your trade and your ongoing spreadsheet provide your best feedback tool for improving your trading results.

Sports analogies make easy comparisons to trading because they are both professions that are competitive and performance oriented. Having just received my invite to this season’s Fantasy Football Office Pool, I turned to the Bleacher Report to see what’s up with the Chicago Bears preseason. This article, Breaking Down a Sizzling Start to the Preseason for Bears QB Jay Cutler, talks about Jay’s performance, and begins the task of building his season long statistical score card with filling in pre-season numbers. By the end of the season sports analysts will know a lot more about Jay than, how many completions, how many touchdowns and how many times he got sacked. They’ll have a complete ‘profile’ of Jay’s strengths and skills as well as what upsets his balance. His stats tell some specific detail but his profile is what’s revealing. We need to be able to do a critical micro-view, individual trade review but also have the macro-view context in mind. Suggestions?

Solution # 8 –  Be objective, it’s not personal.

Lewis tells you the key is objectivity in your review. Only with objectivity will you be fully able to understand and leverage your strengths and skills. Reality with football is the same with trading. Professionals work on improving their performance by reviewing everything, wins and losses. Lewis carried his disciplined mindset to football, as offensive coordinator for the Broncos, coaching Montini High School to win 4 consecutive Class 5A titles. Imagine the daily work to be prepared for coaching each player, each game strategy, each game, each season. That is what disciplined passion can accomplish!

So take this page from Lewis, expert in both trading and coaching and love your losing trades as much as you love your winning trades. It’s a normal reaction to bask in the glow of a good wining trade and disassociate from the losing trade. However…

True discipline is when you prevent either from affecting you negatively.

Examples of patterns you might see in a monthly review that can be addressed.

• Better or worse trading on a particular day of the week.
• Better or worse trading on a specific product.
• Trading better in the morning vs the afternoon.
• Overtrading around news events.
• Picking bottoms or tops on trend days.
• Trading with no plan.
• Consistently not reaching targets.
• Consistently playing with stops causing losses.
• Consistently fighting larger time-frame trend or just getting caught unaware of supply or demand on the larger time frame. (more in Rule # 9)

There’s an old joke about saying to your doctor, doc, it hurts when I do this… and the doctor replies… don’t do that. Well sounds too good to be true but sometimes we’re so busy looking through the microscope that we don’t notice the elephant in the room. Doing a longer term objective review gives you the chance to find those patterns that make you more successful and those that cause a lag to your success. Hey who knows, maybe you’ll find out you’re more profitable if you take Friday afternoons off!

Resources – This really well-done info-graphic is worth a look, especially if you find your pattern is fighting the trend.

And if you find your Friday afternoon free….

MOM’S TRADING RULE # 7 – KNOW WHEN TO TRADE AND WHEN TO WAIT

In Rule # 7 we will continue with more trade management concepts. In Rule # 6 we looked at the first concept; planning your return to be a multiple of your risk. The next concept is the rotational nature of the markets. Knowing when to participate and when it’s better to wait is a crucial element in the disciplined trader’s toolbox.

“Trade when your analysis, your system and your strategy say that you have a buy or sell to execute. If the market doesn’t have a clear direction, then wait on the sidelines until it does. Keep your mind on the market, but keep your money out of it.”   Lewis Borsellino

Challenge # 7 – What should I be looking for to take a position and why wait?

Lewis tells us the reason for trading futures is volatility! Volatility is a trader’s paradise, higher or lower doesn’t matter, its movement we crave. Traders last week, like most weeks, had to be nimble and willing to change their bias on a dime. The patience to wait for an opportunity to setup and then take decisive action when that opportunity is presented is a critical skill for a trader. Of course I wondered what sport required that combination of quiet observation followed by explosive action; that ability to quiet internal noise, to watch and feel for that precise moment to participate… so they can join in seamlessly.  Surfers sit on their boards watching, feeling the movement of the water… they feel the energy build, they count time between swells and at the right moment they launch and pace their paddling to catch the lip of the wave for the perfect position to ride the barrel. Late… and they miss the crest, early… and the wave can fold over them. My surfing research revealed the perfect description given by an obviously talented surfer talking about his experience. Listen to this ”technical” description of his performance. ***

Solution # 7 – Understand and identify market movement before entering a trade.

The same way the surfer smacks the lip… the trader needs to time his entry to ride the barrel or get pitted! How many times have you entered long on an uptrend day only to get stopped out? The market moves in patterns, specifically the 4 stage market process of accumulation, markup, distribution and decline… and it happens on all time frames. Whether it is the long time-frame seasonal tendency or the micro time-frame 610 tick chart, we can see that pattern constantly repeated. The disciplined trader uses these patterns of movement to his advantage.

Trading wave patterns can best be expressed as rotations that vary in intensity and duration at any given moment depending upon the participants. On a day-trading basis, traders use rotations to help them surf the trend or bracket balance.

Lewis tells you if you have a trade, execute. If not, wait. You can’t ride the barrel if there’s no wave action, you have to wait… yet be prepared for action. Let’s look at an example from a recent day when the market moved up 13.5 points after a MOM buy alert was given. Notice the up rotations, the down rotations and the point swings shown in the blue boxes. We can see the market moved from 1910 to 1923.50 but did so by auctioning back and forth, moving with greater intensity and duration on the upswings, the downswings shallow by comparison, illustrating a directional move. During the course of the day, as shown on the 3 minute chart, the market went through accumulation, markup, distribution and decline several times before reaching the destination, making it very easy to lose money going in the direction of the trend if your entries were not timed to be with the wave. If you jump in long at the high of the swing… you will… get pitted!

Resources – Registration for a free 5 day trial for Inside Edge software can be found here. This beautiful and extremely helpful software, in addition to the 6 different types of charts available from the profile to the footprint, allows you to do a look-back over a user specified period of time to determine average rotations by time-frame!

The surfer checks the weather channel before heading out the door so he knows if today’s weather is conducive to his kind of surfing. The trader checks the VIX for a measure of implied volatility.

Here’s a great info-graphic – Understanding Market Structure