Trader Scott’s Market Blog
December 8, 2016
An insightful question from P:
Good morning Scott!
What time frame do you use to determine a retest? For example, GDX went down to 20.63 on 12/5 on half the volume of the 11/23 low of 20.14. Is the high today so far of 21.74 useful in your determination? If 12/5 was a retest, did it affect your short-term trading?
Answer – (edited): The time frame thing is really nuanced and tricky. But one thing to keep in mind is to separate out the different buying and selling waves and make sure your work is taking into account what is that specific time frame – for instance, if this is a bigger accumulation area, then each selling wave gets “added up” and is part of a bigger time frame. But you can trade each part of the accumulation area separately, it’s how I do hedging within a bigger picture accumulation area. But still understand, each specific shorter term trade within a bigger accumulation area, needs to be treated as separate for each trade. Therefore, you would judge relative volumes to each other only within each shorter term selling and buying wave. But to make it more confusing (sorry) , but if you’re goal is to accumulate (not just purely short term trade), then you need to mentally step back a bit and remember what is your overall goal. You believe this market is eventually going very much higher than this smaller trading range, and you want to slowly build a long position. So you do not sell all of your holdings into rallies. You hold onto some. But you use profits (hopefully) generated within the area to buy more, because that is your ultimate goal. This is basically what the strong hands are doing. And interestingly enough, they are basically the ones who set up these areas to begin with. But the strong hands do not mind at all “averaging down” in this manner, because they are selling/shorting into rallies, so they may be buying lower, but still making money on net, if that makes sense. They’re fine with the market going lower. They’re never sitting idly for too long, as they’re often turning over their capital. They view markets as inventory, not just as an asset to sit on – they don’t become emotionally attached/”invested” in their inventory. They buy/cover shorts low(er) and sell/sell short high(er). They are not trying to predict/guess, they’re just patiently waiting for what they believe are the best opportunities. It really helps a lot to look at markets this way. A detached approach helps tremendously with our own psychology, which ideally is a calmer and more planned, prepared approach. Mastering psychology (which is a part of trading skills) is, once again, more important than the method we use (analysis). And I can’t say this enough, almost everyone, myself included, starts in markets with the same approach. That approach is to learn some kind of method, fundamental or technical or other, which we believe is the key to it all. It’s not, it’s only a small part.
So back to the question which is well thought out, since it pertains to looking at relative volumes – that is one of the keys to this. So the way to do this is to wait patiently for the first, or preliminary ending action. You need to see a distinct ending action first to “set” this process in place. Then you start the process judging from that event. And the great thing about this method/approach is it can be used on multiple time frames, long term to day trading, because it’s a process. It’s about 3 main things. It’s about the trend (up, down, or sideways). The sideways trend, or the trading range, is either accumulation, distribution, re-accumulation, or re-distribution. And the third thing is the support and resistance zones. So to wrap this up, and to be able to see this better, we’ll use an annotated short term GDX chart. As per the question, the ending action sets the process, so we take it from there. The first (preliminary) is almost always followed by a much higher probability ending action, which is almost always lower than the preliminary low, and is often the selling climax. And a key there is to assume (from experience) that the second ending action will likely be lower than the first one. It helps with timing tremendously. Those are the ones which are much better points to go off of. And yes, the first two retests the relative volume stayed low, and were tradeable in real time. The low of 20.63 is also a retest, the problem for me, this is one during a trading day which would be in a rear view mirror as for doing anything, as it needed to be lower in price. But in the bigger picture it is part of accumulation, as a retest. The first two retests were areas to turn over, that one was not. And to remember to look at markets as a series of buying waves and selling waves, the 21.74 high I’m still viewing as part of the buying wave from 12/1.
Trader Scott has been involved with markets for over twenty years. Initially he was an individual floor trader and member of the Midwest Stock Exchange, which then led to a much better opportunity at the Chicago Board Options Exchange. By his early 30’s, he had become very successful in markets, but a health situation caused him to back away from the grind of being a full time floor trader. During this time away from markets, Scott was completely focused on educating himself about true overall health and natural healing which remains a passion to this day.Scott returned to markets over fifteen years ago where he continues as an independent trader.