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Archimedes
Principle „From the roots of his hair to the bottom of his chin is a tenth of a man’s height; from the bottom of the chin to the top of the head is one eight of his height; from the top of the breast to the roots of the hair will be the seventh part of the whole man” ~ notebooks of Leonardo Da Vinci T h e P y t h a g o r e a t r a d i t i o n f o l l o w t h a t t h e c i r c l e i t h e s p i r i t u a r e a l m ; t h e s q u a r m a t e r i a e x i s t e n c e , a n d t h h u m a n b o d r e p r e s e n t s t h p e r f e c t m a r r i a g o f m a t t e r a n s p i r i t , w h i c h w a r e f l e c t e d i n i t ’ p r o p o r t i o n s .
n s s l e l e y e e d s s
V p S o d b p t
a e y , s e f ,
i r a f e a r h
t r u v i u s , o p o n e n t o f t c r e d G e o m e t P y t h a g o r a s i g n e d t e m p l s e d o n t o p o r t i o n s e h u m a n b o d
h r s e h o y
b b p V d t l p p h b a
e l i e v i n g t h e m t e p e r f e c t . T h i e r f e c t i o n , w r o t i t r u v i u s , w a u e t o t h e f a c h a t t h e e x t e n d e i m b s o f e r f e c t l r o p o r t i o n e u m a n f i t i n t o t h t h e c i r c l n d t h e s q u a r e .
o s e s t d a y d o e
M a d e f a m o u s b y L e o n a r d o D a V i n c i , V i t r u v i a n M a n i s n a m e d a f t e r t h e m a n w h o c r e a t e d h i m . M a n y t r i e d t o d e p i c t t h e p e r f e c t m a n . , b u t o n l y D a V i n c i s u c c e e d e d .
brought to you by Jerry Stewart
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PREFACE Why is this book any different than other trading books on the market? In a way, you could say that this body of work provides a holistic approach to trading. I mean, in this age of technology many things that we have thought to be irrefutable for hundreds of years are being overturned. The trip is this. The more technologically advanced we get the more technology tells us that that the natural approach as applied by the ancients was and always will be correct. The ancients already understood "THE LAW OF ONE". Today's market doctors are like today's medical doctors and drug makers. Their quest is only to sell you drugs. Drugs with side effects worse than the ailment you are trying to remedy. I'm talking about drugs like additional market indicators, charts with more bells and whistles, books and DVD'S by physicians who cannot even heal themselves. THE SIDE EFFECT IS CONFUSION. If this were a medical book it would be called "NATURAL REMEDIES". Ask yourself a question. If operators control the markets and they make 90% of the money, would you rather trade with them or against them? If you want to trade with them doesn't it make sense to analyze the market the way they do? These predators trade off volume analysis, as do most successful traders. By the end of this book you will see how they use volume. They are no smarter than you are they just have access to information that you don't have. However, there is proxy information that will give you similar, not exactly the same, info that they use but pretty close. Close enough to give you an edge over all the other public traders. You have been told that there is no reliable volume information on the forex market. But think about this. I'm sure you are aware of political survey polls and marketing polls. You've probably been solicited for something like this by phone. These polls have proven to have a +/- accuracy of 3%. There is a similar method you can use for forex and the accuracy of this approach will become apparent to you shortly. There are forex charting services that compile volume data from various brokers and market makers and incorporate this data into their charting platform. The result is akin to what happens in a poll. The data may not be 100% accurate, but accurate enough to make for reliable trading. Stop trading tears and trade emotions. When you see someone crying what do you think? What are those tears. Are they simply water and salt or are they something more? Tears are only manifestations of emotion. Something physical that originates from something non-physical. So, which is real. The tears or the emotion that generates the tears? I would say that the emotions are real and that the tears are only the results. In the same way what you see on a chart is not real. Those bars are only manifestations of the emotions of the cumulative total of all traders. The psychology behind the bars is what's real. These emotions are expressed in volumes of tears. Tears of hope, and tears of greed. Tears of joy and tears of need. Markets move upon waves of volume, and price, well price is just along for the ride. There is something about the market that no one ever told you and it is that, other than price pattern recognition, the most important knowledge you can have about markets is the knowledge of volume pattern recognition.
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by Jerry Stewart
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If you had to chose, which way would you prefer to see? Would you like to see like an eagle or a bat. When we talk about someone that has excellent vision we say they have eyes like an eagle. But when we talk about someone who has poor sight we say they are as blind as a bat. But which really has the better vision, the eagle or the bat. Isn't it funny how we talk about the benefits of echo - location for sight when we talk about a dolphin? How it is superior to using eyes for sight. It is well known that dolphins use echo - location to see inside of an object. See, that example I just gave you tells you why most people fail at trading. With me, you can tell me all day every day that a bat is blind and you will sound ridiculous to me. I go with what I can experience, what I have learned, not what I have been taught unless what I've been taught flows with my experience in the natural world and you should too. But, too many traders listen to so called experts when what they hear doesn't make sense but they go with it because it must be true because so and so said it. When you understand volume pattern recognition you will see the market like a bat or dolphin. Eagles have excellent eyesight but they can't penetrate the surface with their sight.
You want to penetrate the surface of the markets then get to know volume. No one, no matter what type of analysis a trader uses, fundamental, or technical analysis, long term traders or short term, and no matter what market you are trading, currencies, stocks, shares, bonds, commodities, it doesn't matter at all as long as it is a liquid and transparent trading market, there is one thing common to them all and that thing is this. All markets have a root cause of their motion. A singular thing that sets price in motion. THAT THING IS THE BALANCE OF SUPPLY AND DEMAND. That is the most fundamental concept of markets as well as everything else in the known universe. When the supply of energy is in balance with the demand for energy there is inertia or no motion. It is when the two sides are uneven that we have motion. When there is more supply of a thing than there is demand for it, the thing or object is less valuable. There is too much of it. When there is more demand for something than there is supply then the thing or object becomes more valuable. There is not enough of it. Whenever there occurs an imbalance in nature, a universal mechanism or force is set in motion and the job of that mechanism or force is to restore the balance. So, you already know that nature will not tolerate imbalance of any type at any level. Volume will/must confirm whatever trading decision you make. The following pages will show you why and how. In my first book, "THE LAWS OF CHARTS AND MEN", I teach you to recognize certain chart patterns that signal the direction of the imbalance so that you can trade in the direction of the imbalance. THIS EDITION IS CONCERNED WITH THE FORCE OF VOLUME. Volume is the gasoline that market run on. This book is about understanding exactly what it is volume is trying to tell you. There are many who will tell you that you cannot get reliable forex volume statistics. This may have been true at one time but I have developed reliable volume sources that have proven to be highly accurate for trading.
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by Jerry Stewart
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INTRODUCTION With technical analysis you focus on price chart patterns. Then you use indicators to confirm your analysis of the chart pattern. Indicators like moving averages, stochastic, MACD, RSI and the like. Most are helpful when used properly but even the best of them have one major drawback. They are lagging or trailing indicators. Meaning they lag behind price action. There is only one true leading indicator and that is VOLUME. In my groundbreaking book, "THE LAWS OF CHARTS AND MEN" we have learned that a price reversal is signaled on the chart when a pivot is formed. But, there is another pivot that's just as important. And that is a VOLUME PIVOT. The truth is, though price and volume may be manifested or displayed separately on a chart, they are really the same thing because it is their combined values that dictate the direction of motion. Trust no price move that is not confirmed by volume. Fundamental laws of nature dictate that an object must move in the direction of greater force. If there is more weight pushing down from the top of an object than there is force pushing up from the bottom, then the object must fall. If there is more force pushing form the bottom of an object than there is from the top, the object must rise.
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by Jerry Stewart
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THE BUOYANT FORCE The buoyant force is essentially caused by the difference between the pressure at the top of the object, which pushes it downward, and the pressure at the bottom, which pushes it upward. Since the pressure at the bottom is always greater than at the top, every object submerged in a fluid necessarily feels an upward buoyant force. Of course, objects also feel a downward force due to gravity, and the difference between the gravitational force and buoyant force on a submerged object determines whether that object will sink, or rise to the surface. If the weight is greater than the buoyant force, the object sinks, and vice versa. It is simple supply and demand. Price moves wherever volume pushes it. A market is like two tectonic plates. The plates push against each other. In addition to deforming the plates, friction causes stress to build up. But there is a balance of energy between the two plates so there is no movement. When too much stress builds up, the plates will suddenly jump, the sudden release of these stresses results in the sometimes violent shaking of an earthquake. ACCUMULATING AND DISTRIBUTING ENERGY- A MARKET CAN GO DOWN AND STILL BE UNDER ACCUMULATION AND A MARKET CAN GO UP AND STILL BE UNDER DISTRIBUTION. It is the release of this stored energy that propels a market in one direction or another. One side, either the accumulation or distribution is storing energy faster than the other. While both sides are simultaneously gaining and releasing energy one side is storing energy faster than it is releasing energy and the other side is releasing energy faster than it is storing energy. Like two tectonic plates of the Earth's crust, when the difference in energy hits critical mass the result is an earthquake or earth motion.
What we are talking about here is VOLUME. THE VOLUME OF ENERGY. OR MARKET VOLUME.
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by Jerry Stewart
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THE CAUSE AND EFECT Thus far, in my first book, "THE LAWS OF CHARTS AND MEN," I have focused on forecasting price direction by using price pattern recognition. I've suggested that you use 3 basic indicators. The 10 and 20 period moving average crossover. The slow stochastic, and MACD. But now I'm going to introduce you to the granddaddy of all indicators and that is VOLUME. THAT'S BECAUSE IT IS VOLUME THAT IS THE CAUSE AND DETERMINING FACTOR OF PRICE MOVEMENT. It is supply and demand. Yeah, I know, you've probably heard this all before but here is the thing. How do you incorporate what you know about volume into a trade-able indicator that can give you enough information at the time you are making your entry or exit decision? I have included some analogies and real chart examples to help with our discussion. My thinking is this. You can acknowledge the value of any indicator but the big question is, how do you make that information trade-able? Well, this is how we are going to do it. Since we are only trading pivots and continuations, we need to know what volume is telling us at the pivot or continuation point. In fact, when you can read volume you have need of no other indicator. Other indicators are just the icing on the cake. The following pages are my attempt to illustrate how to read the short term pattern of volume for whatever time frame you are trading, where to get reliable Forex volume statistics and how to incorporate this information into your entry and exit decisions.
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by Jerry Stewart
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THE ARCHIMEDES PRINCIPLE Price is like a cork, floating upon an ocean of liquid consciousness. The ocean is composed of billions of individual droplets of consciousness. Consciousness, like water, air and light is a medium, and like water, consciousness can separate from the ocean in the form of droplets yet is still a part of the one body of water. The cork or ball of price, Bobbing up and down while being buffeted by the opposing forces of mental gravity and emotional buoyancy. With gravity pressure pushing down on the cork/ball and buoyancy pressure pushing up on the cork/ball simultaneously. When these two forces are in balance the phenomena we call floating manifests. These two forces have been in a perpetual struggle for dominance since the dawn of creation. When gravity gains the upper hand the cork sinks and when buoyancy is in control the cork sits on or rises above the ocean surface. In terms of market language buyers represent the force of buoyancy and sellers represent gravity. The first level of resistance when the cork rises is the surface tension of the water. When the cork first hits the surface it will bounce back down to a fibonacci depth and then bounce back to the surface where it will float in the action we call "bobbing." Even when a market is relatively still, price will bob up and down just like the cork riding the waves. If the cork is moving with enough force to break through the surface tension it will rise into the air due to the momentum that the forces have generated. The height that the cork can rise above the surface will meet resistance at a height which is a fibonacci level, before the force of gravity will overcome it and push it back down to hit the surface of the water. There is one force that is dominant which causes a market to rise and a different force at work that causes a market to fall. The buoyancy force forces an object to rise and gravity forces an object to fall Buoyancy is proportional to submerged volume. These are the dynamics of fluid motion caused by the balancing and unbalancing of these forces. A market operates within the fluid of the collective sea of thoughts. the collective consciousness of all market participants. Once you understand how the mechanics of volume operate on an everyday natural level you will intuitively understand how to apply volume to financial markets. As you know by now I submit the operations of natural laws work the same on all levels, Physical, mental, spiritual, and emotional. So bear with me while I discuss the mechanics of volume. When we are done I promise that you won't be disappointed. The buoyancy force comes from the fact that fluid pressure increases with depth that causes an unbalanced buoyancy force equal to the weight of the fluid displaced. This is the "The Archimedes'
Principle".
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by Jerry Stewart
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The Archimedes principle explains why market prices behave the way they do. Have you noticed that when there is a fast and deep down-move that the subsequent correction (up-move) is just as swift and powerful and when there is a fast and deep upmove the subsequent correction (down-move) is just as swift and powerful. A
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If you drop a rubber ball into water the ball will float. Of course we know that the weight of gravity is pushing down on the ball so if that is the case, why doesn't the ball sink? Obviously, since the PRESSURE of gravity is pushing down on the ball, there must be pressure pushing up on the ball up against the gravity force. If you push down on the ball it goes down below the water level. But, what happens when you release the ball? Yep, the ball pops right back up to float on the top of the water. Elementary right? In fact, the deeper down you take the ball in the water the stronger the buoyancy force/pressure becomes. You know this because you can feel the ball trying to escape from your hand more aggressively as you descend. In addition, if you take the ball deep enough before you release it, the ball will be carrying so much speed/force when it rises to the top that momentum will carry the ball right through the surface tension and into the air and it bounces off the resistance of gravity above it which knocks the ball back to the surface of the water. However, if you place a rock in the water it will sink straight to the bottom. These occurrences are so natural that that we rarely reflect on the natural law or forces behind these actions. But what are the forces that cause the rock to sink to the bottom of the water while the rubber ball will float on top? The same forces that are working on the rock are working on the rubber ball and are at work in financial markets. But the key here, once again, is unbalanced force. In the case of the rock, the pressure of gravity pushing down on the rock is greater than the pressure pushing up on the rock. While in the case of the rubber ball the pressure pushing up on the ball is greater than the pressure pushing down.
THE RUBBER BALL IS PRICE!… THE REACTION IS THE SLINGSHOT EFFECT!
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by Jerry Stewart
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ANALOGY When you jump on a trampoline the same principle is in effect. When you first jump on the trampoline the first bounce doesn't take you very high does it. But as you introduce an energy impulse (the force of your leg muscles) to jump higher you create a stronger gravity force (tension) the higher you rise. So, when you come back down to land on the trampoline you sink deeper down (i.e. membrane on the trampoline sinks deeper down) because of stronger tension force created in the membrane you will rise higher on the next jump. Why? Because, as you already know, the higher You rise the stronger the force of momentum becomes to push you down deeper. This is why it is best to make your trading decisions based on the closing price of the bar in whatever time frame you are using. Because momentum may take price higher or lower than the equilibrium or balance point (trampoline at rest), and it is only when the trampoline is at rest that I can definitely say where your height level is while you are on it. Now, isn't it true that the higher you rise up on one jump the higher you can raise on the next jump but, the lower you rise the more leg force you have to use if you want to raise higher than the previous jump? Isn't it also true that the higher you rise the deeper the membrane (trampoline surface) will sag and that the deeper the membrane sags, and the deeper the membrane sags the more powerful the force with which the membrane springs back up? So, it can be said that the previous jump created the force necessary to propel you up on the next jump. This is why pullbacks are healthy for a trending market and also illustrates again why knowing where price is in relation to the current trend is important. This explains why, when a market is trending, a pullback and bounce off a 62% Fibonacci retracement will bounce harder than a 50% retracement, and a 50% retracement will bounce harder than a 38% retracement. Not necessarily to say that price will bounce to a new high or low, just that it will bounce with more force relative to the other retracement levels mentioned. This is nothing more than the Archimedes principle at work. The only difference is that, instead of water, the medium is air. Instead of buoyancy force we say spring force. The same terms can be used for this process in the medium of collective human thoughts or psychology. The one or universal human mind. Price charts are just a mathematical representation or physical shadow that is cast by this mental process. If you picture each price bar on a chart as a trampoline, a series of price bars like a series of mini trampolines, and market tops and bottoms as a series of large trampolines. The longer the time frame the larger the trampoline. In between these extremes of mini anD large trampolines are other, not so obvious trampolines. The top of a trampoline is support and the bottom of a trampoline is resistance. The leg strength you use on each jump can be likened to volume. The amount of leg strength used in relation to your last jump will determine, ultimately, how high you can jump. Now if I'm watching you on the trampoline I can judge if you're going to go higher on your next jump by your geometry or how deeply you bend your knees in relation to your previous jump, and the balance of your body. If you are off balance, you will not rise higher on the next jump even if you bend your knees deeper to use more leg strength (additional spring) because some of your energy will be dissipated in sideways motion. You could say that volume bars are measurements of the leg force for the time frame of that bar, once again, like the numbers on a ruler or beaker.
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by Jerry Stewart
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Markets function according to the "Archimedes' Principle of Buoyancy" I know, I know, you already know this. But we can use this as a workable metaphor to illustrate for us the mechanics of market volume. Understanding that these actions are a result of the physics of volume will allow you to take your market understanding to a new level. Once again I put forth the notion that natures laws work exactly the same on all levels. Understanding volume will allow you to recognize when a move is natural or un-natural. An un-natural move is unsustainable, i.e. stop hunts and countertrend moves. ANY MOVE. WHICH IS NOT SUPPORTED BY VOLUME. IS UNNATURAL. Let's go back to the water for a moment. Why is it that the rock will sink but the ball will float? It's because the rock has more weight (larger gravity force), right? When you push down on the ball you temporarily increasing the gravity or weight of the ball. The ball will sink in direct proportion to the amount of downward (gravity) force you use to push the ball down vs. the upward force. In short, the ball can be forced to the bottom of the water by increasing the force of gravity upon it to a degree greater than the buoyancy force pushing up against it. When you release the ball another force comes into play. What is the force that pushes the ball back to the top of the water? "THE BUOYANCY FORCE." Explained by "The Archimedes' Principle" All liquids react this way and markets are liquid. FINANCIAL LIQUID. Markets flow in accordance with this principle, as you will see momentarily. Have you ever heard the term "LIQUID MARKET"? A market functions as if in a liquid because it, as is everything we called reality, is swimming in an ocean of liquid light of one density or another. "The Archimedes' Principle" is a function of all liquids, and that includes light, air and thought. The Buoyancy (upward pressure) force on an object is equal to the weight of the volume of material (liquid) that is displaced or pushed out of the way by the object. The material displaced can be a liquid such as water for a boat, or a submarine, or air for a balloon. The buoyancy force is directed upward while the force of gravity (weight of the object) is directed downward. When the forces are equal (BALANCED) the object floats or does not want to move up or down (inertia or stillness). Now, as always I attempting to show you anything you don't already know, only to shine more light upon what you can already see so that you will not only be re-exposed to these principals but to be grounded in them. We don't need to get bogged down in the science (physics) of volume. I'm only trying to show, as always, that markets move in accordance with natural laws of nature. You may say, "Jerry that sounds good but the market does not function in a liquid or air". However, I would have to say to you that everything functions within a medium or carrier. Water and air are mediums that things propagate or travel through. Water, air and light move in waves as do all mediums. These waves carry everything from particles to organisms. But here's the thing. WHAT IS THE MEDIUM FOR LIGHT? I MEAN, WHAT IS LIGHT TRAVELING THROUGH? What is AIR traveling through? WHAT... IS... TIME... MOVING... THROUGH... ?
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by Jerry Stewart
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Have you ever heard the term, "WATER OF LIFE OR AETHER? But that's for a future discussion. The point is, it is helpful to think of a market as if it is ball or cork immersed in a liquid. Now lets see how "The Archimedes' Principle" applies to markets. MARKETS MOVE IN REACTION TO PRESSURE ... "VOLUME PRESSURE" Which comes first, the volume move or the price moves? Volume creates pressure and motion is caused by a pressure imbalance. If you hold a cork under water, what force makes the cork pop to the surface when you release it? If you say volume, then you must say that volume is a leading indicator, meaning volume runs ahead of price while all other indicators are lagging indicators or follow behind price. If you say the move, then you'd have to ask yourself, "If a unit must be bought or sold at a given price, and this buying and selling is volume, the volume must precede or lead price. If volume is so unique, so key to market price movement, why does no one teach it? Just a few tightlipped master traders know how. That is to say, volume analysis is complex within its simplicity. You see, there are different volume rules for rising prices than there are for falling prices.
NEVER SHORT A QUIET MARKET This is an old market adage. This is because when gravity is absent a thing will rise. When the force of gravity diminishes the market will rise just like if you released or stopped pushing down on the ball and it pops up to the top of the water level to float. Markets operate with natural buoyancy.
A MARKET WILL SINK DUE TO IT'S OWN WEIGHT When you drop the ball it will fall due to it's own weight until it hits the water where the buoyancy force kicks in to support it's weight.. A market will fall due to it's own weight until it hits a support level where the buoyancy force kicks in.
BUOYANCY IS AFFECTED BY GEOMETRY Why is it that a small rock will sink, but a huge ship that is 100,000 times the size and weight of the rock will float? It is because of the shape (pattern or geometry) of the boat. The geometry of the boat is specifically designed to distribute more buoyancy force and thereby counteract the effects of gravity pushing down on the boat. When the market has a certain shape or geometry the force required to push price up or down will be more or less depending upon the pattern. If you are off balance it takes less force to knock you down than if you had steady balance. Sometimes the market is shaped like a rock and sometimes it is shaped like a boat, so to speak. In this way a market is predictable under natural law. So, this is why price pattern and volume are the only tools you really need. All other market indicators are just icing on the cake.
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by Jerry Stewart
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The lower the depth the greater the buoyancy force pressure and the higher the depth the greater the gravity force pressure. The deeper down you push the ball the more force with which it rises to the surface. In a market, this is why a big down-move is usually followed by an up-move of equal or greater force when down volume or gravity has dried up. And this is why a big upmove is followed by an equally powerful down-move. Water seeks it's own level for balance. For this reason a market can be moving up and still be weak and a market can be moving down and still be strong.
HOW TO READ THE SHORT TERM VOLUME PATTERN First you need to determine if the market is strong or weak. If the market is strong you look to enter on a long pivot or long continuation breakout. If the market is weak you look for an opportunity to enter short on a short pivot or short continuation. Buy when the market is strong and sell when the market is weak. But, how do you know when the market is strong or weak?... VOLUME! Any entry decision should be confirmed by volume. The main thing to remember about volume is that price should move in the direction of greatest volume pressure. Volume leads and price follows. Volume is the cause and price movement is the effect. When price moves in a direction opposite to volume that is a divergence (departure or deviation from normal). I'm going to talk TO YOU about bar by bar volume analysis. How to interpret volume on a bar by bar basis for whatever time frame you are analyzing. Since most of us determine our entry and exits on a bar by bar basis it only makes sense to analyze volume bar by bar.
BASIC RULES VOLUME - QUICK KEY PRICE
VOLUME
OPEN INTEREST
INTERPRETATION
Rising
Rising
Rising
Market is Strong
Rising
Falling
Falling
Market is Weakening
Falling
Rising
Rising
Market is Weak
Falling
Falling
Falling
Market is Strengthening
• WHEN THE MARKET IS STRONG THERE IS MORE UPWARD PRESSURE ON PRICE THAN DOWNWARD PRESSURE. A BAR CAN CLOSE DOWN YET, A MARKET CAN STILL HAVE MORE UPWARD PRESSURE THAN DOWNWARD PRESSURE, SO LOOK FOR A GOOD LONG ENTRY • WHEN THE MARKET IS WEAK THERE IS MORE DOWNWARD PRESSURE ON PRICE THAN UPWARD PRESSURE SO LOOK FOR A GOOD SHORT ENTRY. A BAR CAN CLOSE UP YET, A MARKET CAN STILL HAVE MORE DOWNWARD PRESSURE THAN UPWARD PRESSURE.
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by Jerry Stewart
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STRONG MARKET If prices are rising and volume is rising, the market is strong. A bar that prints a higher close than the previous bar should have higher volume than the previous bar to continue the upward thrust. (buy on strength) In figure 1-1 notice bar 1. It has closed higher than the bar immediately before it and did so on higher volume than the previous bar. At the close of this bar the market is strong and, as expected, the next bar (2) printed a higher high, low, and close.
1-1
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STRONG MARKET If prices are falling and volume is declining, the market is strong. If a bar prints a lower close with lower volume than the preceding bar, the market is strong since selling is drying up. (buy on strength). At point (A) and (B) the market prints a lower high, low, and close than the bar immediately prior to it. The market looks weak here right? Wrong ... The bar closed with lower volume than the bar immediately preceding it. If that's the case, what force is going to push price further down? This market is still strong. Remember, a market can fall even though it is under accumulation and a market can rise even though it is under distribution. So, at the close of this bar the market is still strong. As you can see, the market turned up after this bar.
1-2
page 13!
by Jerry Stewart
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WEAK MARKET If prices are falling and volume is rising, the market is weak. A bar that prints a lower closing bar than the bar before it should have higher volume than the bar before it to continue the downward push. (sell on weakness) On both points (A) and (B) on the 1-3, after an upswing the prior bar signaled weakness by printing a higher high, low, and close. Bars A and B confirmed the weakness by closing lower on higher volume. Higher volume in a given direction usually means a continued move in the direction of the higher volume. You can see that the bars immediately following A and B followed through on the displayed weakness by closing down.
1-3
page 14!
by Jerry Stewart
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WEAK MARKET If prices are rising and volume is declining, the market is weak. If a bar prints a higher close and has lower volume than the bar preceding it, the market is weak since buying is drying up. ( sell on weakness) Look at bar (2) on chart 1-4. It printed a higher high, low, and close than the bar immediately preceding it (1). However it closed with lower volume than the bar immediately preceding it (1). This market is displaying weakness at the close of bar (2) even though it closed up. See, without higher volume, what is going to force price up further. The market is displaying weakness at the close of bar (2) and this weakness is confirmed by the next bar immediately following it which printed a lower high, low, and close.
1-4
page 15!
by Jerry Stewart
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At first glance, it appears some of these trading guidelines may conflict. Actually, they imply very similar market conditions. Volume is always the primary indicator, especially when the trading volume deviates from expected patterns. This includes volume patterns versus chart patterns, and divergence. You can use volume to determine market action. You must watch for divergence between price direction and volume. For instance, if the market makes new highs while volume falls short of the previous high, it implies the market is getting weaker. In short, fewer buyers are willing to enter the market at current price levels.
IMPORTANT NOTES: If you are running in one direction, before you can turn and go in the other direction you have to stop first. When a market is running in one direction, before it can turn and move in the opposite direction, it has to stop first. With volume, you can know when and where the market has stopped. This knowledge gives you a huge advantage. This is how to know when the market has stopped moving in the direction it was going. • The first up bar after a series of down bars should have lower volume to signal selling pressure has dried up and the balance of supply and demand has shifted to the upside. (Of course there are always exceptions) Bar (B) on the chart (1-5) illustrates the statement above. After a series of down bars bar (B) closed up on lower volume. This is a volume reversal signal. The bar closed up on lower volume. That tells you a lot. It tells you that gravity (downward force) has lost control and the buoyancy force has gained the upper hand. It is your earliest signal of a shift in the balance of supply and demand from downward to upward.
1-5
page 16!
by Jerry Stewart
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• The first down bar after a series of up bars should have higher volume to signal that buying pressure has dried up and the balance of supply and demand has shifted to the downside. (Of course there are always exceptions) In chart 1-6 bar (A) is the first down bar after a series of up bars. You want this bar to have higher volume to confirm that selling pressure is greater than buying pressure, which it has. As you can see, the market followed through by continuing down. If the first down bar has lower volume do not consider it a swing reversal signal unless the next bar confirms with higher volume.
1-6
Knowing these market traits, you can anticipate a pivot turn and start looking for it. You will be able to validate a pivot or breakout. You will also be able to time your exit at the first sign of weakness in your position and recognize stop hunts easily.
page 17!
by Jerry Stewart
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BEHIND THE SCENES Price movement often masks what is really happening behind the scenes. Prices can be manipulated in the short term by organizations with "deep pockets". The following is an example of such manipulation: An Institution wishes to accumulate a significant number of contracts particular currency pair. It starts by buying a modest number of contracts (say 500), and it thereby pushes the price up as it mops up immediately available volume. It then withdraws, and the act of withdrawing causes weak holders who have been watching the price move up - to fear that they may have missed the boat. These weak holders place sell orders which causes the share price to react downwards. As the price is in the process of reacting downwards, the same Institution applies (say) 10% of its original 500 contracts to ''force'' the price down even further - possibly to a lower level than when it first started buying. This, in turn, causes more weak holders to panic out, and the Institution picks up another line of (say) 500 contracts. Net result: The currency price remains virtually constant, and the Institution has picked up 900 contracts. "On Balance" there has been accumUlation even though the currency pair price has landed up where it started - or may even have fallen. When looking at the volume bars you are looking for a divergence. A higher close with lower volume or a lower close with higher volume is a divergence. This divergence signals that buyers are drying up and you can expect a reversal to occur within the next bar or two. This makes sense when you consider that, due to the effects of gravity, a market will fall due to it's own weight. A market can only rise with new buying pumping up the price but, if the buying (pumping) stops, price can no longer rise. You've probably noticed that price falls faster than it rises. Gravity is the reason why.
SWING VOLUME • In a bull market, volume has a tendency to increase on rallies and to decrease on reactions. • In a bear market, volume has a tendency to increase on declines and decrease on rallies. • Trading volume usually increases dramatically at tops and bottoms in the price chart. In the example below, since we start with a stock trending down, we will start by comparing one downward swing to the next. Notice the downtrends in sections A and B. While the price dropped more in section B compared to A, the trading volume was less, as indicated by our blue trend lines in the volume window. This is typical of a weakening trend, which means it is probably close to ending and becoming a trading range or reversing to a trend in the opposite direction. Next we compare sections Band C. This time the downward swing in section C doesn't even make it as far as section B did. We could say this was expected or a probable statistic since the volume for section B was less than section A. This time, not only does section C show less trading volume than B, but also the trading volume displays a diminishing pattern. This indicates an ever-weaker move than B and also means the previous trend is now most likely dead in the water. An attempt to ride this trend further would be extremely risky. So volume would indicate that we now look for an entry in a trading range or a trend in the opposing direction. Since we have determined that the downward trend is probably non-existent at this point, we will start scrutinizing upward price movements. We could also look for shorting opportunities in a trading range, but I promised to keep it simple for today. Now we compare section D to E. In doing this we note that the page 18!
by Jerry Stewart
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trading volume for section D is stronger. This would indicate a continuation in the new upward movement. Armed with this information we could look for a long position in a trading range or trend. Next we compare sections E and F. More volume accompanies the new upward price movement, again indicating this price action will continue. Finally we compare sections F and G. This time the trading volume doesn’t just get weaker on the first comparison, but it also shows a diminishing pattern again, notifying us to take extreme caution in following this trend any further and more importantly to be on the lookout for a turn in events. As can next be seen this happens.
page 19!
by Jerry Stewart
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PSYCHOLOGY OF THE HERD Why sellers make a market rise and buyers make a market fall. Sounds backwards right? But if you listen to successful traders they often say that, "you must think counter intuitively" (opposite of what seems logical). However, when an understanding of the Archimedes principle is added, it does seem logical. This is why... SELLERS CAUSE A MARKET TO RISE - Sellers are composed of three groups. New short sellers entering the market and Current short sellers already holding positions, And buyers now selling to take profits and/or cut their losses. When you think of sellers think of "SHORT SELLERS". When there is a mass of short sellers accumulated at a particular price level this level becomes a resistance or a barrier to further upward price movement… But why? In order to answer that question we need to look at the dynamics of human nature. A CRIMINAL WILL RETURN TO THE SCENE OF A CRIME... That is an extreme example of the fact that we all have the tendency to return to the scene of a prior success. I know that is not how YOU think. I'm talking about a collective psychology. See, when a trader sells short and makes a profit, they will reenter (sell short again) when the market returns to that same level. The thinking is, (I've) had success here once so why not try it again. I'm sure you have noticed that the majority of the time, when price moves back up to a prior top, price is pushed back down or at the least will pause at this level on the first attempt to move past this level. There is no trick to knowing where these areas of selling are located. You can see them on your price charts in the form of price tops and can be confirmed even easier by looking at volume bars. But, what happens when price rises above this level (accumulation of sellers)? Those who failed to take profits when price was moving down are now taking profits when price moves back up to this level hoping to break even. And when price moves up above/past this level of mass selling, those sellers start to panic and start a stampede of buying to cover their position in order to cut their losses. This wave of buying to cover, causes price to rise above the selling level. This rise causes new buyers (longs to enter the market) in addition with those SHORT SELLERS buying back to cover. All this SUDDEN SHORT COVERING is like gasoline that ignites an up-move THAT PUSHES PRICES to the next area of accumulated selling (resistance level). This is why you hear things like," a market is a better buy higher up than it is lower down". That's because higher up means ABOVE the resistance level. If price closes above a resistance level on higher volume, it is more likely to go up than a market that is forming a bottom lower down. Buying attracts buying and selling attracts selling. HENCE, SHORT SELLERS COVERING THEIR POSITIONS ARE MOST RESPONSIBLE FOR A RISE IN PRICE.
page 20!
by Jerry Stewart
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In the first edition of my book "THE LAWS OF CHARTS AND MEN," As well as my free TRADING MAJIC NEWSLETTER I am always talking about support and resistance. If I keep talking about it you should not underestimate it. Only enter a trade at a support or resistance level. A support or resistance level is nothing more than an area congested with buyers in the case of support while sellers form resistance. These areas are manifested on the chart as price tops and bottoms. Whenever a new market top or bottom is formed on the chart, a new level of support/resistance is formed. The strength of the top or bottom is determined by the thickness of volume at or around that level. If support/resistance is a wall, the thickness of the wall can easily be seen by the amount of volume displayed. BUYERS CAUSE A MARKET TO FALL - We've looked at how sellers cause a market to rise. Now let's see how buyers cause a market to fall. This time we will superimpose ourselves into a situation we have all been in as traders. Well, I know you haven't so just imagine yourself in my shoes for a minute. You just entered the market long. You place your stop below most recent support. Guess what? Right after you enter the market it goes against you and turns down. Price is approaching your stop but you need to make some trading income and you're sure that price will turn around and start going back up in your direction. So you widen your stop from 25 to 50 pips. We know what happens next don't we. Price continues down past your new stop level. Now you are down 50 pips but you stay in saying to yourself, "I can't take a loss so I'm going to hold on to this position until I can break even. So you hang on because you can tell yourself you haven't lost the money because you haven't exited the position. Ah... you know... the old paper loss. Thus, you now change your stop to break even. There you sit waiting for price to come back to you. But here's the thing. You are not alone. All of the traders who did not get out feel the same way you do. They are waiting to break even. So, for this reason, you should expect a support/resistance level to hold and reject the first attempt to go beyond it.
page 21!
by Jerry Stewart
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THE HERD REACTION I was watching the science channel and the scene was this. A huge herd of 100,000 wildabeast needed to cross the river to get to fresh grazing areas in order to have food to eat. But, there is just one problem. The river is full of ravenous crocodiles waiting for the wilda beast to hit the water. As a trader you are part of a huge herd that need to cross the river, which is the market. You need to cross the river to graze the profits you need to feed your account. The Market River is full of crocodiles disguised as market makers/brokers/banks/Governments/trading cartels, waiting for your trading dollars to hit the market. Now, the more experienced wildabeast will find a spot to cross that has the shallowest water and the least experienced have no strategy at all. But, of course, the catch is... how to cross without being eaten. The key to that is WHERE THEY ENTER THE WATER. Animals are not dumb. They choose the shallowest water because it gives them an advantage. In shallow water their feet can touch the ground, which, gives them support to run across the river as opposed to swimming across. Where the crocks have the advantage in deeper water because they can pull the beasts below the surface and drown them because the wildebeest have no support beneath their feet. The more experienced traders will enter at the most shallow point of the market (in a long trade) this is as close to the nearest bottom support as possible. This keeps their stops very small if they need to get out of the water. Their account may be bruised but not mortally wounded. The less experienced traders will simply enter because they see the herd getting away from them and they have not even entered the water so, they don't want to miss out on the move. They then enter too deep into the move because they want to chase and catch up to the move. Their account capital is pulled underwater and drowned because they are in over their head with bottom support being too far away. Naturally, they also picked the shortest crossing point so they can be in and out of the water as quick. The longer they're in the water the greater the risk of being eaten. An experienced trader will get out as soon as she hits shore. They do not dive into the market river and try to ride the current down to the most bountiful shore. They know that the longer they are in the river the greater the chance that the predators will eat their trading account. Their 3rd advantage is their sheer numbers. They all know that the first one of their comrades that jumps into the water full of waiting crocks is toast. So, they all pile up to the waters edge and wait for the right moment. When the first beast hits the water it is not because he is the leader of the herd. Each animal in the herd is acting independently out of self-preservation. But like a hive of bees their actions inadvertently support the longterm survival of the herd. The first wilda beast jumps in due to hunger. He knows the danger but it is overridden by hunger. He jumps in and the crocks zero in on him. Then an interesting thing happens. Can you say "STAMPEDE!!? Even though the first beast is eaten there is a sudden rush of horns and hoofs running across the river 100,000 strong. The smart crocks stand aside while some of the less experienced crocks are trampled to death.
page 22!
by Jerry Stewart
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The wiser, more experienced crocks wait for the tail end of the stampede, and as it is petering out they pick off the isolated stragglers. A trader should attempt to enter with the herd (stampede) and exit while the stampede is still rolling. If you enter during the stampede the market crocks (operators/brokers) must stand aside or get trampled by the thundering herd. If you are still in the market when the stampede is over you will be picked off as an isolated straggler. Easy pickings for market predators. The key for the trader is the same as it is for any herd animal. Enter with the highest volume (number) of the herd at the same time, which is the pivotal psychological moment when the herd collectively (in mass) and simultaneously says stampede. For the trader this point is evidenced on the chart as a swing pivot on higher volume.
page 23!
by Jerry Stewart
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HOW TO IDENTIFY WHOSE BUYING AND SELLING I'm going to tell you about an indicator that can tip you off to real buying and selling as opposed to manipulated buying and selling designed to suck you into an adverse position OR shake you out of a winning position. We have already discussed how large positions are accumulated and this is why markets don't go straight up or straight down. There is an indicator called the market "MARKET FACILITATION INDEX." Market Facilitation Index Technical Indicator (BW MFI) is the indicator that shows the change of price for one tick. Absolute values of the indicator do not mean anything as they are. Only indicator changes have meaning. Changes in the value of this index are typically compared to changes in volume to determine the interest that the market has in the current price trend and current time frame. Four possible combinations can occur, each with its own label.
Index Up, Volume Up (continuation) The market is moving primarily in one direction and more people are participating in the market. This is a good time to already be in the market in the direction that prices are moving. The herd is on the move with new participants entering the water and the crocks (predators) are waiting for the stampede to thin out. They don't want to get trampled. It is one of the few moments that the predators are not in control.
Index Down, Volume Down (consolidation) The market is idling, typically due to fading interest. Often, this occurs towards the end of a trend. However, the direction of a next new trend could be in either direction. The stampede is thinning out and both, predators and prey are waiting for the other to make the next move. The market is poised for one side or the other to show their hand
Index Up, Volume Down (reversal) The market is moving primarily in one direction, but there are no new participants generating additional volume. While less volume is moving the price, the activity may be generated primarily on the floor (by brokers and dealers), faking the actual off-floor market sentiment. The predators are probing the herd by faking an attack to get the herd moving. This is where the predators pick off the weak who fall too far behind and try to chase the herd to catch up or the foolish who run out in front of the herd. The classic predator strategy of separate from the herd and devour
Index Down, Volume Up (reversal) The volume is increasing, indicating more trading, but the price is not moving as strongly in the same direction. This typically occurs prior to a significant move in the opposite direction. Close attention should be paid to the direction the price moves when breaking out of this slowdown. The herd is gathering in mass at the water edge and waiting for someone to jump in first to get the stampede started. page 24!
by Jerry Stewart
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1-8
Volume confirmation Any entry decision you make based on technical analysis should be confirmed by volume. It doesn't matter what system or technique you use, your analysis should be confirmed by volume. No matter if you use a breakout technique, a trend following technique, or trade the news and data releases. No matter if you are a long-term investor or trying to scalp intra-day, volume is the key. Like surfing, with volume you want to ride the wave. Stay in the trade as long as the wave is going in your direction. Get out when the wave goes against you. We live in a 4 dimensional reality length, width, depth, and thickness. Price and time give you length and width, while volume gives you thickness and depth.
page 25!
by Jerry Stewart
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VOLUME SPIKES 1-9
page 26!
by Jerry Stewart
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HOW TO KNOW QUICKLY THAT YOU ARE WRONG 1-10 (DEC. PIVOTS)
page 27!
by Jerry Stewart
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1-11 (DEC. PIVOTS CONT.)
page 28!
by Jerry Stewart
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1-12 (OCTOBER PIVOTS)
page 29!
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HOW TO GET IN EARLY When entering the market your objective is to enter the market as close to the beginning to the stampede as possible. That way, you will quickly know when you are wrong and can get out early. Think of it like this. If you jump into the water first you want the rest of the herd to follow you. If they do not, you are isolated and the predators can zero in on you easily. But when do you want to get out if you are wrong? If you have to get wounded you want it to be a minor injury like a scratch or a bruise. With those injuries you (your trading account) is still healthy enough to participate when the real stampede begins. But if you don't know that you are wrong and the herd is not ready to participate until you're too far from shore, you are out there naked and can't make it back to shore before, at least, suffering a severe wound (to your account) if not death. That's why you must always identify which support or resistance level you are trading off. It is your safe shore. If you were a wilda beast and the predators (crocks) left the water and came past the shoreline, you know it's time to get out of there! You must know where the shore is at all times. A swing pivot point is your shoreline. A swing pivot consistently provides enough support to be considered the first shoreline in a series of rivers you must cross in order to get to better feeding grounds.
HOW TO SPOT PIVOT FAILURE When a pivot is formed you must confirm the pivot with volume rules. If the first up bar, after a down bar with higher volume, also has higher volume the move cannot be trusted, even if a pivot is formed. It is usually a retracement to the main move. In illustration 1-13 bar Z, identified by the yellow arrow, has printed a higher high, low, and close on higher volume than the bar prior to it. This bar also formed a bullish pivot reversal. At first glance the price pattern by itself says a long signal has been generated. BUT, WHAT IS VOLUME SAYING HERE? We have already stated that after a series of down bars, the first up bar should have lower volume. Bar Z has higher volume, which would be good if it was a continuation of a move already in progress but not at the reversal (pivot point). So, in this situation I would be looking for an opportunity to go short at the close of bar Z. Bar Y tells you the truth about this pivot. Bar Y is the pivot test bar. If Volume on the test bar is lower than volume at the pivot bar the bullish pivot would be confirmed. But this test bar (Y) closed down on higher volume. This tells us that the downward pressure is greater than the upward pressure so, unless something special happens, such as a news/data report. The close of bar Z appears to display strength but the market has turned on a dime so, just like when you are running, if you turn too fast you are off balance and the slightest push will turn you back in the opposite direction. As we see, the market weakness shown at bar Y is confirmed by the next bar, which was a big move down. In short, volume can help you spot pivot failure before it happens. You will spot false breakouts of any support or resistance level your system uses to trade.
page 30!
by Jerry Stewart
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1-13 PIVOT FAILURE
page 31!
by Jerry Stewart
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KNOWING WHEN THE TIDE HAS TURNED It kind of reminds me of a story my father told me. He was at the movie theater. He was downstairs in the concession line when there was heard a commotion from the balcony upstairs. Everyone who was downstairs at the time heard the commotion and ran to the stairs and started to run up to see what was going on. By this time my dad was running upstairs with a crowd or a wave of people who were running upstairs. About half way up the stairs, the wave (crowd) running upstairs where met by a larger wave (crowd) that was running downstairs, away from the commotion. The wave running downstairs away from the commotion was much larger than the wave running upstairs toward the commotion. Now what do you think happened, halfway up, when the larger wave running downstairs met the smaller wave running upstairs? My Dad told me what happened but he really didn't have to tell me, did he? Those in the crowd running upstairs were trampled crushed and injured. My father was crushed by the weight of the crowd and barely escaped with his life. This is exactly what happens in financial markets when you trade intra-day time frames without awareness of the daily or weekly trend. In the example above, those running upstairs had no chance. It is pure arithmetic. From my newsletter, I get many traders who tell me that the trade signals are more accurate on the daily charts than the intra-day charts and my answer is of course. Does anything else makes sense. You don't need to know a thing about trading to know that the larger wave will always and I mean always crush the smaller wave if the two should clash. I mean, come on. You don't have to be a rocket scientist to know that a bearish pivot on the daily chart will crush a bullish pivot heading up against it on the 1 hr chart. Some things are just common sense. So listen, If you see an intra-day setup that you want to trade, you better make sure you don't see an opposite set up the other way on the daily chart.
page 32!
by Jerry Stewart
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REVERSAL BARS A reversal bar is signaled when price makes a new high (or low) but close opposite the direction of the open and the trend. The reversal bar is telling you that the trend for that time frame has run out of gas and that no new buyers or sellers are coming into the market at that time. (See attached chart titled "basic reversal bars"). In the paid version of "THE LAWS OF CHARTS AND MEN," we call the reversal bar, the "pivot measuring bar". Remember from this point on that they are one and the same. The distinction is this. 1 st comes a reversal bar and when the reversal bar is followed by a pivot bar, the reversal bar is confirmed and the reversal bar now becomes the pivot measuring bar. I have heard the pleas from some of you that, "Hey jerry the pivots work but I'm missing some moves by waiting to enter on a pullback to the pivot that never comes." If you want to enter early you can enter at the close of the reversal bar for a high probability entry. Just remember, this entry is not as sure as waiting for the pivot but it has the advantage of getting you in the move early which lowers your stop-loss and is only slightly more risky than waiting for the pivot bar to form. Enter a long trade on a bullish reversal bar and exit a long trade on a bearish reversal bar. Enter a short trade on a bearish reversal bar and exit a short trade on a bullish reversal bar. Not every reversal bar is significant. This is especially true for intraday charts. Reversal bars take on importance when they occur at a support or resistance level. Not all reversal bars signal an immediate reversal but the market tells you which ones are true and which are false. The key to this is volume. More on volume in later lessons. Not every major pivot point is marked by a reversal bar. Continuation set-ups can still get you in a trade relatively close to the pivot point. Continuation bars are easily identified on a bar or candlestick chart. They always start with either an inside bar or an outside bar. (SEE ATTACHED CHART TITLED, "CONTINUATION BARS"). Inside Bar - Today's high and low do not exceed yesterday's high and low. Outside Bar - Today's high and low both exceed yesterday's high and low. The guideline for continuation bars is that the new trend has resumed when price breaks over the high or below the low of the bar immediately before the continuation bar.
page 33!
by Jerry Stewart
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1-14 BASIC REVERSAL BARS
page 34!
by Jerry Stewart
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1-15 CONTINUATION BARS
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by Jerry Stewart
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CLOSING PRICE ORDER OF SUPPORT AND RESISTANCE There are different levels of support and resistance that can be reliably traded. If you are trading intraday your first key areas of support and resistance are the open, low, high, and close from yesterday's trading. For example, if you are considering entering the market long, you should check to see that the market is above yesterday's low. If the market goes up and does not go above yesterday's close you don't want to go long from there. If price breaks above yesterday's close it is a sign of strength. If price bounces off yesterday's close it is a sign of weakness.
Up-move after a down bar Low = support Close, open, high = resistance The two charts below illustrate the support and resistance levels from yesterday's (the prior day's) price bar.
1-16
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by Jerry Stewart
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1-17
1.
Pivots
2.
3 bar support/resistance
3.
Fibonacci levels
4.
Tops/Bottoms
5.
Mov. Avg.
BENEFITS OF SCALING IN UNDERGROUND FIBONACCI You must know the difference between trend and retracement.
page 37!
by Jerry Stewart
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THREE BAR EQUILIBRIUM As I have explained in the free section of "THE LAWS OF CHARTS AND MEN", THERE ARE THREE STEPS OR POINTS OF BALANCE REQUIRED FOR AN OBJECT TO ACHIEVE BALANCE. A MARKET IS NO DIFFERENT. I AM ABOUT TO ILLUSTRATE HOW A MARKET RESPECTS 3 BAR SUPPORT AND RESISTANCE. When a pivot has formed 3 bar resistance will let you know if the market can continue to the next high or low. Price must clear (close above) the hurdle of 3 bar resistance before it can continue to a new high or low. Look at chart (A) below. The bar marked (P) is the pivot bar. Now count 3 bars backward from the pivot bar. This bar will serve as resistance for the upswing. I have drawn the resistance line at the open of the third bar. The close of a price bar is the most important price. Many manipulations can occur during the time frame of a given bar but, like any game, you don't know who won until the end of the game. If trading were a basketball game each intra-day bar is like one quarter or period in the basketball game. Most Strategy decisions are made and adjusted at the end of a period. As you can see on the chart, price did not close above the 3 bar resistance line it reversed. As a side note you should notice that the high of the third bar is also the pivot bar that formed the prior bear pivot, which is the most recent top. If the market is to go higher it must close above top of this pivot. But the main thing here is that you have two layers of resistance at the same spot. Odds were high that the market will not break through this double layer on the first try unless some major news event generates a stampede or volume explosion. NOTE: 3 bar resistance is equivalent to a range bar as discussed in "THE LAWS OF CHARTS AND MEN".
CHART A
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by Jerry Stewart
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Let's move forward a few bars and look at chart (B) BELOW. You see here a similar setup as you see on chart (A).
CHART B
At this setup the pivot bar went above but closed below 3 bar resistance. An important side note in case I haven't said this before. If price bounces off of a price level you can be certain that the level is a support or resistance level. But, since this is a valid pivot you would expect price to try to continue up which it does. The first bar after the pivot is a follow through bar supporting the upswing and adhering to our volume rules. This bar closed above the open of the third bar, which is generating the resistance. So, that is one hurdle cleared. But, since this bar did not close above the high of the pivot bar, I need to watch the situation closely because closing below the high of the previous bar takes away from the strength of the signal. After the close above resistance (yellow line), the yellow line becomes support. I'm looking for price to pull back to support. As you already know (because I told you in "THE LAWS OF CHARTS AND page 39!
by Jerry Stewart
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MEN"), if a price move does not back up and test (touch) a support/resistance level after a breakout (close above resistance or below support) You should not trust that move to break out of the next level. Now look, the second bar after the pivot bar does not test support but closed above the high of the (3 bar) resistance bar (red line). This is another hurdle the up moved has conquered. However, I'm not impressed with this bar because it is a Sunday bar. Sunday bars usually do not provide enough conclusive volume to provide clarity. So, due to the facts that this bar printed on a Sunday (low volume), and has not tested support, I would not expect this move to breakout of top resistance on this upswing until the test has occurred. But at this point, if I wanted to be aggressive I would enter long on a pullback to the red line, which is now support. But I hesitate and don't enter because of the reasons I just expressed. The green line is the most recent top (high of bar 1). This is the next resistance hurdle the market must breakout of and after that the next stop is the next top shown by the blue line (high of bar 2). Bar (S) did indeed pullback to touch support before continuing up and breaking out of the most recent top (green line) on higher volume before stopping at Major resistance at the top of bar (1). This is a breakout bar on what appears to be higher volume than the prior (Sunday) bar. However, I usually add Sunday volume to Friday's volume in the forex. I view Sunday as a continuation of Friday's trading so I therefore combine the volumes as one day. When you do this you can see that, even though bar (S) has a green (up) volume bar, this bar is actually up on lower volume and that, my friend, is a volume divergence. The market has to back up and test the breakout of the most recent top (green line) before continuing up and breaking up out of the blue line that is now the closest resistance level. Remember, the green line has now turned from resistance to support after the breakout. The market is now tired from busting up through several resistance levels and is ready for a breather. This is evidenced by the lower volume on the breakout bar (S). You can see that the market was rejected by Major resistance and reversed down where the same process begins all over again, only downward instead of upward. THIS IS HOW A MARKET WALKS. Now look a (A) and (B) on the chart. These are the areas of high volume. You can see how the price action we just commented on did respect these bars as far as support and resistance is concerned.
page 40!
by Jerry Stewart
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1-18 (bar-by-bar)
BEGIN BAR BY BAR ANALYSIS 1.
Let's say you pulled up the chart above (1-18) to analysis at the close of bar (1). You see that the market has closed down and the short term trend is down. You also see that this bar has formed a bearish reversal bar and a bearish pivot. In addition, the MFI indicator shows that new sellers entered the market here to force it down. This is a signal for a short trade entry, but wait, not so fast. After identifying the trend direction you look for the closest area of support and resistance. •
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You scan backwards on the chart to find closest support and resistance. You get to bar (A) and see a volume spike (look at the volume bar) which let's you know that this bar will act as a support / resistance level in the short term. This bar is a bearish continuation bar which tells you the market wants to go down further but since there is a volume spike, you expect a bullish retracement before price will continue down. The volume spike tells you that the low of this bar will act as support and the high of this bar should act as resistance (shown by yellow trendlines) by Jerry Stewart
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•
The (MFI) indicator in the bottom window tells you that there were no new short sellers entering the market to take the price down and that market operators stood on the sidelines during this bar. If there was no new buying and selling, what caused price to fall? If you look at the bar Immediately prior to bar (A) you see that it also closed down and also formed a bearish pivot bar on higher volume, with an MFI that tells you that new short sellers entered on this bar to force price down.
•
The momentum from this bar continued to bar (A) and since no new participants entered to bring price up, it continued down. In short, bar (A) is an example of the market falling due to it's own weight.
Summary: Expect bullish retracement. Wait for close of next bar for clarification. 2.
The bar immediately following bar (A) is a volume divergence (see volume divergence) that confirms that selling has dried up. This bar is the first up close and it came on lower volume, which tells you that the bulls have taken control by the close of this bar. (MFI) indicator shows that the market is idling at this bar which usually happens at the end of a move. This is further confirmation that the down-move has stalled here and you should be anticipating a bullish pivot reversal.
Summary: Wait for bullish pivot reversal. 3.
Now that you have your frame of reference (support/resistance) •
Go back to bar (1). As I've said, the close of this bar seems to give a sell signal under our pivot reversal rules and volume rules but there is one small issue here. This bar did not close below the low of the low bar (bar immediately following bar (A).
•
That's okay though because our pivot rules require that we enter short on a pullback to the bearish pivot point 3089 (the low of the second bar prior to bar (1). Your stop will be above 3115 (the high of the second bar prior to bar (1) (at least 27 pips above your entry).
•
The first bar after bar (1) provides the expected retracement back up to the pivot (3089) so you would enter a short trade here with your stop above 3115 or the first sign of strength. So, the first bar after bar (1) is the entry bar.
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The entry bar closed at 3095 or 6 pips above our short entry so we are down 6 pips at the close of the entry bar (otherwise known as the pivot test bar). We are going to loose 6 pips on this trade because the close of this bar displays market strength instead of continued weakness according to our volume rules.
SUMMARY: Exit trade for 6 pip loss. Anticipate an opportunity to enter long. Wait for market to display continued strength in the form of a bullish pivot or a close above the most recent top, which is the high of the bar two bars prior to the bearish pivot bar. 4.
Okay, look at the fourth bar after bar (1). This is a breakout bar (close above resistance). In addition to being a bullish reversal bar, this bar closed above the most recent high as discussed above, and on higher volume, as well as closing above the high of bar (1) which happens to be a range bar. This is a bullish signal to go long. But hold on. You want to wait for a pullback to the broken high of 3115 to enter long, not on a break of the high. So, the fourth bar after bar (1) is a breakout bar (breaking out of resistance). Remember... it is only a valid breakout if price should close above resistance.
page 42!
by Jerry Stewart
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SUMMARY: Price has broken out of resistance and we are waiting for a pullback to support, which was resistance before the break, to enter long... 5.
The fifth bar after bar (1) pulls back to a low of, guess what, 3115 and no lower. A rare perfect entry with no draw-down. We place our stop or hedge below the closest support level below our entry. The most logical place is the location of the volume that began the up-move and that would be the bar immediately prior to this bar (fourth bar after bar (1)). •
So, we want to place our stop or hedge below 3084, the low of that bar (32 pips below entry).
•
Where will we look to take profits? The most logical place is the high of bar (1). Why? Because that is the bar that has the volume spike ... And you probably noticed that all of the action we have discussed thus far, has occurred within the high and low (the range) of bar (1) and the high of the bar is 3184.
•
3084 entry and 3184 exit for a profit of 100 pips. Now, here is how the trade breaks down. Your'e looking to make 100 pips profit and willing to risk 32 pips to get it. Risk $1 to gain $3, I'll take that. A nice reward to risk ratio of 3 to 1. I will take a risk reward of 1 to 1 if I think the trade has a higher than normal probability of success.
•
Keep in mind that I'm not saying that this is where price will reverse I'm only thinking that this is the minimum distance price will rise before and if it reverses. The safest place to take profits is while the herd is still stampeding. At this point I am betting that, PRICE WILL RISE 100 PIPS BEFORE IT FALLS 32 PIPS. Be advised that this is the conservative target.
•
If you want to be aggressive you could place your target at 3235 or 41 pips higher. That's because, as you learned in "THE LAWS OF CHARTS AND MEN", markets cycle between pivots and the next pivot above our entry is bar (i), which began the prior down swing. Aggressive traders will target the open of this bearish reversal bar to take profits.
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My personal preference is to take profits at the first identifiable support or resistance level and renter on a pullback to the first level if the breakout bar is a continuation signal. I will repeat this, step by step, breakout by breakout. Until I get a reversal bar or the market shows weakness, whichever occurs first.
SUMMARY: On the fifth bar after bar (1) a long trade is entered at 3115 with a stop of 3083 and a target of 3184. 6.
As you can see, after the entry, the market continued to rise on higher volume with each bar. That is, until it hit our first target at 3184.
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The bar marked (a) is the bar that touched our target. Of course the limit order is executed and the profit is taken. But what if you want to be aggressive and place your target at 3235? You should still take profits here and exit the trade.
•
You should take profits here because this is an up bar that closed above resistance. BUT THIS BAR HAD LOWER VOLUME. A breakout on lower volume? Possibly but I doubt it. The market could still go higher but the market has told you that it wants to go down by displaying weakness at the close of this bar. You already have a 100 pip profit so do you want to risk that to gamble on another 40 pips? Many traders do and may get away with it a couple of times, but it will catch up to you and bite! by Jerry Stewart
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In addition, the MFI indicator is telling me that the buying that took this bar up was due to buying by operators. Hmmm... No new buyers and lower volume. Yet, a breakout. You smell that stink don't you? GET OUT!
SUMMARY: YOU HAVE EXITED THE TRADE VIA LIMIT ORDER WHEN YOUR TARGET WAS HIT. MARKET CLOSED ABOVE RESISTANCE BUT LOWER VOLUME AND NO NEW BUYERS SMELLS LIKE A FALSE BREAKOUT. CLOSE OF NEXT BAR WILL PROVIDE CLARITY. 7.
The first bar after bar (a) is tricky. It is an inside bar with both a lower low and lower high than the bar preceding it (a). Yet, it closed higher than bar (a) but had lower volume. •
The MFI indicator says the market is in idle mode and more importantly, the market did not pull back and test support at 3184, only pulling back to 3188. "No test no faith", is my motto.
SUMMARY: The market has not displayed a reason (strength) to re-enter long. We must wait until the close of the next bar for a clearer picture. So far, we've completed two trades. We lost 6 pips on the first trade and gained 100 pips on the second trade for a net profit of 94 pips. Hmmm... we have only a 50% winning percentage and yet, still up 94 pips. 8.
The second bar after bar (a) is very illuminating. It has a higher high, low and close after breaking out of resistance. But, there are serious problems for this up move. •
This bar is a stopping bar. It bar has lower volume. This up-move has not tested support. This bar stopped at pivot resistance marked by bar (i) which is also volume resistance at the most recent bullish volume spike marked by (ii) on the chart. It would be asking a lot to expect the market to close above these multiple points of volume resistance on lower volume. There is no choice but to expect a bearish reversal off this level OR AT LEAST A PULLBACK.
SUMMARY: Two bars after breakout the market is displaying weakness, not strength so our attention should turn to looking for an opportunity to enter short. 9.
The third bar after bar (a) confirmed the bearish landscape by printing a bearish reversal bar on higher volume and bouncing off resistance. A clear bearish reversal signal. Now understand, just because there is a reversal signal does not mean a trade entry signal. I mean, you still need to see a reasonable entry point. •
Reasonable as far as risk reward ratio that is reasonable and the most likely point to enter should be where you will not get stopped out of your position.
•
The MFI indicator on this bar is empty. No new buyers and operators are standing on the sidelines. Thus, the market falls from it's own weight.
SUMMARY: higher Volume, a reversal bar, no buying participation, and bouncing off resistance. Now we wait for a pivot bar to form to confirm our bearish analysis and to get us in with the stampede.
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•
The fourth bar after bar (a) is displaying strength right? WRONG!
•
The market is displaying weakness. It appears to be displaying strength but remember your
by Jerry Stewart
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volume rules. The first up bar after a down bar should what? That's right... should have lower volume. But this bar has higher volume. •
The MFI index is zero so, who is doing the buying?
SUMMARY: The pressure is still down. The market is displaying continued weakness. I'm still waiting for a bearish reversal bar. 10.
The bearish pivot bar printed at (2) on the chart and is confirmed by higher volume. This is a follow through of the bearish reversal signal from the prior bar. But still no entry signal. We enter on a pullback to the pivot. So, we wait for a pullback to the pivot. •
I'm also concerned that this bar closed right at support.
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The signal would be stronger if the bar closed below support, especially with the higher volume. As long as price is above support I don't want to enter short unless I get a strong signal.
•
The MFI indicator says the herd is diving in short.
SUMMARY: The sell short signal has occurred but price failed to close below the support line. This has me concerned so I will be watching my indicators and 5 min chart closely for confirmation signals when/if the pivot is tested, before I enter. 11.
Bar (3) is a key bar as far as an entry is concerned. I mean, I'm waiting for a pullback up to the pivot to enter. The pullback did not occur so, no entry. In fact, at the close of this bar the market is displaying strength. •
This bar displays a volume divergence. The bar printed a higher high, low, and close than the previous bar, bar (2).
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Ah yes, to complete the deception this bar closed below volume support. Just looking at the bar pattern you would assume a continuation of the down move. But now you know that the volume has to come from somewhere to continue this move down.
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This is why I smell a rat here. My MFI indicator tells me that the volume came from market operators and not new short sellers so, this appears to be a bear trap. And like I said, a break of a support or resistance level cannot be trusted unless the breakout bar occurs on higher volume. The topper is, as you learned IN, "THE LAWS OF CHARTS AND MEM," do not trust a move to continue unless it has tested the pivot. So, a single bar has changed the landscape and therefore, dictates a change in tactics.
SUMMARY: Market has turned from weak to strong on this bar. No trade entry was signaled, as pivot was not tested. Down volume was generated by operators and not new selling, and market broke support without necessary volume. My posture has changed from looking to enter short on a pivot test to waiting for the market to confirm the strength indicated by bar (3). 12.
At the close of the first bar after bar (3), the market is showing continued strength that began at the close of bar (3). As you know by now, a market turns up on lower volume as selling pressure dries up. So, this bar is a note that the market wants to continue up. Not that it will go up, but it is about to make an attempt.
page 45!
by Jerry Stewart
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•
My MFI indicator is telling me that operators fueled the buying on this bar. That brings me to my next point about how operators work the herd.
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See, When the market is at a certain level, they already know which way price is going to go. But to shake you out they will do enough buying or selling to move the market past a key level where the bulk of the herd is poised to jump in. This is easy enough to do. All they have to do is look at the order book and see where the bulk of entry or exit orders are located. I know you've heard that the forex market is too big and that is true. But a midget can push a giant if the giant is already off balance. I mean, If you are walking a tightrope, trying to maintain you balance, it won't take much force to push you off the tightrope or over the cliff.
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When volume has dried up in a market, all they need to do is follow the herd to the waters edge and fake an attack. Now the herd is in motion, diving into the market waters, in the direction that the predator wants for the moment. So, It is not their volume that propels the market, it is your volume, volume that you were tricked into using.
SUMMARY: Still no entry signal from the bearish pivot. The pivot is still in play until a valid bullish pivot reverses it. Though the market is displaying strength here, it has not turned around yet. Then, of course, I must consider what the market is telling me. 13.
Check out the bar labeled (b) on the chart. The bar closed above volume support but there is a problem. By now you should be able to spot it. Yep... lower volume. A breakout on lower volume. This is a display of weakness, so, no thoughts of a long entry. I only buy on strength and sell on weakness. Also, this bar has a small range for the amount of volume it carried. If it was strong a breakout bar should have more juice. •
The MFI index is saying that buyers are losing interest but since there is no selling pressure the market is idling.
SUMMARY: More and more it looks like operators are setting up the herd by getting them to buy into the market when the market is setting up to go down. Yes... operators are holding up the market to give as many suckers as possible a chance to go long here. In short, NO SIGNAL NO TRADE!! Look here at the first bar after bar (b). What do we have here? Ooh... a bullish pivot bouncing up off support on higher volume. It looks like a go to enter long on the pullback to the bullish pivot point. In lieu of my suspicions about a bull trap due to the characteristics of the preceding bars, I cannot take this pivot at face value so I must dig deeper before making a decision to enter. You should know this by now but, in case you didn't know, the bull pivot point is the high of bar (3). The MFI says that the herd (public) is participating on this bar so it is confirming the bullish pivot. Just one thing bugging me, and it always does in these situations. This is the bar that is finally testing the bearish pivot, but could not close above the bear pivot. So, right here we are at a crucial point in the battle between the bulls and bears. We have a bar that is torn between two lovers. On one hand this bar forms a valid bullish pivot reversal, and on the other hand, this bar failed the bear pivot test by not closing above it. The bar is showing market strength and market weakness at the same time. What can we do to bring clarity to this situation? THERE IS ONLY ONE THING TO DO...
page 46!
by Jerry Stewart
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DROP DOWN TO 1 HOUR CHART… 1-19
The yellow vertical line on the chart above (1-19) is the 1 hr chart from where we left off on the 4 hr chart (1-18), and continues our analysis of the bar by bar by dropping down from the 4 hr to the 1 hr. The yellow (dotted) vertical line on the chart is the beginning of the 4 hr bar on chart 1-18, (the first bar after bar (b)), and the red vertical line is the 1 hr bar that closed the 4 hr period. The red horizontal line is the bearish pivot point on the 4 hr. , while the horizontal yellow line is volume support from the 4 hr. This is how to use multiple time frames. You do it so you can look a little deeper, like fiddling with the controls to focus a picture. The chart above (1-19) serves that function here. Looking at the chart we can see that the market closed the 4 hr period below the pivot line. That tells me that the bullish pivot on the 4 hr is losing the battle of the pivots. See the bar marked (Z). This bar forms a bearish pivot on the 1 hr and is bouncing off the 4 hr bearish pivot. We now have bear pivots on 2 time frames. In addition, the bar closed below 4hr volume support (yellow horizontal line). The thing is, the bearish pivot point that forms just happens to also be exactly at our volume support level. Volume and MFI are both giving the green light on a short entry. So, you can see how dropping down has helped me with my entry decision. Summary: Here I decide to enter on a pullback to the bearish pivot, which is also volume support
page 47!
by Jerry Stewart
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turned resistance (upper yellow line). Bearish pivots on both the 4 hr and 1hr, supported by volume and MFI. Will enter on pullback. 14.
Look at what happens on the one hour. The next bar after (Z) pulls back exactly to the 1 hr bear pivot so I enter short at 3184, stop above the pivot measuring bar 3215 (31 pips) or first sign of weakness, and target is 3070, the bottom yellow line on the 4 hr (volume support and low of range bar). •
This was another perfect entry as price never rose above 3184 so zero draw down on this trade because I exit the trade at the close of bar (Y) at 3150. The close of bar (Y) displayed strength. At this point I should not have to explain what that means.
SUMMARY: The short trade was closed for a 34 pip profit. So far we have three trades for -6pips, +100 pips, and +34 pips, for a net gain of +128 pips. Time to go back to our 4 hr chart to seek another opportunity. To save you the trouble of having to go all the way back up to see the 4 hr chart 1-18 we will repeat it below.
page 48!
by Jerry Stewart
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1-18 repeated
15.
Looking up at chart 1-16 Above, You can see that after the pivot has formed on the 1 hr, a bearish pivot is forming on the 4 hr at the bar marked (4) on the chart. By dropping down to the 1 hr you were able to get in earlier, with a smaller stop, and early warning exit system. If you did not get out on the 1 hr chart you later had an exit signal (to get out) at the close of bar (Y). The bar did not close below the low of the prior bar, yet had higher volume. This is a sign of strength while you have sold short into weakness. By exiting on the first sign of strength on the 1 hr, I make 13 pips more profit than I would have by exiting off the 4 hr because the 4 hr closed higher. I play the setups off the 4 hr charts and enter off the 1 hr or shorter when they are agreeing with what the 4 hr says. That is to say, I use the 4 hr or daily charts to make my decision whether to trade or not trade and use the 1 hr or shorter to pick the point of entry/exit.
SUMMARY: I think by now you get the idea. You can start seeing into the mind of a trader. A real live trader who has been trading real money, in various markets since the inception of electronic trading for the public. Stocks, commodities, index futures, bonds, currencies, and options/derivatives. I'm not bragging her, but I know exactly what I'm talking about. My only teacher through the years has been the loss of my hard earned cash. No one taught me anything so I've spent thousands seeking answers just as so many have. I many of the answers, do you have the will? I've spent the time and money so you don't have too.
page 49!
by Jerry Stewart
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THE STOPPING BAR I want you to stand up on your feet and stand perfectly balanced and flat-footed. Not on your toes or your heels nor the balls of your feet. Now, take one step forward and pay particular attention to your body balance and mechanics. Did you notice that before you could step forward you had to shift your center of gravity backwards on your heels before you could step forward? This is nothing more than the Archimedes Principle in another medium. Your body is price and the medium is the liquid of air instead of the liquid water. Still don't get it? Stand up any way you want too. Try jumping forward as far as you can. Notice the first thing that you do before you jump is to step backwards and then jump. Why do you step backwards? TOO GAIN SUPPORT TO PUSH OFF OF, so as, TO ENABLE YOU TO JUMP FURTHER. THE FURTHER YOU WANT TO JUMP THE FARTHER YOU WILL STEP BACK TO GAIN BETTER SUPPORT FOR YOUR PUSH. MARKETS MUST DO THE SAME THING. Now think about this. You are running fast. You decide to stop quickly and reverse directions. So, you stop immediately. But is it immediately? Did you stop on a dime or did it take you at least 3 steps to stop? You can stop in less than 3 steps but you will be off balance. It takes three steps to regain balance (There are 3 points on a triangle, think tripod) once balance is lost. From my days as an accomplished athlete and I've also been coaching 14 years, I have had to learn and teach body mechanics all of my life. So, I can tell you the technique to stop in one step. In sports this technique is called the hop step. When someone does a hop step they do it for one reason... To stop suddenly... For the purpose of pausing your current direction immediately and then continuing (the old hesitation move) or to immediately change direction. A market follows the same principle/s and is manifested on the charts by forming a stopping bar. A stopping bar is a bar has no tails. Price never fell below the open and closed at the high if it is an up bar or low if it's a down bar. For the market this is a hop step. When you land from a hop step you land on two feet and you want to land as flat footed as possible… that is if you want to maintain your balance. In fact, when you hit the ground you'd better have a slight backwards lean or your forward momentum will topple you forward or off balance. So, just like a man, when you see a hop step you know that the man/ woman or market has the intention of stopping, at least temporarily. So, if you land with your center of gravity forward, you will have to take an extra step to gain your balance before you can stop. See chart C below to see the stopping bar illustrated.
page 50!
by Jerry Stewart
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CHART C
!"#$%& %&'& '&( ()*++ *++,,-.&/0 -.&/01&1 1&10 01234& 4&0++20 0++2011(& (&*-& *-&))52& 52&33*-.2 *-.21& 1&)),62& 71062(8& 8&90 90,,34& 4&0-9& 0-9&33*-.2 *-.211:&& :&&# #52 524& 4&6 6*()& )&* *7)2-&0++20 2-&0++201& 1&*-&0-& *-&0-&,,-)1 )10 0; 904& 90 4&<50 <501) 1)8& 8&/ / =)& )&> >52-& 2-&?& ?&( (22&*-2& 22&*-2&?& 2@+2<)& +1,<2& <2&))They *&0)))most *&0 26+often )&)*& )&) *& NOTE: A stopping bar rarely appears on the longer time frames, ?&2@+2< daily and)&+ longer. <50-.2&9, 2<))one 2< ,*-&*-& *-&*-&) )52& 52&7 7,1()& )&* 1&( (2<*-9& 2<*-9&/0 /01& 1&0 07)direction 21&) 1&)52& 52&( (on )*++ *++, -.&&& appear on an intraday chart,<50-.2&9 but when I,1see I expect price to*1& attempt to change the,-.& first or second bar after the stopping Look at the illustrations I. And II. Below and tell me what they look like to you. I bet look like bars on a candlestick youthey don’tlook they? Look at the illustrations I. And II. they Below and tellprice me what they look like tochart you. to 1 bet likeThey price look like a down bar and an up bar. I know…I know you’re far beyond wasting bars on a candlestick chart to you don't they? They look like a down bar and an up bar. 1 know ... 1 know timeononsomething somethingthat thatsimple. simple. Do Doyou youknow knowwhat what they they look look like you're far beyond wasting time like to to me? me?
I.
II. Upper shadow
Real body
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#*& *&6 628&, 8&,)& )&,,(& (&-*& -*&<* <*,,-< -<,,92-<2 92-<2&&)50 50)&) )&)52& 52&))0,3 ,3(& (&))50 50)& )&2@ 2@))2-9& 2-9&771*6& 2,)52 521& 1&2-9&* 2-9&*77&)52& 52&1120 203& 3&/*9 /*94& 4&0 012&<0 2&<033 332 29& 9&( (509* 509*> >(:&4 52( (2& Jerry Stewart (509* 509*> >(& (&0< 0<)& )&0 0(& (&5 522 2233(& (&0-9& 0-9&))*2 *2( (8& 8&3, 3,A A2& 2&> >52-& 52-&4 4*=&0 *=&0112& 2&( ()0by-9 -9, ,-.&
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To me, it is no coincidence that the tails that extend from either end of the real body are called shadows. These shadows act as heels and toes, like when you are standing straight up and rocking backwards and "#$%! #$%!& &'( '() $!+ $! +, -./%0!1' %0!1'+ %#/%# /--! -!& &'( '(*! *!+ +$and /0# 0#2! 2!' '*! *!3$% 3$%22with $*! *!' '4! 4!0 0*,toes 5/2&!to forwards. You catch with !your heels to)*keep from falling+over backwards you catch your /6! 6!+ +/2When #!& #! &'( '(*! *!#$,1 #$,17! ,6! 6!$ $are 5/1$%3$1!8 1$%3$1!8&! &'(!#, '(!#,5 %0!22feet. %0! '!--$,% '! $,%! '(*! '( *! have keep from falling over forward. you rock7!, you rocking on &!& the balls of5/your You!&must #$,1! #$,1 8,3.+ 8,3. ,*16!6 6!6-/ 0#22-&! &!+ +#$%! #$%!+ +,-./%0!1' %0!1'+ +%# %#/-/--!!2'!.$ '!.$$ $9! a pivot in order to rock and the !balls of+your feet-/0# serve this purpose. &'( '(**6$-4! 4!8, 8,--,%3$1 ,%3$1::!! To me, price bars look like the illustrations Below. To me they look like feet, your head and your butt. There are 3 points of balance. On a down bar your head is the low and your butt is the high. On an up !"#$%! #$%!& &'( '())*$! $!+ +,-./%0!(9# %0!(9#//--! -!& &'( '(*! *!+ +$/0# 0#2! 2!//6! 6!+ +/2#! #!& &'( '(*! *!8 8(22 2277!,6! bar your head is the high and your butt is the low. The real body acts like the ball of your foot or a pivot $5/1$%3$1 1$%3$1!!8&!& &!&'(!#, '(!#,5 5/%0! %0!22'! '!--$,%! $,%!& &'(*! *!#$,1! #$,1!6 6-/0# 0#22-&! &!44'*+,*1! 1!22'! on both an up and a down bar. On a down bar your heel is the tail on the bar extending from the open to .$$9!& .$$9! &'( '(**6$-4! 4!8, 8,--,%3$1 %3$1::! the high, while your toe extends from the close to the low of the bar. "#$ #$2 2#$ #$*! *!& &'(! '(!+ +downward ,-.!(9# .!(9#/--! /--!' '*! *!1' 1'+ +%# %#/ /--7! 7!//%!' %!'* *1$ 1$*!2 *!2'! '!; ; ,/%versa. 2,/%! %!& &'( '(*! *! Now, we all know that when your but goes your head raises upward and vise 8,--,%3$! 8, ,%3$!& &'(! '(!--,%1 ,%1!!'%! '%!22#$!8, #$!8,---6! 6!' '4! 4!& &'(*! *!44$$ $$22:!! :!!<<4! 4!& &'(! '(!--,%1!'% ,%1!'%!!&'( '(*! *! When you're walking downhill your weight or center of gravity is with your head, as evidenced by you #$$--67! #$$ 7!22#/6! 6!+ +'( '(--1! 1!22#*'+! +!& &'( '(*! *!8( 8(2! 2!1' 1'+ +%7!3,( 3,(6 6/%0! %0!& &'( '(*! *!# #$,1! ,1!22'! having to lean your head backwards slightly when walking downhill to keep yourself balanced. */6$!(9 (9::!! !!<<4! 4!& &'(! '(!--,%1!'%! 1!'%!& &'( '(*!2 *!2'$ '$6 67! 7!22#, #,2! 2!+ +'( '(--1! 1!22#*'+!&'(*! *!#$,1! #$,1! When you're walking uphill your is with your butt, by you to your 1'+ 1' + %+weight ,*17! 7!3,( 3,(6 6/%0! 0!& &'( '(*! *!8( 8(2as 22!evidenced 2'! '!**/6$!(9 (9:!! :!!= ='! '!//having 2!,% 2! ,%&! &!' '2lean #$*! *!+ +,&! head slightly forward to keep yourself ,%1!& ,%1! &'(! '(!--'6balanced. $!8,--,%3$ $!8, %3$:!! :!!> >#, #,22)6! 6!+ +#&!& &!&'(! '(!+ +/--!/ -!/% %62/%32/5$-&! &!--$,%! $,%!//%! ,33'* *1,%3$! 1,%3$!+ /2#! #!22to #$!0$'; #$!0$' ;$your 2*&! 2* &!' ' *!22$**,you *! /%!' %!'4! 4!22#$!# #$!#/ /--! -!& &'(! (!, , Whether you walk uphill ,33' or downhill, in + order maintain balance land on the balls of*$! your 2*, 2* , 5 $ * 6 / %0: %0 : ! ! feet. If you land on your heels, this would throw your but down, causing your head to rise up. If you
land on your toes, that would throw your head downward, causing your butt to rise up. Do it any other '(*! '( *!#$,1 #$,17! 8(22 227! 7!# #instinctively $$-7! $$ -7!22'$ '$7! 7!,%1! ,%1!2 #$!8 8,--! --!' '4! 4!& &'( '(*! *!44$$ $$2! ,*$! $!22#$!or way and you lose balance.?That's why 7!8( you will lean2#$! in accordance with the2!, geometry *$69'% 9'%6 6/8-$! $!44'*! *!1 1/62* 2*//8( 8(22/%0! %0!22#$! #$!44'*3$ 3$6! 6!' '4! 4!0 0*,5/2&! &!,%1! ,%1!8(' 8('& &,%3 ,%3& &! terrain of the hill you are traversing. /%!,! %!,!+ +,&! &!22#, #,2! 2!, ,-+,&6!6 &6!6$$. $$.6! 6!8'1 8'1&! &!8, 8,--,%3$ ,%3$7! 7!+ +/2#'( #'(2! 2!& &'(!$ '(!$5 5$%! Your head, butt, heel, toe, and the ball of your feet are the responsible for distributing the forces of 2#/%. %.//%0!,8'( %0!,8'(2! 2!//2:!!>#$!3'% #$!3'%2* 2*' '-! -!' '4! 4!& &'(*!3$% 3$%22$*! *!' '4! 4!0 0*,5/2&! &!//6! 6!'%! '%! gravity and buoyancy in a way that always seeks body balance, without you even thinking about it. The 2#$!8, #$!8,---6! 6!' '4! 4!& &'( '(*! *!44$$ $$227! 7!+ +#/3#!,3 3#!,32! 2!, ,6! 6!,!9 ,!9//5'2! 2!8, 8,---: -:!! control of your center of gravity is on the balls of your feet, which act as a pivot ball.
@!9*/3$!8 @!9 $!8, ,*! *!**$,3 ,3226! 6!$A,3 $A,322-&! &!22#$! #$!6 6,;$! $!,%1! ,%1!<<)--! *'5reacts $!//2! $! 2!22exactly '!& '! &'(the :!!! same and I'll prove it to you. :! A price9bar ! ! !
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III.
YOUR BUTT
YOUR HEAD
Heel
Toe Ball of foot
! YOUR HEAD
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Toe !
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by Jerry Stewart
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!FIGURES IV. AND V. BELOW, ILLUSTRATE THE POSITION
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AND DISTRIBUTION OF WEIGHT FOR A BODY IN PERFECT FIGURES IV. AND V. BELOW, ILLUSTRATE THE POSITION FIGURES IV. AND V. BELOW, ILLUSTRATE THE POSITION AND DISTRIBUTION OF WEIGHT FOR A BALANCES, WALKING DOWNHILL AND UPHILL BODY IN PERFECT BALANCES, WALKING DOWNHILL ANDFOR UPHILL RESPECTIVELY. AND DISTRIBUTION OF WEIGHT A BODY IN PERFECT ! RESPECTIVELY. BALANCES, WALKING DOWNHILL AND UPHILL ! RESPECTIVELY. IV. IV. IV. !
YOUR BUTT
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WALKING DOWNHILL WALKING DOWNHILL
WEIGHT
HEEL
WEIGHT
HEEL
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BALL
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WEIGHT YOUR HEAD
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YOUR HEAD
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V V YOUR HEAD YOUR HEAD
TOE TOE
WALKING UPHILL WALKING UPHILL
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YOUR BUTT YOUR BUTT
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HEEL
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by Jerry Stewart
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OKAY, A DIFFERENT A R LET’S C H I TRY M E LITTLE D E S SOMETHING P R I N C I P L E AND FLIP THE PRICE BAR ON IT’S SIDE AND SEE WHAT WE GET.!
OKAY, LET'S TRY A LITTLE SOMETHING DIFFERENT AND FLIP THE PRICE BAR ON IT'S SIDE AND SEE WHAT WE GET. VI. ! ! ! !
VI. SELLING VOLUME GRAVITY
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WEIGHT= 20 CONTRACTS
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BUYING VOLUME WEIGHT 20 CONTRACTS BOUENCY FORCE
Once again we end up with our seesaw. This illustrates what I mean when I say that sellers (short sellers) "#$%!&'& #$%!&'&((#! #!) )%!% %!%# #*!+,! *!+,!) )(-.!/+ .!/+0! 0!1 1%% %%1 1&)2! 2!!!3.(1! 1!((44 44+ +1-0&-%1!).& .&-! -! make the market go up and buyers make the market go down. 5!6 5! 6%&#! %&#!) ).%#! .%#!5! 5!1 1&7! 7!--.& .&--!1%44 44% %01!81./ ./0-! 0-!1 1%44 44% %019!6&:%! &:%!--.%! .%!6 6&0:% :%-! -! Above we see that the sell side and the buy side both have 20 open contract. Both sides are evenly '/!+,!&#*!;+7 '/!+,!&#*!;+ 7%01! 1!6 6&:%! &:%!--.%! .%!6 6&0:% :%-! -!'/!*/ '/!*/) )#2! 2!!!! balanced so price does not rise nor fall. <;/ ;/= =%! %!) )%! %!1 1%%! %%!--.& .&-! -!--.%! .%!1 1%44! 4!1 1(*%!&#*! *%!&#*!--.%!;+ .%!;+7!1 7!1((*%!;/ *%!;/--.! .!. .&=%!>?! But, what happens if one of the 20 short sellers should buy back 1 contract. I n order for the seller to exit /,%#!$/#-0 /,%#!$/# -0&$ &$--2!@/-.! .!1 1(*% *%1! 1!& &0%!%=%# %#447!;& ;&44&#$%* &#$%*!!1/!, /!,00($%!*/% %!*/%1! 1! the trade she must become a buyer to cover her position. Therefore, there is 1 less seller (now 19 instead #/-!0 #/ -!0((1%! %!# #/0! 0!AA&44 442!! 2!!!! of 20) and 1 more buyer (now 21 instead of 20). This is a net gain of +2 for the buy side. This seller has caused the market to rise, not a buyer. @+-B! B!) ).& .&-! -!.&,,%# .&,,%#1! 1!((A! A!/#%!/ /#%!/A! A!--.%!>?! .%!>?!1 1./ ./0-! 0-!1 1%44%01! 1!1 1./+ ./+44*! *!;+ ;+7! 7! This process works the same way in reverse. That's why buyers make the market go up. ;&$:!C!$/#-0 ;&$:!C!$/# -0&$ &$--2! 2!!!5#!/ #!/00*% *%0! 0!AA/0! 0!--.%! .%!1 1%44%0!0!-/!%D /!%D((-!-!-.%! .%!--0&*%! %!1 1.%! 6+ -!;%$/ -! ;%$/6 %!&!;+7 %!&!;+ 7%0!0!-/! /!$/ $/= =%support 0!.% 0! .%0! 0!, ,and /1(-resistance (/# /#2! 2!!!3.% .%0 0%A/0are %B! B!-.% .%00%! When you understand this it1will help6 you understand why levels so (1! 1!C! C!44% 11!1% 11!1 %44 44% %0!why 8#/ #/)! )!CE CE! !(#1-higher %&*!/A! %&*!/ A!> >?9!&#* &#*! C!6 6/0%!;+ %!;+7 %0! 0!88sold #/)! #/ )! important. This also helps you understand you need volume on !aC! breakout. If7you short at a certain level, and price should rise above the level you sold, you and all the other short sellers at this level are looking to buy back to cover their position. When there is a mass or herd of orders at a particular level, that level is called a support or resistance level. If price is above the level, the level is called support. If price is below the level of herd volume, the level is called resistance. When price passes up through a level from below, the herd of short sellers buy back their positions in mass and this herd is joined by a herd of new buyers who see a move starting and want to get in on it. This stampede of buyers provide the volume momentum (wave) that will wash price up to the next page 54!
by Jerry Stewart
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resistance level, which can be recognized as the high volume areas. Now, go back to figures IV. and V. above. All you are doing is looking at the seesaw from directly behind it, instead of a side view. Stopping bars are like everything I talk about. It is not meant to be traded as a stand - alone analysis technique. Like all techniques the key is, where does the stopping bar occur? If It occurs at a support or resistance level, the predictive ability of the stopping bar is a reliable confirming indicator when used together with the whole system of analysis. I will say this one more time. If you don't have a defined support or resistance level upon which your trade is based, you have no business in that trade.
FISH HAVE HABITS My dad is an expert fisherman. He always tells me, "If you know the habits of fish, your chances of catching fish are vastly improved. Markets are the same way. If you know the habits of markets, your chances of catching profitable trade are vastly improved. When you think of our seesaw example above, where we are +2 on the buy side. This net gain of 2 is enough to start the buy side going. Once the buy side starts going up it generates upward momentum. Due to this momentum, the buy side cannot change direction immediately. Let's say that the buy side is rising due to the +2 gain. If you subtract 1 buyer from the buy side, you must add 1 seller to the sell side as, a buyer must become a seller to close the position. When the buyer sells we are once again even with 20 contracts on both, the buy and the sell side. Now that both sides are even, they must fall back to balance. You know how a seesaw works. Now you tell me. Does the buy side change direction immediately, like a flying saucer, or does momentum continue to carry price upward, even though the two sides are balanced? The buy side must fall but, not until after the upward momentum has run out. After the upward momentum runs out, the same thing happens in the opposite direction (sell side) then, back again on the buy side, rocking back and forth until the seesaw come to rest or equilibrium in the process known as rocking. The ups and downs you see on a price chart is simply a visual manifestation of the market rocking, back and forth, in accordance with the same universal laws as the seesaw. But, a market never truly achieves equilibrium because buyers and sellers are constantly jumping on and off the seesaw as long as the market is open for trading. And just to make sure a market never achieves equilibrium, markets have "market makers", more commonly called brokers. I call them operators. Anyway, the function of the market maker is to induce other traders to jump on the seesaw because they make money called, "the spread and commissions". No one trades a market that does not move. There is no opportunity to make money. They are allowed to get their money but that's not enough for them, nope... They also make most of their profits from the methods I often speak about. But, like predators that maintain a healthy ecosystem by weeding out the sick, old and diseased, thereby keeping the system clean and free of disease and to make room for the new births. If not, over population undermines the efficient operation of the system. If you notice a seesaw behaving any other way you would pay close attention, because would know that some outside influence is at work. It is the same with markets. If a market is behaving counter to it's habits, you must assume some outside influence is at work so you want to stay away from a trade entry. Never trade uncertainty that is gambling. Always trade certainty, which is business.
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by Jerry Stewart
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AGGRESSIVE FISH My dad was telling me that fishermen usually catch the most aggressive fish. Market fishermen (operators) usually catch the most aggressive traders. See, when food hits the water, all the fish in the area run in to check it out. If you've ever fed fish in an aquarium you have seen these habits in fish. The more aggressive fish will fight and chase the others away from the food so they can rush in and grab it first. In the wild, fish are smarter than you think. They will check out the food or nibble on it to taste it. But, if the food is not behaving like it usually does, swim like usual, smell like usual, exhibit distress as usual, or in short, doe's not react in the usual way. When the fish say, "this meal is not following it's normal habits. don't know for sure what it might do. Something is different so I'll wait for another meal that is more predictable. Now compare this to the aggressive fish. The aggressive fish won't take the time to check it out thoroughly. He's to busy trying to snatch and grab. He will live for a while, but it is only a matter of time until he swallows the hook. When you enter on a price reversal, before the pivot is formed, you are like the aggressive fish. You may get away with it for a few trades, but you will eventually swallow the "operators" hook. The same holds true for entering at any support or resistance level. If the market is not following the habits of universal motion you know that some outside influence is at work. Since you probably can't know what this outside influence is so, you should wait for a more predictable meal or you will end up swallowing the hook.
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by Jerry Stewart
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SHADOW VOLUME Price will typically retrace to a level that balances out the shadows from the previous bar. This phenomena is the functioning of one footed balance. As I have shown you in "THE LAWS OF CHARTS AND MEN", I have already shown you how walking is a process of alternating balance and imbalance. How whenever you take a step you throw yourself off balance and your next step is called a "catch step" because, the landing of the second step provides support for you to catch or regain your balance. We have already discussed earlier how one footed balance is controlled by the heel, toes, and ball of the foot. We have discussed the mechanics of rocking. If you are standing on one foot, and you want to remain perfectly still (balanced), your weight must be distributed evenly between the 3 points of foot balance. The heel, toes, and ball of the foot. Your foot is always working to maintain this state of equilibrium and, like the seesaw and the markets, you will rock back and forth before stillness or balance can be restored. As we've discussed, the heel and toes are your shadows. Just like the shadows on a candlestick bar. So, between the time of you pushing off to take that first step, and your catch step hitting the ground, you still need to maintain a certain degree of balance to keep from falling over before your catch step hits the ground. Understand that the distance and degree that the catch step can travel is directly proportional to the shadow of the prior or push step. It is the same for a market. The distance a bar will retrace in relation to the bar immediately prior is proportional to the sum of the difference between the upper and lower shadows of the prior bar. SEE CHART (D) BELOW.
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by Jerry Stewart
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ILLUSTRATE THE HERD EFFECT
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UNDERGROUND FIBONACCI
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THE IMPORTANCE OF NEWS AWARENESS
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VOLUME REVERSAL, PIVOT BAR, FOLLOW THROUGH BAR, CONTINUATION BAR, BREAKOUT/REVERSAL
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Volume with higher close and volume with lower close
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TEST BARS-A support or resistance level must be tested to weave a thicker level and if not tested, will usually not hold when tested after a reversal.
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Pivot bar has more volume than measuring bar
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Measuring bar has lower volume than bar preceding it.
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On a long pivot Test bar should have lower volume for a down close and higher volume for an up close.
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On a short pivot the Test bar should have higher volume on a down close and higher volume for an up close.
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A market turns up on lower volume
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A market turns down on higher volume
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by Jerry Stewart
