www.PureTick.com

I have been trying to step back actually attempting to make sense of "why" markets
move the way they do. Also, "why" certain patterns and methods work sometimes
and then why they don't.

My research is probably not thorough enough to classify my work as seminal,
yet somewhere I do feel I am on to something.

It is not often that we can objectively and accurately know things about the
market, like what will today's high and low be. But there are plenty of
certain facts.

There is the fact that most traders lose. There is the fact that the
intelligence level of most traders is way above average.

After a while most traders begin to attempt to apply a method to trading.
Most methods are geared toward some kind of mathematical model. They call
these models indicators. I wonder how many traders attach themselves to such
indicators as if the "indicators" determine the price. I will bet that most
traders forget that any indicator in existence can only be determined
"after" price has made a move.

Yet most traders continue to act otherwise. The 5 period moving averages
crossed below the 15 period moving averages. That means the price will go
down. Bull. The price HAS gone down. The moving average just recorded, on a
mathematically precise way, exactly how much the price went down in the
past.

The past does not guarantee the future. When one applies mathematically
based study to any series of past data, a number always results. Any high
school student can review the past 50 September
29ths and calculate on average that .12 of an inch of rain has fallen (lets
say it only rained 3 times in the past 50 years in Death Valley and each
time 2 inches of rain fell in a downpour). Would you bet 10% of your capital
that we will get .12 inches of rain in Death Valley today? Many traders do.

The other side of the coin deals with prevalent psychological advice
regarding trading. The conventional wisdom is that traders are ruled by fear
and greed and that dooms us to failure. Well Gordon Gekko, in Wall Street
has already convinced us that "Greed is Good."  Well I am saying now that
"Fear is Fine." I think intuitively fear is a learned reaction by traders
who began trading without fear. After 6 months and blowing out half their
account, they rightly so have reason to fear. As a pilot I understand fear.
If someone hands a novice the keys to a Piper Arrow with retractable gear
and tells you if you conquer your fear you can successfully take off and
land without any training at all---be very fearful and run away.

Same way with trading. If Lewis Borsellino told you today you could trade
alongside him, and he will tell you in advance what he will do, that you
could take a position before he did, and even if you were wrong, he would
reimburse you for your loss, you might not have fear on that trade. We fear
because intuitively we sense that the methods we use are not very vigorous,
that they have a good chance of losing.

Our accounts have proven that.

So the next thing people do is get out some canned system, which they can
see mostly loses money, and they go back in time and try to find a rule that
will produce a profit. It is mathematically certain that one can always find
a number to produce a certain result. For example, if you take the previous
5 years, you can come up with a rule that makes money. Buy put options every
year on the OEX on September 7th. It tests out well. Maybe doesn't work most
years. But it did work so well during 2001 that it makes every year seem
great.

What is the answer? The answer is to study the nature of markets and the
people who trade them. There are big money traders and small size traders.
The only assumption we should start with is that the people with big money
are the ones doing the right thing and the ones with small contracts are
doing the wrong thing, on balance. Even a stopped clock is right twice a
day.

So our job is to figure out what the big boys are doing at significant
points in the markets
One way is to study volume. Big traders need big volume. Or rather produce
big volume. The other thing is to question traditional studies, the same
studies that are commonly available and used by the masses, the same masses
that can't make money.

The most promoted method is to buy when volume is up and price is up. Small
orders cannot panic. Small traders can or traders placing small orders can effect
the market just as much as big firms. So if the market is shooting up, the only way to get good
fills naturally would occur if one was selling. So the big question is if the price of the YM is
up 30 points in the last 5 minutes who would be the one buying at that point
in time, a trapped newbie who was short 30 points ago, or a professional?
Possibly the newbie. And who would be selling at that point? It might be
reasonable to assume the professional who was long 30 points ago.

Anyone can figure that out. What we have to try to figure out is what would
be happening to prices if the pros were actually shorting new highs? That is
what I am studying at this point. What should happen?

Possibly there should come a point that no matter how much buying the
newbies did at new highs, the price would have to reject a certain point and
would not be able to close on the highs anymore. You would get high range
big volume green bars but soon price would start closing in the middle of
the range. Then volume would slow down.

I have started to see lots of evidence of this occurring. But can we guess
the high point? That is where I think that we can not. And that is where I
think amateurs go wrong.

I don't think pros try to guess either. I think their combined selling just
produces these tops. The selling might be random. It might occur where pros
except prices to change. Whether they are just flat or short we can not
tell. What we might be able to tell is where the newbies are wrong.

There may be reasonable price levels to quickly determine the nature of
buying panics. Then it can just be a matter of determining where the newbies
will start panicking again and have to get out where they are wrong.

For that we might have methods to quickly jump in as the newbies are jumping
out.

In my next update I will talk about such methods.