This blog entry was inspired by an article I just read by James Dalton, father of Market Profile.
I often talk about the importance of context. In some of my psychology presentations and in all of my work with traders I also talk about how many traders, especially newer ones, become too rigid or mechanistic in their approach to reading the market. And that’s understandable because everyone hears how important it is to ‘follow the rules’. But rules, for a discretionary trader need to be based on context. (rules around risk mgt are something else, I’m referring to what some refer to as their daily plan)
I use Market Profile to help me see the structure of the market, but I base my trades on other things like multiple time frames in volume profiling and internals. James Dalton has evolved how he uses MP over the years as well. In his article, Dalton uses the term ‘linear thinking’ to describe the same problem I often see where traders become rigid or fixated and lack the cognitive flexibility that is required in discretionary trading.
A good way to develop cognitive flexibility and a sense of perspective on market context is to observe the market with an open mind and ask questions…..What did it do? What is it trying to do now? How good of a job is it dong? Based on that, you can begin to develop hypotheses about what it might do next. Yes, you may have standard MP levels like VAH, VAL, POC, but I don’t get fixated on them because the market is much more dynamic then most realize. I sometimes describe the market as a living breathing dynamic entity that has forces within it battling back and forth for control in multiple time frames.
My main job in the morning is to try and figure out the following: who are the main players right now (locals, day traders, OTF, etc), who is in control and who is in pain; and based on that I adjust my strategy for the day on the fly…I will trade a rotational strategy or look for a place to get on as quickly as possible if I think it is a directional day. Once in the trade, I continually look for a few things: obstacles ahead of me (I typically scale 1-2 ticks in front of the obstacle) ,support behind me, signs that my hypothesis is wrong, signs that my hypothesis is correct.
Similar to Dalton, part of my preparation begins with looking at the market from a longer time frame and then looking at smaller and smaller time frames. Based on that analysis, I simply identify areas or levels (not precise to the tick, but areas) of interest that I may want to do business at. I may end up using a given area of interest to get short, get long, or use that same area to scale heavily (e.g. I don’t automatically sell the VAH or buy the VAL, I look for context) I watch how the market behaves as it approaches an area of interest to see if it will act as an inflection point or not. I look at multiple time frames, order flow (MarketDelta footprint, held bids/offers, T&S), internals (TICK, ADD, etc) to see how the market is reacting to the area I’ve identified as potentially important.
The bottom line is that I feel comfortable with making my entry. Notice I said ‘comfortable’, which is not the same as expecting it to work. I look at any one trade as having a 50/50 chance of working, even if I feel comfortable about it. Does that make sense? If not, you have not internalized how probabilities work, and trading is largely a matter of probabilities. If you have a stat that says, “this works 60% of the time”, you must also realize, and this is the part where most people glaze over and don’t get it…that just because you see 60% of trades or a certain set-up win, or a certain market condition result in something, it does not mean that this will be the case on the next 6 out of 10 occurrences. Within a distribution, even a skewed distribution, each individual occurrence or data point is 50/50. Read some Mark Douglas if you still don’t get this critical concept.
Back to context for a moment. Learning to see context takes experience and what Dalton calls “quality screen time”. Dalton does not define ‘quality screen time’, so here is my definition. Quality screen time is the following: I’m focused and remain open minded to what the market is showing me while I make observations, take notes, and make mini hypotheses and watch the market test them. That is quality screen time. Some traders have spent many hours in front of the screen, but it was not quality time. I have seen many traders with years of experience who lack the ability to see context; and on the flipside I’ve seen some (a few, not many) who spend less time in terms of hours but it was quality time in front of the screen, and as a result they, ‘get it’.
Once you have this under your belt, the final hurdle to consistency is going to be your psychology and how you manage yourself, your time, your energy, your actions, your emotions, your thoughts. Lots of traders can recognize what they need to recognize in terms of a market pattern or level but they are unable to consistently execute on their plan due to various fears that have not been dealt with (fear of being wrong, losing money, missing out, leaving money on the table, etc). Unfortunately, its this last stage that most traders never get past.
Nice post. But I want to know, how long does it take on average to start seeing the context? If I’ve been watching and taking notes for 1 year, should I be getting it by now, or is that unrealistic?
Eric
Eric,
It is not so much a matter of time by itself, but how you use the time. The degree of cognitive flexibility present when you are in front of the screen is the major variable. It can take some people months, others years, and many never get it at all.
Andrew Menaker
Andrew – Thanks for the post. I’ve heard Mark Douglas mention that it’s a good idea for new traders to trade mechanically as a way to learn context. What is your opinion of this? Sounds like you may believe that in itself can build bad habits. Thanks,
Adam
@Adam
I may not have been very clear in my blog about what I meant by context. I was referring to how one looks at the market, not actual strategy or execution. And I should of distinguished that idea from the probability concept, the two are related, but different. Sorry for the confusion.
Regarding probabilities, I, and other trading psychologists I know often recc. a mechanical type of trading exercise to help a trader experience, or internalize, what it really means to trade probabilities. This can help a trader begin to grasp on an experiential level (beyond intellectual understanding) the meaning of probabilities and how they actually play out. So, I agree with Mark Douglas.
It’s one thing to intellectually understand how probabilities play out, but many traders have not been able to embrace it and trust it. A 60% run rate will still have many unpredictable streaks, often playing tricks on the mind in terms of expectations. Each individual data point or occurrence in the run rate is actually a 50/50 probability in isolation.
I hope I cleared things up.
Andrew Menaker
Andrew,
It is interesting to see your opinion on Mr.Dalton’s work right after watching his Fields of Vision set, highly recommended btw. I am trying for years to pick up whoever makes sense in the traders education field and both you and Jim are on my short list.
In his set Jim did not devote a lot of time to psychology of trading, but made a couple of remarks that wrung true to me: one is that the preparation is important — prevents you from emotional reaction when you are ready to what is happening. Second is that you need to learn what is difficult to you and not leverage your strengths (like you think). If you only develop a method of trading that is easy for you you’ll end up in shock when market changes so that you need to something outside your comfort zone.
I wanted also to share with what I recently picked up from another well-known trader – Larry Williams. First of all I loved his “disclosure statement” – If you trade with money that you can afford to lose – than lose you will all of it. He says that every time he was not afraid to lose – he did, and that when he was scared like hell to push the button – usually those were the most profitable set ups. Another contradictory on the first sight advise -always believe that the current trade is a loser. I love this one and trying to use it for a few weeks. You know, it works – never unpleasant surprises, no need to pull stops or exit earlier.
Sorry for my poor English, Alex
@Alex
Thanks for sharing your very insightful comments and observations.
I’ve never seen Dalton’s videos but have read his two books Markets In Profile, and Mind Over Markets, and have great respect for his work.
You bring up a very important point in that there are different ways to approach a market, and different ways to approach psychology as well. There is more than one ‘right way’. Unfortunately, many traders become overly influenced by a guru, who may or may not be a successful trader, and when they try and copy what the guru does they don’t get the expected results because they lack certain subtle nuances, including mind-set. I’ve been in psychology for over 20 years, and worked with traders since 1995…I’ve seen this phenomenon over and over. I believe each person is susceptible to the same mental traps but the inner experience of each person and their subsequent reaction and behavior is unique. The path to successful trading includes understanding who you are and what makes you tick, not just what makes the market tick.
Thanks again for your observations comments,
Andrew Menaker
@Alex
Alex – Thanks for sharing what you’ve learned from Dalton and Williams. I’d definitely like to talk more about your progression. If interested, send me an email at jabartley at gmail.com. Thanks,
Adam
@Adam
I approved your comment to be posted here….but I hope the spam bots don’t pick up your email. Whenever you post your email publically you expose your email to spammers. FYI….
Let me know if you want me to take it down.
Andrew
Perhaps the best piece I have ever read in my six years, and some $50,000 spent trying to learn to be a trader.
@mj
Thank you the positive feedback.
Andrew
[…] things never change. When humans are faced with information or data and need to decide what to do with the information, including how to respond to market moves, there are two general […]
[…] People will go to great lengths attempting to avoid discomfort. And as traders, much of what we do is in response to being uncomfortable. This is an extremely critical concept to understand and explains many trading problems and mistakes. The problem is not in being uncomfortable per se, the real problem is that our efforts to avoid discomfort can easily end up making us feel worse. If you can understand why you’re uncomfortable and what your typical default reaction is to being uncomfortable, you will be well on the road to trading success. […]
Hi Andrew,
The article is no longer available at the link you provided. Do you know how I can get that article? Another great blog entry by you by the way!
Thank you.
Regards,
Iwan
The link to Dalton’s article is not working, its likely that since I posted the link he may have removed the article or changed the location of it. Sorry, but I don’t have any control over that. Perhaps you can find by exploring his web site.