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amount of information. We cannot be certain that either buyers or sellers were in charge at the end of the period.

We know now that, by looking at the open, high, low, and close of a bar, we are able to tell a great deal about who is in charge and what they are doing. The important concept to grasp is that each bar clearly indicates how the interaction between buyers and sellers moved the balance point around during the period. This information alone is more than the majority of traders can read into the market.

We need a second data input to narrow down our evaluation of market action: Which way is the immediate trend? By immediate, I mean compared to the previous bar of the. same length. For example, on a 5-minute bar, we are talking about a total of 10 minutes (2 bars). On a 1-hour bar, we are looking at a total of 2 hours.

Our "quick and dirty" way to determine the trend is shown in the pairs of bars in Figure 6-7. If the midpoint of the current bar is above the top of the most recent bar, the trend is up and is indicated with a plus sign ( + ). If the midpoint is inside the range of the previous bar, we designate it with "O" and call it an overlap with no clear trend. If the midpoint is below the


+ 0 -Figure 6-7 Determining the immediate trend.

range of the previous bar, we mark it with a minus sign (—) to indicate the trend is down.

Now we know who is in charge and what they are doing, and we begin to get a feel for the longer-term picture by knowing which way the immediate trend is going. Our next task is to look deeper into what is actually happening during the trading day (or any longer time period). What are the various interacting forces that determine price, price movement, and the termination of a price move (the end of a trend)?


A rather old axiom of trading is that the best way to make profits consistently in trading is by following the trends. A source of real confusion is that the other axiom of making money in the market is: "Buy low and sell high." As mentioned in Chapter 2, these two axioms are obviously contradictory. If you buy low and sell high, you are going directly against the trend. The ideal, of course, is to buy low at the very beginning of a new upward trend. To develop this ability, let's look at how trends are formed.

Years ago, the "market" and the "marketplace" occupied the same physical space. Most of the large grain commercials were on the trading floor. Their orders were of sufficient size to move the market and they had much more control over the market than they do today. During the past 20 years, the markets have become worldwide. Not only are Ralston Purina, Kellogg, and other large commercials trying to hedge their bets, but millions more small speculators and farmers all over the world are competing with them in anticipating the future prices of grain. This spells great opportunity for traders. Today, trends are not made on the floor. The floor primarily provides a liquid market by responding to "outside" orders.

The fact that trends are now made off the floor, rather than on the floor as they were previously, gives us an opportunity to anticipate what the market is going to do. The key is volume. Our only real-time information from this market is tick volume, time, and price. Tick volume is the number of price changes made during a specified period. It is not the number of contracts traded. A number of studies have indicated that there is no significant difference between the relationship of actual volume and tick volume. We use tick volume and can assume that it represents actual volume. This on-line volume is our best clue to what is happening in the trading pits.

In the pits are two basic species: floor brokers and locals. Floor brokers are the people who fill orders. They get paid a salary, a commission, or some combination of those two factors. Generally, they do not have their own money on the line. They are order fillers. Their financial future is not affected directly by the prices they get for orders filled.

Locals trade with their own money. If they don't get good prices, they pay out of their pockets then and there. Locals must be much better traders than floor brokers. Locals must make their own decisions; floor brokers generally follow someone else's orders. Locals' primary function is to make a market by taking the other side of a trade. They usually are not interested in any long-term positions. We have had dozens of locals at our private tutorials, and to some of them a 10-minute trade can be a long-term position. Remember that trends are made from orders off the floor rather than from the locals' taking longer-term positions. Because the locals' main job is to take the other side of outside orders, they have no future in trading with each other. They are after your money. Again, our key to understanding the action in the pit is tick volume. The locals do no significant amount of trading with other locals, and trends are made by outside paper. We must know, therefore, when and in what amounts outside paper is coming to the floor. This is signaled by a change in tick volume.

The bar chart in Figure 6-8 has a tick volume histogram on the bottom. Compare any bar with the immediately preceding bar. If the present bar (the right-hand bar in the pair) has more volume than the previous one, more outside orders are coming to the floor. Before a trend can start, there must be more volume coming to the floor. An increase in volume always precedes an increase in momentum, and the momentum changes


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before the trend changes. Before any of this starts, hundreds or even thousands of decisions must be made by outside traders who are changing their minds about the market. Let's restate this sequence for clarity. The first changes are the decisions in traders' minds off the floor. Their decisions are then reflected in changes in tick volume. After that comes a change in momentum, and then, finally, a change in trend. Our goal is to get in on the first 10 percent of any change in trend, and get out on the final 10 percent of that same trend. If you can do this, you will be rich. Again, for emphasis, the first key is a change in tick volume.

A practical rule in intraday trading is: A difference of one tick is enough. We are interested in whether there is more or less volume than in the previous time period. If we are trading on a daily chart, we use ±10 percent as a significant difference in volume. Trading dailies, we must have 110 percent of the previous day's volume to be counted a plus (+). Volume that is 90 percent or less would count as a minus (—), and between 91 percent and 109 percent would count as the same volume. Our task here is to take all the complicated information the markets are giving out each second and translate or funnel it into an easy-to-understand decision format. The only language the market speaks is ticks, volume, and time. Let's examine more closely the syntax of this language.

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