Synopsis of Trading Strategy

Day Trading is conceptually very simple. So simple that you only need to know two things to be extremely profitable.

1. Which direction

2. When.

The hypothesis, however, is that technical analysis alone is not enough to be consistently profitable because it is not performed within the context of a Directional Expectation the way long-term stock investing is. But if we pay attention to the immutable characteristics of market movements, it is possible to ‘logic’ your way in to determining Which Direction is most advantageous, and When to make key decisions that are in line with that natural flow.

Let me give you one example of what I mean

Utilizing Market Characteristics

The market follows something I call the Sawtooth Principle. Every upward trend is created by a series of up, down, up, down, up, down movements as shown in this drawing.

So is every downward trend and every sideways trend.

These up, down, up, down movements create a natural range for the larger trend that can be encompassed by "bands”, or trendlines, or some other parameter.

How to Use this Principle

One secret to profitable trading is to use the right time frame. You want to make each trade to be from Low to High on the trend’s natural range. Even if you choose to hold through more than one retracement, the goal is still to be disciplined to buy at the Lower part of that natural range and sell at the Upper part of that natural range. For example, if you expect the price to go up and you buy “low” as in ‘low in the trend’s natural range’, and sell “high” as in ‘high in the trend’s natural range’, you’ll win big when you are right about the direction and lose small if you’re wrong. This is the meaning of the old adage “Buy low, sell high, take a piece of the pie.”

But if you do the opposite of that and buy high in the range and sell low, you’ll win small when you are right about the direction and lose big if you’re wrong.

If your wins are small and your losses are big, you have a major disadvantage. But if your wins are big and your losses are small, you have a major advantage. This is the power of Sawtooth Positioning, and this is how to take advantage of the First Law of Market Movement: the Sawtooth Principle.

Every trend has a natural range. Just accept it and take advantage of it.

My method utilizes Five (5) Laws of Market Movement in tandem with basic technical tools.

Bank Involvement

My theory is that these 5 Laws are the result of Bank behavior. In US stocks a wealthy individual or a fund could buy up a lot of an individual company stock and create a random tall bar, or even a rally that lasts most of a day. But FOREX markets are in the Trillions per day. Banks, therefore, are the only group that move so much money that they have to split their purchases into chunks to avoid creating mad volatility and deterring people from trading.

It is my assumption that the Sawtooth Principle (Law 1) is created by the oscillation between active bank orders and intermittent rest periods as they gradually scale in or out. I believe two of the other four laws can also be explained by bank activity with the other two being based on the distribution of non-bank traders between all time frames.

With the 5 Laws and a few technical tools, there’s not a lot that can’t be derived from the charts. And it’s all thanks to the fact that Banks are doing things in small repetitive batches in an attempt to not be noticed by the rest of us.

My wife's opinion is that this goes beyond Technical Analysis. These incredible observations about the Market’s behavior are so powerful they could easily be called the Technical Analyst’s equivalent of Fundamental Analysis. After all, the goal of fundamental analysis with stocks is to get a sense of the strength of the underlying in order to make educated decisions and see them through with confidence. So it makes sense that anything that can provide that benefit should be considered fundamental regardless of its origin.