Step 3 :- Identifying the strength of the trend…. Introduction..
We now have our battlefield. We also know the trend the price is moving and the trend violation point. Before going further, let me add a few more points so that you will understand the remaining procedure clearly.
When price is in uptrend,
Bulls are attacking and Bears are defending. Bulls will give up when the trend violation point is broken. If the bulls are strong enough, they can also attack even after breaking the trend violation pivot, but that happens rarely.
When price is in downtrend,
Bears are attacking and Bulls are defending. Bears will give up when the trend violation point is broken. Same as above, bears can also attack even after breaking the trend violation point if they are strong enough.
When price is in sideways range,
Bulls and Bears are in equilibrium. Each one protects their own boundaries. Bulls will try to defend the range support. Bears will try to defend the range resistance.
So far, so good. What next? How can we use the above data in our decision-making process? One thing remained before going to that prediction stuff, ie. determining the strength within the trend.
We already know that bulls are strong in uptrend and bears are strong in downtrend.Then,
What is this strength of the trend?
When you are attacking, you are expending relatively more energy than the defenders, your opponent. You might start the battle aggressively, but as the battle progresses, the attacking army will be tired and give up. Then,
How can you know that the attackers are tired?
You can know that just by comparing the attacker’s present energy with the energy they have fought with in the past. You can also do that by comparing the speed at which the attackers are attacking with the speed of them in the past. You can also do that by comparing the force with which the attackers are moving front after crushing the defender line. Indirectly, you can also do that by comparing the strength of defenders at present with their strength in the past. If the defenders are showing more strength than previous, it might mean that the attackers are weakening in the course of the battle.
To make it a bit clear, you can say that a car is decelerating only when you know the speed with which it travelled in the past.
The same logic applies to trade. Bulls might be fed up in an extended uptrend. Bears might be fed up in an extended downtrend. If Bulls/Bears are not so strong, they can even get tired in the initial stages of the trend. But one thing, just because the bulls/bears are tired doesn’t mean that the trend will change. They can relax and attack again if the opponents are not strong enough to grab the opportunity to take the charge. Now that you understand what I am trying to say, let’s get into the topic with a small introduction.
I have been using the words battlefield, bulls, bears, the battle between bulls and bears, terrain, attack, defend etc. Because trading includes each and every aspect of warfare. Battlefield, enemies, strategies, opponent psychologies, choosing the correct battles and running away from the strong opponents, economic warfare, whatnot. Everything in trading resembles a war. Before I started trading, I didn’t have much interest in wars. In fact, I was the last in the class when history marks were announced in my high school. For me, only military people are destined to know the answers to how questions of the battle and I used to think that a war is won when the opponent is crushed with the winner’s entire force.
One of my mentors said,” If you want to be successful in the profession you have chosen, no matter what stream it is, no matter how ridiculous it appears to people around you, treat it like a war. You know what it takes to win a war. You have to fight until the last drop of your sweat ignoring the chaos around. Winning the battle is the only thing that should dance in front of you. No distractions. No attractions. Learn about wars and apply them to daily life. Someday, you can smile at the people who ridiculed in the past. “
Each and every word in the above paragraph were uttered by him. I haven’t changed a single word.
That triggered my curiosity to learn about warfare. Bought and read around half a dozen books on war strategies. None of them was practical. It might be possible that I was not capable enough to apply them in real life. My enthusiasm didn’t die and my research about warfare still went on. Then I came across two books, titled, The 33 strategies of War, written by Robert Greene. and The Art Of War, written by a Chinese army general, Sun-Tzu in 400 B.C, translated by Ralph.D.Sawyer. Oh boy, what a gold mine they are!!!
There is no doubt those two books are practical. Those two books have changed my perception of almost everything. Including the way, I ride my bike. Frankly speaking, applying the concepts learned from those two books in designing the trading plan around the technical concepts of trading I have read from the YTC price action trader book has outstandingly improved the results. If you are a book worm like me, I highly recommend you to have a copy of those two.
Before moving further, I am going to quote a phrase from the book, The Art Of War, which is related to the topic of this article.
If your enemy is secure at all points, be prepared for him. If he is in superior strength, evade him. If your opponent is temperamental, seek to irritate him. Pretend to be weak, that he may grow arrogant. If he is taking his ease, give him no rest. If his forces are united, separate them. Attack him where he is unprepared, appear where you are not expected. – Sun Tzu….
If you have seen the movie, The Wallstreet (1987), you might have listened to this.
70% of the war is won if you can correctly read your opponent psychology. Here, in trading, all the traders except you are your enemies. Their loss is your win and their weaknesses are your strengths. The brutal way of fighting the enemies is obsolete nowadays and people are winning wars with minimal resource damage and minimum bloodshed just by changing the normal mindset to that of a strategist/warrior. You can also do that here in trading just by a slight change in the perspective.
Our job is to fight against weakness and to fight in the direction of strength. We never violate this rule.
In the third step, we will find strength in the trend. We follow the same procedure I have explained above, ie. by comparison.
So, what shall we compare to form a conclusion on trend strength?
Momentum – by comparing the speed.
Projection and Depth – by comparing the forces of attackers and defenders.
The evening session of crude oil futures has started just now and I have to rush. I will be starting the momentum analysis in the next article and you will realize that it’s very easy to find the strength in the trend at a glance. 😀
Until then, read and understand the concepts that I have explained till now. Have a good day.