Short covering rally: usually produces a P shape profile. We refer to short covering as “old business” because it is reversing earlier inventory. Short covering actually weakens a market as it removes potential buying interest; you cover a short by placing a buy order. The old adage is that a market may be too short to break any farther and that it has to “rally before it can break”; another way to view short covering is an adjustment in inventory. Short covering rallies can be very violent and misleading if you don’t understand the difference between old and new business. Short covering occurs within every timeframe; day timeframe short covering may be over quickly while longer timeframe short covering may last for much longer periods of time.
Long liquidation break: usually produces a b shape profile. We refer to long liquidation as “old business” because it is reversing earlier long positions. Long liquidation can actually strengthen a market because it removes potential sellers; you liquidate an existing long by selling. Similar to short covering rallies, these breaks are against the prevailing trend and can be sudden and sharp. The old trading adage is that a market may be too long to go any higher, i.e. “a market has to break before it can rally”. Long liquidation is a process that adjusts inventory that has gotten too long. It occurs within every timeframe; day timeframe long liquidation may be over quickly while longer timeframe long liquidation may last for much longer periods of time.
It's amazing how much information you can pick up from Dalton if you really pay attention to his webinars. I was watching one of his most recent webinars and something clicked.
Maybe this is just me, but I thought whenever he was talking about location, it meant trading from those single prints at the extremes. However, this here summed it up for me. I hope this helps someone too.
"Good trade location means you have a place - structural - to place your stop."
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In the example provided, it is apparently clear that CL had been ranging for 3 brackets. However, when we broke out of that balance (D period), good trade location would be to take a short with your stop inside the balance (however, you have to understand where your target is. This is a small opportunity trade because of where we are in regards to yesterday's range, so take your profit when price reaches the lows instead of hoping for more). Dalton calls this great trade location (even though it's not at the extremes) because, you know that since we've broken out of balance, if we get back into balance, then that invalidates your trade and you want out. That's structure and trading value instead of price.
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Ryan: Thanks for your commentaries and insights throughout this thread and for this reminder to keep the Big Picture in mind when finding a good trade location. I have been using your daily and weekly VWAP bands sucessfully, and would like to add the monthly VWAP bands shown in the referenced post. Has the monthly VWAP band file been published, I am unable to locate the zip file in the download or in other searched areas. If it has been published, a point in the right location is appreciated.
Thanks for the headsup @Sylvester 17. I am presently using the Monthly Vwap from FT
@greenr has modified the daily and weekly verisons of the FT Vwap indicator to plot the mid point of each band. I am searching for the modification of the Monthly VWAP and not sure of Ryan has published the monthly yet. Ryans modified day and week vwap indicator can be found here: Search - Big Mike's Trading Forum (hopefully I linked properly).
Last edited by Ron 52; March 28th, 2013 at 03:16 PM.
Reason: clarify monthly vwap
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