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Query regarding Larry Williams' idea of market structure


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Query regarding Larry Williams' idea of market structure

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  #1 (permalink)
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So I have been through the entire book called 'Long term secrets to short term trading' by Larry Williams and I have a query regarding one of the concepts introduced by him in the very first chapter of the book. It's basically about identifying market structure i.e. swing highs and swing lows essentially. Now, the problem I am facing with this concept is that the chapter that details it leaves some questions unanswered. What I am basically talking about is the special case scenarios that I came across while backtesting this concept. These cases were hard to analyse, for me at least, because of the fact the chapter did not go in depth as to how to analyse when these cases do happen.

Now for those who haven't read the book, let me describe what Larry's idea for a swing high is. So, he says in the book that a swing high is formed when the high of candle has lower highs on both sides of it.

But there's a catch here. He talks about the concept of inside days and outside days. This is all on daily time frame btw. An inside day or an inside candle basically is a candle that has all of its trading range within the preceding candle. Likewise, an outside candle is a candle that had its entire trading range outside of the range of the preceding candle.

Let me elaborate this concept of inside and outside days. What he's basically saying an inside candle is the one that had neither made a newer high in comparison to the preceding candle nor made a newer low in comparison to the same preceding candle.
Thus both of its high and low were inside the trading range of the previous candle. An outside candle is just the opposite. The high is higher and the low is lower in comparison to the previous candle. Simple concept so far.

But it gets harder. What Larry says is that just because lower highs have formed on the both sides of a swing high doesn't confirm it to be a swing high. Because what could happen is that the candle that succeeds the swing high could be an inside candle i.e. while it did in fact make a lower high, it did not make a lower low. He goes on to say that until this condition is resolved, we cannot confirm that a swing high has formed. That is what he literally said in the book. I find it to be pretty vague actually. He doesn't describe under what manner this condition could get resolved. This is what has been confusing me.

Similarly, he doesn't write much about outside days either. He vaguely writes that one has to see how the outside day was formed in order determine the structure. He doesn't really expand on it by giving examples.

Now, I am gonna present some special case scenarios that I came across which I had a hard time analysing.



In the above image, I have marked the swing high. Now, there are several problems when I try to interpret this.
Sure, the swing high was succeeded by a lower high but that was an inside candle. What Larry merely says is that this 'condition' needs to be resolved in order to determine anything. As you can see the candles following the inside candle are making higher highs and higher lows in comparison to the inside candle, thus resolving the said condition but it's in contra to the trend that we are trying establish which is a downtrend. So how do I interpret this? Do we necessarily wait for a lower low to form or does a break from an inside candle suffice? This is only one scenario for the time being. I will post more if this thread gets a response.

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  #2 (permalink)
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blackshugar View Post
Sure, the swing high was succeeded by a lower high but that was an inside candle.

From your description of an "outside bar" followed by an "inside bar" I can conclude the outside bar begins the event. And, the inside bar can be ignored as it does not contribute additional information about the high or low.

Not that I agree with the above, I just think it is what he is saying. In my opinion, every bar ads information to the event.

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SidewalkAerobics View Post
From your description of an "outside bar" followed by an "inside bar" I can conclude the outside bar begins the event. And, the inside bar can be ignored as it does not contribute additional information about the high or low.

Not that I agree with the above, I just think it is what he is saying. In my opinion, every bar ads information to the event.

OK, so I got my hands on the latest edition of the book and he has updated the chapter by adding that it is very much required for the low of the swing high to be broken in order to terminate an uptrend. That clears a lot of confusion. But what if, just like in the image I have posted, an outside candle forms and that candle itself terminates the series of higher lows. What about that situation? Cause in all of the examples that Larry had given in his book, he illustrated ideal scenarios where in the the candle that breaks the series of higher lows is different than the candle that made the swing high. The situation that I have described above involves an outside candle that made the terminal swing high and at the same time broke series of higher lows. Do we wait for more candles now or what?

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blackshugar View Post
The situation that I have described above involves an outside candle that made the terminal swing high and at the same time broke series of higher lows. Do we wait for more candles now or what?

Good job reading more. Learn all that you can. The rest will be determined by your backtest.

Try both scenarios in your back test 1) Use the outside bar to end your series, 2) Wait for more bars to end your series. I am looking forward to the result of both. Please post here so we can all learn.

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blackshugar View Post
So how do I interpret this?

I think the best way to interpret this is to realize that this way of determining a trend change does not necessarily work. Sometimes it does. Sometimes it doesn't.

A lot of people have come up with variations on this idea, that a certain number of bars on each side having lower highs means this bar is a significant high (and the opposite for lows.) I have no idea if Williams first thought of it or not. More often, you see the suggestion of using two or more bars on each side, to rule out some false turns, which of course introduce some additional lag as well.

Indicators that are sometimes called "fractals," and some "zigzags," operate on this principle (other zigzag indicators use other methods.) You can usually set the number of bars per side that will define a turning point. If you put them on a chart, you will see that sometimes they work, sometimes they don't.

I suggest not spending much time on this. An author can give examples in books that look convincing, and Williams is good at this, but in actual trading -- or just looking at other charts that have not been pre-selected to show what is being described -- things may be different.

If you rely on them in real trading, especially by themselves, your results are likely to be terrible. Sorry.

The thing is, that every trend change will have lower bars on each side of the highest bar, but so will a lot of bars where the trend doesn't change.

Here's a link to a typical treatment of the concept, using more than one bar on each side. https://www.investopedia.com/articles/trading/06/fractals.asp Note that on the charts that are given in this link, sometimes it works -- that is, sometimes the trend changes -- sometimes it doesn't.

Books on trading may give you some good ideas sometimes, but I don't suggest relying too heavily on them.

Bob.

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bobwest View Post
I think the best way to interpret this is to realize that this way of determining a trend change does not necessarily work. Sometimes it does. Sometimes it doesn't.

A lot of people have come up with variations on this idea, that a certain number of bars on each side having lower highs means this bar is a significant high (and the opposite for lows.) I have no idea if Williams first thought of it or not. More often, you see the suggestion of using two or more bars on each side, to rule out some false turns, which of course introduce some additional lag as well.

Indicators that are sometimes called "fractals," and some "zigzags," operate on this principle (other zigzag indicators use other methods.) You can usually set the number of bars per side that will define a turning point. If you put them on a chart, you will see that sometimes they work, sometimes they don't.

I suggest not spending much time on this. An author can give examples in books that look convincing, and Williams is good at this, but in actual trading -- or just looking at other charts that have not been pre-selected to show what is being described -- things may be different.

If you rely on them in real trading, especially by themselves, your results are likely to be terrible. Sorry.

The thing is, that every trend change will have lower bars on each side of the highest bar, but so will a lot of bars where the trend doesn't change.

Here's a link to a typical treatment of the concept, using more than one bar on each side. Note that on the charts that are given in this link, sometimes it works -- that is, sometimes the trend changes -- sometimes it doesn't.

Books on trading may give you some good ideas sometimes, but I don't suggest relying too heavily on them.

Bob.

What alternative do you suggest then? If you kindly can provide.

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blackshugar View Post
What alternative do you suggest then? If you kindly can provide.

Well, no one thing. But in general, learning more about how price behaves by putting in a lot of real-time screen time, and perhaps some judicious use of some of the various techniques that are out there in the world.

There is nothing terribly wrong with fractals either, but they would need to be a part, and a somewhat small part, of a larger whole.

I am not going to suggest any particular method, because there are many, and there are many traders who may use any of them successfully and others who do not. In large part, the most important aspect of trading is the individual trader's execution of a method, not the method itself, and in particular their ability to trade without emotional involvement in winning and losing. Emotional self-control is the most important and most difficult thing to learn, in my view.

If you would like something more definite to latch onto in terms of trading methods, you will find many styles of trading in some of the trading journals on this site. The most useful ones are the ones where the traders honestly discuss their losing as well as their winning trades.

Trading is much less a matter of conceptual understanding and much more a matter of experience and personal development.

If you want concrete advice, it would be to take any method that seems valid to you, that you feel you understand and that appeals to you -- and it could include Williams' fractals or anything else, frankly -- and actually trade it. Use your successes and failures in trading with that method, as you understand it, as feedback to learn, improve and change your trading. If you prefer, trade initially using the simulated trading capabilities most trading platform provide ("sim" or "paper trading,") so you have no financial risk. However, you should introduce an element of real monetary risk as soon as possible, because that is where the psychological aspects of trading arise, and without dealing with them you will not be able to really trade.

I do not know what is available to you in India, but if you were able to access US trading markets, I would suggest trading in the "micro" emini futures contracts, such as the MES and MYM contracts (scaled-down versions of the larger ES and YM), where your actual real-money risk is limited.

But taking some method into real trading, or as real as you can manage, is the best thing to do. You will not learn to trade from books, beyond a certain point, nor from online sources either, and not even from following someone else's trading journals. Like everything else, it is learned by doing.

There are traders from India who are active on this forum -- I have in mind @LastDino for example -- who may be willing to give you an idea of how you could get started with an actual cash account, if you don't presently have one.

You should also know that trading is risky, and that most people lose most or all of their initial account, often more than once, and may progress no further. But encountering losses is also part of the learning process. Controlling losses is also an essential aspect of trading -- knowing that you are not going to be perfect, and discovering when to just kill a loss before it grows beyond your tolerance.

I apologize if these suggestions are too elementary for you and if you are more experienced. Since I don't know your background, I have simply assumed that you are closer to starting out. Whatever your experience, I hope that at least some of what I have mentioned will prove useful to you.

Bob.

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Legendary Pratik_4Clover
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A Delhi guy with name "BlackSuger" ---

https://www.urbandictionary.com/define.php?term=black%20sugar

Just in case you didn't get the reference.

On a serious note:

1. Take Bobwest very seriously.

2. Avoid wasting too much time on "converting book trading methodology into real trading strategy" for you. In fact I would go out on limb and say avoid books and courses.

3. Avoid sim account, not that anyone really offers that in India which is also "realistic"

4. What asset class you are trading? I've trading account at god knows how many brokers, so I can certainly give you some good starting point for that. -Only If You Want-

5. Consider joining elite, who knows you might also get some offer black Fridays or something

6. I can see you are using TV, so here is public library result of "LarryWilliams"
https://www.tradingview.com/scripts/larrywiliams/

Please note that trading is like entering long term boxing match, there is no book that can teach you that unless you start boxing and experience it physically. Your journey only starts when you get beaten first, so don't be in rush to put too much money in demat account, in India you can trade with as little as INR 10,000/- (And I'm aware margin rules are changing but still this is applicable)

Don't be in rush, it takes LOT of years to turn profitable.

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Legendary Market Hack
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bobwest View Post
Indicators that are sometimes called "fractals," and some "zigzags," operate on this principle (other zigzag indicators use other methods.) You can usually set the number of bars per side that will define a turning point. If you put them on a chart, you will see that sometimes they work, sometimes they don't.

I didn't read this whole thread yet, but I will add a few things that I've learned about fractals, since it was brought up:

1) Depending upon your platform, the fractal will usually appear three bars ago. So when you first use fractals, you may get overly excited and think they are foretelling the future. They aren't, but they still have a use.

2) Depending upon your platform, you may need to wait for a bar to close for the fractal to form. Some platforms will plot a fractal before a bar closes, but when it closes it disappears because the conditions for a fractal are not there at the close of the bar. Sierra Charts comes to mind. Just be aware of that situation.

3) Fractals can be hit or miss. I use them in some cases, but generally they are good for identifying support and resistance and may help you identify good breakout points. Automated strategies using fractals are difficult (you can always read about my fractal experiences in my journal: Attack of the Robots).

I agree with @bobwest on pretty much every point... pearls of wisdom.

~vmodus

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@vmodus

Indeed.

I'll say this though, there are plenty of fractal scripts on TV in public library, so feel free to experiment.

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