Most of us know doctors, attorneys or other professionals who must complete a number of continuing education credits each year in order to maintain their licenses. What if our brokerages required traders to complete continuing education classes each year to maintain our trading privileges?
That might not be a bad idea. Here on this site, we try hard to educate our readers. Other than our educational articles, the CBOT is one place to head for those courses.
One recent Thursday afternoon, I registered for and then listened to a CBOT (Chicago Board of Trade) webinar titled "Detecting High Probability Turning Points Using Volume Spread Analysis." Todd Krueger and Tom Williams, author of MASTER THE MARKETS, explained their theory that combining a study of the price spread and volume gives traders insights on what actions professionals might be taking.
Williams peppered his discussion with cautions about the viciousness of professionals toward retail traders, illustrating by saying at one point, "Professionals will agitate the herd [retail traders] into selling, and professionals come in and buy. The herd does the same thing all the time, and professionals take full advantage."
Williams and Krueger noted that such action can be discovered by looking for high volume on weakness, with a bar that closes well off its low. "Buying," he says, "when it does appear, will appear on a down bar." The news will have been horrible and professionals will have marked prices down hard, he says. Lots of stops will have been triggered. Bears will have been encouraged to go short. But they're about to be locked into a losing play.
A classic example occurred in LEH in mid October as the Refco debacle was hitting the news. LEH alleged in a lawsuit filed in California that another hedge fund, Wood River Capital Management, duped the firm into wiring almost $21 million to the hedge firm's account at Merrill Lynch.
Annotated Daily Chart of LEH:
No special volume studies are needed to see the actions of professionals, William claims, when studying highly liquid entities such as the Dow emini's. Ninety percent of the volume comes from professionals in such liquid issues. Although I'm not sure that he'd agree about the percentage in an individual stock such as LEH's, the action here clearly illustrates the effect he mentioned, so LEH's chart was chosen for illustration purposes.
Williams asserted that traders should "remember the background," with this action seen in mid October now being part of the background should LEH decline. Professionals were anxious to acquire LEH at prices just below $105. If it should retreat there again, traders should watch for signs that it's being accumulated again.
Strength always shows up on down bars and weakness on up bars, Williams stated. An example of weakness might appear first at resistance, with a high-volume bar that either closes well off its high or else has a small range. Williams determine high or low volume by comparing it to the volume on the two previous bars on the time frame being examined. The close well off its high tells an obvious story, but the tight range tells a story, too, when coupled with that high volume, Williams explains. The high volume shows that professionals were active. The lack of price movement shows that they were actively unloading the stock. They were selling.
If the bar is a high-volume bar with a large range, and there was not a sharp pullback, Williams cautions that the next few bars should be watched. Volume should drop off if prices pull back slightly or price bars trend sideways, showing that there's no more supply to meet the demand. A break higher on high volume followed by low-volume sideways movement reassures traders that the overage in supply that had been there is no longer there.
However, if the weakness seen in a high-volume low-range bar is confirmed by a pullback, remember that background, too, Williams cautions. When prices return to that resistance, it's possible that a low-volume bar will tell you that professionals weren't active. They weren't interested at that price.
Annotated 2-minute Chart of the YM:
Williams wouldn't approve of the candlesticks I show here. He uses bars that show only the close. The range and close are all that's important, he says, using the analogy of studying what someone has accomplished during the day. He wouldn't want to see evidence of how they behaved when they arose from bed if the end-of-day accomplishments were what interested him, he asserts.
These charts demonstrate several other aspects of Krueger and Williams' practices, but don't do their theories justice in this brief article. The charts cover different time intervals, something both advocate studying. Also, no stochastics or other price-derivative studies appear on those charts. Williams contends that you need two variables to make decisions, and that oscillators such as stochastics, derived from price, don't offer a new variable. Volume does.
These observations may not do justice to Williams' work, but they do introduce the wealth of information offered free to traders who want to continue their education. Events this month include webinars titled "Learn How to Greatly Simplify Your Gold Trading" and "How to Achieve Long-Term Success with Short-term Trading." Classes require registration and broadband or high-speed connections, but are free. Registration with CBOT will get you reminders about upcoming classes. Most classes allow you to submit questions to be answered, time permitting, by the presenters. They tend to be chart intensive, offering examples of the principles being discussed.
Your brokerage might not require continuing education to maintain your account,
but it's not a bad idea anyway.