Mike Baghdady - ESTA

Trade what you see, not what you think™

Mike Baghdady [email protected]

www.trainingtraders.com 1

Copyright Training Traders Ltd Jan 2012

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Welcome to SpyGlass Trading

Trading V Investing Copy Right Mike Baghdady 2000-2009


What is Trading? •Trading is a Psychology – Yours & Theirs

Its is not a E= MC2 •Trading is one thing ……Investing is another The making of an Investor vs. a Trader Investor buys actual stuff for the long haul with the idea they would appreciate in value. “He does not care if the market “price” doesn't reflect the value of the stock “ Buffet”

•Positive Approach a Good Foundation • Understand How Money is Made or Lost in the Market . 4

Copyright © Training Traders Ltd January 2012

Copy Right Mike Baghdady 2000-2009






90%

10%


90%

Retail

100% Market Professional

10%




The Million $$ System


How to become a Great Trader? There is a major misconception that being a Good Analyst would make one a Good Trader

A good trader can become a Great Analyst How Money us Made ?

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Being an Analyst A Trader should not ignore key economic reports or political events that can and often do move markets. Fundamental analysis is more of an educational pursuit-- data is sifted and interpreted to determine the future direction of price movement.

Time lag and Discretionary information are important factors to be considered. 16




Fundamental Analysis Reality Gap Because a Fundamental analyst focus on what the market should be doing based upon what is logical and reasonable as determined by the mathematical models And neglecting or overlooking what is actually happening in the market

Creates a between

Reality Gap “What should be”

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---------------

“What is actually Happening”



Technical Analysis Technical analysis

Has become the ? of adding indicators to a chart ”

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Today’s Technical Analysis

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Technical Analysis Technical analysis

Has become the ? of adding indicators to a chart ”

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Mike Baghdady’s Price Behaviour Methodology Today, more and more traders and sophisticated investors use some type of technical application that he or she use in their investment or trading decisions. Trading has become a function of taking “buy” and “sell” signals off technical indicators rather than applying the basic principles of Technical Analysis and the study of Price Behavior chart structure Price Behavior and analyzing Price Structure are some of the most important aspects of Technical Analysis and of trading, and yet they are the most overlooked. Understanding Price Behavior and Chart Structure will put the ODDS on the trader’s side so that he can make better decisions, trade more successfully and with better results. 22



Mike Baghdady’s Price Behaviour Methodology We are trying to determine the most likely direction in which prices will move. Reflects the immediate psychology

 Everything that is known is reflected in the price at this moment. Supply and Demand With proper implementation and interpretation a chart can reveal very powerful price patterns 23



What do we need to do to become successful and consistent Traders? A well defined set of Rules we have to be consistent

Apply these rules

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Copyright Training Traders Ltd Jan 2012

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Only Two Responsibilities •

Identify high probability trades

• Identify and quantify risk • Select low risk entry points • Identify possible profit targets • Develop a systematic approach

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Copyright © Training Traders Ltd January 2012 0


The Ability to Multitask • Collect all the data • Analyze the data • Make a decision • Act upon that decision 26



To Be a Good Trader In order to trade successfully:

Think like a Fundamentalist Trade like a Technician It is imperative that we understand the fundamentals driving a trade, but also that we understand the market's technical's. When we do, then, and only then, can we or should we, trade.

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Today’s Technical Analysis The Term TECHNICAL TRADERS DO NOT USE

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Chart Anatomy



A Way of Thinking

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Think in Probabilities Each trade could possibly be a loser or a winner Instead of trying to Predict the Market direction FOCUS on Methods where the PROBABILITIES are in your favor and on you side you want a

SUCCESSFUL OUTCOME OVER THE LONG RUN. Consistency : is KEY , all signals should be taken as no one know which trade will make the pay off , you do not want to miss the big Trade.

Trading is simple but it is not easy. It takes a great deal of time and study before one realizes just how simple trading is, but it takes many

years of losing before most traders come to grips with how hard it can be to keep things simple and not lose sight of the basics

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Psychology “Human emotion is both the source of opportunity in trading and it is Also Its Greatest Challenge” –

Markets are made of individuals ,all with hopes, fears and greed .

As a trader we are looking for opportunities that arise from these human emotions •

Successful Traders know that someone else’s error in judgment are opportunities and they understand how these errors manifest themselves in price action

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Winning traders make money patterns of other traders

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Price Behavior works and continues to work because it is based on the market movements that result from the systematic and repeated irrationality that is embedded in every person

by exploiting the consistently irrational behavior


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Trade with an Edge Elements of an Edge: Positive Expectation so that one can continue with their methods during periods of drawdown which every trader will have. •Expectation is one way of defining your edge , Do not judge the rule by its outcome • Expectation: Quantify your edge •Loses are to be viewed as a cost of doing business

•Portfolio Selection : What markets to trade •Entry Signals :To find an edge , you need to find an entry where there is a greater than normal probability that the market will move in a particular direction within a desired time frame.

•Exit signals : Pair it with an exit strategy designed to profit from the type of move which the entry is designed . 33


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Trading is a Business of Risk High Risk , High Rewards “ A mature understanding and respect of risk is the hallmark of the best traders” Traders Trade Risk Traders trade Price , they are buying and selling “Risk” Markets are groups of traders that interact by buying and selling from each other The markets developed to allow the Transfer of risk from one party to the other Controlling Risk The Art of keeping your risk of ruin at acceptable levels while maximizing your profit potential

“Minimize 34

risk and maximize Size”


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3 Components of a Trade Rules to Follow Clear & Precise

Portfolio Selection

=

Statistical Edge

= Choosing What to buy ?

Timely Execution


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What is Price? What Moves the Price?

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What is Price? What Moves the Price? The Price movement is a result of the Collective perception of buyers and sellers in the market, when the collective perception changes, the prices move

At the Lows ,If sellers are no longer willing to sell at the current price and they are demanding a higher price and the buyers are willing to pay the new higher price , Prices will move up.

At the Highs , if buyers refuse to pay the current market price but they are only willing to buy at a lower price and at the same times the sellers are willing to sell it at that lower price than the Prices will fall.

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This Collective perception can take a life of its own and thus move the markets to extreme Copyright © Training Traders Ltd January 2012


Collective Perception is a Function of Human Emotions An understanding of mass psychology is often more important than an understanding of economics. Markets are driven by human beings making human errors and they are also making super-human insights. In order to be able to trade successfully we need to understand the human mind.

People always behave in the same way , and under pressure they make the same errors in judgment , they rarely make completely rational decisions , they poorly assess their risk or the probable market directions and thus they get caught in bad situations where they have to pay to get out of them. These Human Emotions manifest themselves in the price action and on the charts they are a great source of opportunity for the successful trader . A traders success depends on his ability to understanding how these emotions would affect the price action and knows how can he take advantage of these opportunities. 39


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Human Behaviour Successful traders are always looking for these opportunities that arise from these human emotions and from other traders errors in Judgment . These Human emotions and irrational thinking is what creates the repetitive patterns that we can identify , gauge and give us money making opportunities

That is why Price Behavior works and will continue to work because it is based on the market movements that result from the consistent and repeated irrationality that is in every one of us

“The Edge” 40


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Price is EVERYTHING • To determine the most likely direction in which prices will move. • Reflect the immediate psychology. • Everything that is known is reflected in the price at this moment.

• Supply and demand. • With proper implementation and interpretation, a chart can reveal price patterns.

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Technical Analysis Theory I  Everything that is known or knowable about a financial instrument is reflected within the price action of its chart.  The Market is a discounting mechanism - events are usually discounted in advance by movements which are likely the result of the so called “Smart Money” or the “informed” buyers and sellers.

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Discounting Mechanism (continued) Market prices acts as leading indicators of the fundamental or conventional wisdom of the moment.  While the known fundamentals have already been discounted and priced “in the market”…

 Current price action is now reacting to the “Unknown Fundamentals”.

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Technical Analysis Theory II Prices Move in Trends Trends in Motion will continue in the same direction until a major event causes a change in direction. It takes a great deal of time and effort to produce a trend change.

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Technical Analysis Theory III

•

History Repeats Itself:

 History repeats itself in such a way that markets move in fairly predictable, or at least quantifiable, patterns.  Human beings will do the same things and repeat their mistakes over and over again.  Human beings have a tendency to respond to developments in the same way as they have done in the past.  A trader who is winning or losing money will likely react to market changes in the same way that other traders have reacted to similar changes in the past. The Trading Masses will leave their tracks on the Price chart .

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Price Behavior & Chart Structure




An UP Trend is a Series of Higher Highs and Higher Lows The higher lows are in CONTROL

When each intermediate rally (advance in price) rises above the high of the prior rally (higher highs), and each correction down or secondary reaction stops is above the low of the previous correction and price reverses back up (higher lows), the Primary trend is up. This is bullish.


A DOWN Trend is a Series of Lower Lows and Lower Highs The Lower Highs are in Control

When each intermediate decline (decrease in price) takes prices below the low of the previous decline (lower lows), and each rally or secondary reaction up stops below the high of the previous rally and price reverses back down (lower highs), the Primary trend is down. This is bearish.

Price Behavior & Chart Structure


The Simplest Fact ! Price never moves in a straight line .

Just by accepting the simple truth that prices NEVER move in a straight line, a trader will stop trying to pick tops or bottoms and will view the correction as an opportunity to take a trade in the direction of the trend.


Price Movement


Prices are always in between the all time high and the all time low. In between there are several Trading Ranges of a lesser degree. These Trading ranges are tied together by connectors.


Trends Prices Move in Trends. Trends move in Waves. We have “Impulse Waves” in the direction of the trend, Followed by “Corrective Waves” better named as countertrend moves. Trends in Motion will continue in the same direction until a major event causes a change in direction. It takes a great deal of time and effort to change a Trend.


Trends Trends are created by an imbalance in supply and demand and this is what moves prices. Prices will alternate between areas where prices have been marked up to a new higher level or marked down to a lower level. After a big move in either direction prices will consolidate at that new price level. Usually, movements in the market tend to have a relationship to each other.


We must first identify the market condition • Here are some questions we should be asking ourselves Before placing a trade: 1. What is the market condition? a) Trending or consolidating? 2. Is momentum increasing or decreasing? 3. What is the major trend? 4. Do we have a Trend changing pattern and /or buy /sell Climax? 5. Where is Support & Resistance? How are the price reacting at the significant price points – Structure

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Here are some questions we should be asking ourselves after we take a trade 1) What is my expectation? 2) Is the price action acting according to my expectation?

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Let’s try to apply the rules and answer the following questions:


1) What is the market condition? Trending or consolidating? 2) Is momentum increasing or decreasing?

3) What is the major trend? 4) Do we have a Trend changing pattern and /or a buy /sell Climax? 5) Where is Support & Resistance? How are the price reacting at the significant price points – Structure

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1)Yes the market is trending up, series of higher highs and higher lows.


2) Yes, momentum was increasing all the way to the top. You can see that the blue price bars have bigger ranges and are more explosive in the direction of the trend, the magnitude of the price swings are bigger in the direction of the trend than the corrective swings; thus indicating that higher prices will follow. 3) The major trend is up 4) Yes, at the top, we do have a buy climax followed by a failure of prices to make higher highs, prices then gapped down taking out support. That would be our first signal that the trend has changed and we should go Short. 56



Let’s Examine the Reversal Taking it from the Top– we had a buying Climax followed by a failure to make higher highs and then prices broke down through support. The market is now trending down.

Momentum is increasing to the downside evidenced by bigger down swings and red price bars. The final push down, as you see, is indicating a loss in momentum – but that does not indicate a trend change – it could be a profit taking area for us – and we would be still expecting a new lower low to follow . The trend is Down – Lower highs and lower lows The next swing down made a higher low and consolidated at an area marked with low volatility and price coiling. A breakout followed to the upside with an increase in momentum indicating a new trend to the upside.

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Let’s Do the last swing together


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1)

What is the market condition? Trending or consolidating?

2)

Is momentum increasing or decreasing?

3)

What is the major trend?

4)

Do we have a Trend changing pattern and /or a buy /sell Climax?

5)

Where is Support & Resistance?

6)

What is the High Probability Trade?

7)

What is my Risk?


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Here is the answer !



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