Tacit Knowledge

Over the years many attempts have been made to classify knowledge. These have resulted in many classifications. To make it simple there are two types of knowledge. Explicit Knowledge and Tacit Knowledge. In reality, all knowledge is a mixture of tacit and explicit elements rather than being one or the other.

Explicit knowledge is formal and codified. This can be written down, transmitted, and understood by a recipient. Such knowledge can be stored, retrieved, modified and discarded easily. Explicit knowledge can be taught very easily.

On the other hand Tacit Knowledge, sometimes referred to as “Know-How”, is intuitive, hard to define and largely experience based.. It is often context dependent and personal. It is very difficult to communicate and transmit.

The art of trading is a complex mixture of explicit and tacit knowledge. All the successful traders heavily rely upon their tacit Knowledge. It is impossible to convey this intuitive understanding gathered from experience and practice to a learner.

We will remain at a low point of the learning curve with limited tacit Knowledge development. Tacit knowledge is developed by facing challenges to transform ideas into practice. Without continued challenges our development plateaus

Most of the struggling traders focus only on the explicit part and ignore the tacit side. They may probably get “Reputation beyond repute” and win “Thanks” in trading forums but will never succeed as traders.

28032013

Usually i do not trade on expiry days. On such days Market is not in control of day traders and DPs will not work efficiently. Nifty opened within previous day range . later it broke PDL. There was no opportunity to short. Later price break above PDL. But  PDC and then HOD was resisting. BOF of PDL gave a long. Most probably those who entered here might have shaken out  missing the move
@adhi
An up trend is higher pivot highs and higher pivot lows. But crack of any  pivot low is not considered as trend change. Most traders consider the crack of a swing low leading to the highest high as trend change. Here the market in uptrend. A-B impulse move. B-C pull back. C-D impulse wave fail to exceed swing pivot B. Market falls Crack of pivot C is not counted as a trend change. Crack of A is a trend change as it is the swing low leading to the highest high pivot B. Pivot A is a MSP. Hope it is clear.

26032013

Nifty opened below PDL. I was looking to short. First two candles acted as IR. Did not short as price did not break the MC. Did not attempt a long as it was a chop area previous day and PDC &MSP was very close. Took two trades BOF of range high and BOF of PDL/TST of Range Low.These trades did not move as expected.

25032013

Nifty gaped up above PDH and refused to go further up. It made a Barbed wire pattern around PDH/BRN. Skipped the BOF of IR low as there was no space left after PDH and BRN to the Range High. Went short on the BOF of IR High ( MC Low).Alternatively you can treat this as a Cigarette.Nice 50 Point move. Notice how the Fluid Worked.What about VWAP.?

Endowment Effect

"Endowment Effect" is a cognitive bias. It is also known as “Divestiture Aversion” in psychology. Simply, it refers to our tendency to value an item more once we own it. We are always less willing to part with something which we own. Think of how a book on your shelf that you have not used for years seems to increase in value the moment somebody asks for it.

Endowment effect is applicable to ideas and methods equally well. Once we commit a lot of time and effort to learn something, we start to own it and become emotionally attached to it. Even if we find this useless at a later stage, we are reluctant to disown it and discard it. Worse, we spend a lot of time and energy to find justification to hang on.

This cognitive bias is surprisingly strong among traders. During the initial stages of development; they get exposed to many things and spend a lot of time and energy to master these skills. They hold on to these old possessions for ever for no good reason. This will do a lot of harm than good.

Ensure that you are spending your time and energy on something “Actionable” .Your analysis should be  focused on something easily “Recognizable”, “Reactionable” and “Repeatable” otherwise you are analyzing to paralyze yourself. Frequently do an audit.  Eliminate the non essentials and get rid of the time wasters.

Reduce, focus and simplify.

22032013

Nifty opened within previous day range and moved within a 20 point range. Finally BOF of PDL/Range Low gave a long signal. TP at BRN. Did not attempt BOF of BRN as I expected the range high to give support.

21032013

Nifty opened within previous day channel area. I was expecting a chop. Suddenly it gained momentum and broke PDL. Went short on the break of breakout MC. Immediately scratched it as the entry candle itself closed as a hammer. Long on BOF of PDL/BRN. TP at PDH. BOF of PDH gave a short which gave a nice quick move to BRN/PDL. Final BPB of BRN also moved well.

20032013

Choppy day . no commitment from market participants. Nifty opened below PDL . First two bars attempted to go above PDL and failed. Went short on the break of this low as BPB with stop above PDL. This trade moved another push down and reversed. Scratched it. Now price re entered the previous day range. Went long on the break of DO and swing high. This also failed to move. Another scratch. Shorted below PDL again. This trade made some money. did not attempt any other trade.Entire afternoon session price was channeling down.

19032013

Nifty opened within previous day range. Made a cigarette pattern for more than an hour. Break of this tight trading range gave an opportunity to short with stop above PDH. Another signal was a BPB of PDL. Personally I would not have taken these trades being an announcement day. Further Cyprus and DKK threats alive.

18032013

Nifty gaped down below PDL.. Price failed to move below the first bar. First bar acted as the initial range. BOF of IRL gave a long signal. I was hoping for a gap closure but price was in no mood to move up.Scratched.  Tried a short below the psychological level 5850 as the bias was bearish . This also ended as a scratch.Did not attempt any other trade. Price was forming a Barbed Wire around 5850

Fluids

Price does not travel in a straight line. Even during strong trends, price cycles up and down with overlapping bars and consolidations. It is the basic character of all auction markets.

There are times market will move from one price area to another without much gyration. This happens when there is no (or very little) opposing order flow. This could be opening gaps, wide range bars or swift moves with relatively equal closings and openings of bars.

Many things can trigger such moves which is called “Fluids”. Over night sentiment changes, news announcements and significant stop triggering can create fluids in markets. Usually price travels fast through such areas later as these are areas where a demand supply imbalance existed earlier. We can predict with some certainty that there will be a lack of balance when price come back to this area again.

Always pay attention to “Fluids”. If you are trading into a fluid, don’t be in a hurry to exit. It is always prudent to book your profits when you reach the end of a fluid area.

The concept of “Fluids” can be very helpful in managing your trades.

12032013 is a good example of Fluid in action.

15032013

Yesterday was a reversal day. Usually after a reversal day there will be some follow up in the same direction. My bias is bullish.. Nifty opened near PDC. First bar attempted to go above PDH but got rejected.I am feeling bearish now. Will short below point A. Why it is not going below the first bar ?. A breakout above PDH.. Hey I am bullish again. Will try to go long. There could be a channel move in the morning session..

Price is drifting down . May find support at PDH. What is happening . Sure it is going to channel. Will long above Point B. Fails to move above point B. Weakness again. Can't short below point C as FTA PDH is too close and may give support. Anyway I will go short once it breaks below PDH.

I am short now price moves below point A and my stop is just above PDH. Trailing Price breaks BRN and breakout fails. I am out. Now looking for reversal. Will be long above D. Price breaks below BRN again. No more shorts Critical Mass could be short Now. Second attempt to go below fails. Will look to go long above swing high E. BRN is too close. So let me enter just above BRN.

Nice break. Two pushes up. Showing weakness may pull back to BRN. Let me exit.Pull backs look like a channel to the downside. Too late . Done for the day.

14032013

Price action trading is very simple. But it is not easy. You need to train your mind to pay selective attention to so many small stuff. Consciously paying attention to all these details for the entire session is very tedious. You will burn out within a week.It takes time to develop this habit. Once you achieve automaticity , you will be able to do it without any strain. So simulate the trades on historical charts to streamline the thought process.

Nifty opened near PDL and PDC.. Go long with a stop below PDL ? Wait. Trend is down. No strength unless it trades above MSP. Let it break the flip zone A. Getting rejected. Made a swing high B. IR is not significant and tradeable. Now another push up. Let us see whether this will break B and show strength.. No strength Now price is resting on PDL. No sign of strength. candle closes . Upper tail.Better to short the break of PDL with a stop above point B. Little hesitation 40 point trade gone.

A wide range candle. Next candle fails to close below the WRB. Next three candles trade inside this one. Treat this as a master candle ? Upside no resistance may go till PDL. Down side risky. BRN is there NS & NF. A break down . BOF of NS BRN. 5820 is the near flip zone with three candle lows. Let us go long above the MC  targeting PDL.Let us book profit near PDL.

Wow. Price breaks above PDL and enters previous day range again. Lower range rejected. Could be a reversal day. Now Bias is bullish.BRN rejects price pull back to PDL. Time to try a long. Long above Last significant bar. Breaks BRN. Now stop below BRN. Trail the stop below PDH.Stopped out.

13032013

Nifty gaped down below PDL. Market made a Barbed wire around BRN. I would have taken a chance and attempted the BOF of IR high as the bias was bearish. Ended as a scratch.Always it is better to stay out during a Barbed Wire.Another price behaviour I noticed during many range moves is the BOF of Midpoint. Today a BOF happened at point A. Usually one can expect the market to break the other extreme of the range or at least price should reach the other range extreme. Here Mid point of the range acted as a barrier and the breakout of this level failed. This gave a clue that the Market is going to break to the down side

12032013

I was not trading live today. I will not be for the next few weeks. I have to attend office for a while. I will be leaving the comfort of a cushy job on 31st of August this year. I need to settle a lot of things before that. To be frank I am a little nervous and tensed. There is no difference between my real trades and simulated trades. I upload 1M data in Amibroker and simulate it bar by bar.

Being an announcement day I would not have traded the morning session.even though BOF of IRH and BPB of IRL were tradeable. BOF of range low was a good opportunity to go long. BOF of HOD was a short signal. I will not go short below the BO candle low as PDL may give support. Below PDL was a good short

Notice the area between 5930 and 5950. Price moved without much gyration through this area. Down , up and again down.Such areas are called "Fluids". Trades into fluids are high probability trades. I will make a separate post on this later.

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11032013

Nifty opened near PDC. FTC above PDH gave a short signal.. Did not attempt to go long on reversal  as the reversal point was not a DP. Went long on BPB of PDH and stopped out. Missed the BOF down move.

Inefficient Indicators

Do Technical Indicators Work?

When I started trading, like any other beginner, I thought the indicators are the holy grail of trading. I was using a bunch of them in my charts and was paying more attention to these rather than on price and volume. Later, I learned that these indicators are doing more harm than good in my trading, and started paying more attention to price action

All the indicators are derivatives of price and volume data and these derivatives could be effective comparison tools. Where we need to select a trading vehicle from a probable list, some of these tools could be useful. If we are focusing on a single instrument like Nifty Futures these are worthless.

Many Indicators are lagging in nature. There are countless moving averages and these are all arrived at averaging the past values. I don’t find any reason to believe these levels to work. Of course some widely followed averages like 50SMA and 200SMA may attract some order flow not because of the magical nature but as a self fulfilling prophecy

Another set of indicators measure the rate of change or acceleration. These are called leading indicators. Traders look for the divergence of such indicators. The basic assumption is trend decelerate before reversal. This assumption is faulty and price move can accelerate further without market reversing. You will be told to get price action confirmation before trading such divergences. Why price action alone is not sufficient?

Some indicators like MACD combines both lagging and leading indicators. These are all secondary derivatives and fail to avoid the basic shortcomings of primary derivatives.

There are another set of indicators which are belief based. This includes Fibs, Gann, floor pivots and many other mystical variations. If you are using them, “Let your Beliefs Save You!”

Now a days Indicator Bashing has become very fashionable. These people claim they are trading pure price action. If you look closely you can see they are trying to trade some candle patterns without any respect for the location.

There are countless methods to trade the Markets profitably. You can save a lot of time and effort by applying a simple test. Look at the defined Market Structure, the framework within which price is supposed to move. Find out whether the Market is respecting these levels repeatedly and these levels are actionable. Throw it out, if it is not.

08032013

Nifty opened near PDC.. After yesterdays vertical move I was expecting a range day hence hesitated to go long on the open.. Nearly four hours price moved in a tight trading range forming a cigarette. A minor BOF happened at Range low like yesterday. Went long on the BO of range high.This trade moved well.

07032013

Nifty opened within previous day range. IR formed and price traded within this range for four hours . Finally a breakout. Went long on the BPB of range high.even though FTA (PDH/PDC ) was too close.Market gave another opportunity to go long on the break of the swing high above PDH. Cool 50 point trade. Anybody paid attention to VWAP today ?

06032013

Nifty opened above PDH. and refused to move up further. My expectation was a drift down to PDH. Did not short as PDH was too close for a FTC trade.. Went long on the BPB of IR High Scratched this trade later.Did not attempt the BOF of Range High as there was no room for the price to move below MC. Further the rejection was too weak. Long on BOF of IRH. Another scratch.

05032013

Nifty gaped up above PDH and spiked. My expectation was a channel move. But it did not give a meaningful pullback to enter. Finally it made a cigarette pattern and I went long on its break TP at BRN. Day ended as a type one trend day. Thanks to SS for early warning

04032013

Nifty opened at PDL and got trapped between PDL and BRN for a while. Shorted when it broke below the MC.Covered the short when price refused to move below Budget day low. Missed this long trade because I hesitated for a while to take this CT trade. Another short below BRN on TST of PDL failed to move. Scratched.BPB of PDL came very late. So skipped.

The Checklist

We live in a world of increasing complexity. Even the most expert professionals in their respective fields struggle to master the tasks. Longer training and use of advanced technology fails to prevent the errors.

While dealing with complex tasks, two types of errors can occur. “Errors of Ignorance” and “Errors of Ineptitude”. Errors of ignorance are errors we make as we do not know enough. On the other hand errors of ineptitude are errors happening when we fail to make use of what we know. Errors of ineptitude are a real problem especially among professionals.

Acclaimed surgeon and writer Atul Gawande conducted extensive research on this subject in Health Care He found and adapted the humblest and simplest solution from Aviation industry, “The Checklist”. He published a book on this subject titled “The Checklist Manifesto” which became a Best Seller. (Read Summary)

 

As you know trading is also a very complex and complicated task. Mistakes are virtually inevitable: It is too easy for a trader to miss a clue, or overlook a prominent level in the stress and pressure of the moment. Failing to notice a small stuff is failing to plan properly for the eventuality

Can’t we, traders, make use of Checklists?

01032013

Nifty opened within previous day range.Narrow IR formed.  Went long on the strong rejection of price below IRL. Closed the trade when price fell below IRH.. Another long trade on TST of Range low. TP at range high.. Short on BOF of HOD.I was expecting this trade to move well. It did not.

Functional Fixedness

In an experiment a group of people were asked to fasten together two steel rings. They were given a long candle and a match box. All the people failed to do it as the melted wax was not strong enough to bond the rings

Now stop reading and think. Do you have any other idea to do it?    Do not cheat.

The solution is to remember that a candle contains wicks. Wicks are threads which can be used for tying the steel rings together.

There is an old saying that when you have got a hammer in your hand, everything looks like a nail. Further we are reluctant to use some other tools, other than hammer, to nail. People get stuck thinking in habitual ways.

In psychology, this phenomenon is called “Functional Fixedness” .Functional Fixedness is a cognitive bias  that limits a person to using an object only in the way it is traditionally used. This is the number one creativity blocker. If you need creative solutions, you need to escape from the established way of thinking. Most of the time the pieces of the puzzle are just in front of you, but you just can’t see it and put them together.

Trading is not different. It is a complex problem that can be very difficult to solve. Break it down to small manageable components and find ways to tackle it. Think different and use your imagination to find alternative tools and new ways to use existing well known tools.

People on board of the “Titanic” could have used the ice berg as their life boat for nearly four hours within which help arrived. Titanic was navigable for awhile and could have pulled aside the iceberg.