Unless they are a scientist, the average person doesn't need
to see things from a different dimension, so we don't. If
we thought about analyzing the day to day physical things we see
from a different dimension, like a tree, or a bird, or your
neighbor, it would seem silly, because there is really no reason
for it. In fact, our senses -- our eyes, ears, and nose etc. - do
a good job without having to analyze things. The dimension you
see is the dimension you get, so to speak, and when things do
change it occurs at a predictable rate such as the season
changing, or a parent aging. And it is those day to day
dimensions that our senses record which creates our perception.
When it comes to defining market movement in the context of
physical dimension however, our senses and the perceptions
they've created are handicapped. The average person doesn't
have much experience with the dynamics of market price movement.
We're used to seeing things in proportion to ourselves and our
surroundings in a dimension we're all familiar with: our physical
world. In our world things grow and then they die, and that life
cycle is a familiar dimension for us because man has experienced
it for a very long time. We are very familiar with our physical
world because for the most part everything is in proportion, and
it's a pretty friendly environment for us - climate and
temperature wise. We can't help but take the experiences of our
physical world and apply them to everything else. And that is why
initially we are at a disadvantage when it comes to trading.
Rather than first learn how markets move, instead we focus
on why they move.
Markets, like everything else on the planet, have a growth
cycle. They are either growing, or contracting, or somewhere in
between. And while a market product may be physical, its
price is not. And that's why we need to think differently. We
cannot think in terms of the limited growth cycles we're familiar
with such as a tree, or a field of corn, or ourselves. The growth
cycle of modern markets is much more dynamic than the growth
patterns we are accustomed to. Because price moves so frequently,
with its patterns perpetually changing shape on both a micro and
macro level, there is definitely a dimension to it that we are
not accustomed to. Making sense of market movement starts with
accepting whatever price pattern a market is showing us. This is
a very simple concept, but for many, much harder to implement.
Just as we see an oak tree, and accept it's an oak tree; or we
see a blackbird and we accept it's a blackbird; when we see a
bullish price pattern on the Daily chart, we need to accept that
there is a bullish pattern on that Daily chart. This
acceptance of what is, and not what we think it should be, is an
essential step to understanding how markets move. If you find
yourself in disagreement with an existing price pattern it is
going to be very difficult to find consistent success as a
trader. Once you accept that price is always where it's supposed
to be at that moment, it follows that price is an accurate
reflection of its environment. Pattern is the "how" of
price movement, while environment is the "why". If the growth
pattern is a bullish -- one marked by higher lows and higher
highs -- then the environment is positive and you would look for
buy signals following price dips; if the growth pattern is
bearish and price is showing lower highs and lower lows, then the
environment is negative and you would look for sell signals
following rallies. You can still pass on a trade in one
pattern because a higher time frame pattern is divergent, and
this just means you don't accept the risk of taking a trade
in-line with that lower time frame pattern. This also
brings up that patterns can exhibit different behavior on
different dimensions - dimension referring to time-frame.
For example the market's primary pattern can be bearish, but its
secondary pattern bullish. We have a similar situation in the
euro right now - Figure 1.
!["Figure](http://www.ibtimes.com/"http://img.ibtimes.com/www/data/images/full/2012/04/27/268222.png")
Figure 1
These are often great opportunities for traders because it is
at those times when intermediate-term patterns shift in-line with
longer-term patterns that we get the biggest price moves.
The current price pattern on the Daily chart is one of
sizable secondary rallies followed by steep sell-offs in-line
with the overall pattern. It's clearly showing a negative
growth curve which reflects a bearish environment.
!["Figure](http://www.ibtimes.com/"http://img.ibtimes.com/www/data/images/full/2012/04/27/268226.png")
Figure 2
Differentiating between "how" markets move, which is to
understand and respect price patterns, and "why" markets move
which is a determination of economic environment should simplify
our market analysis, not complicate it. Price pattern is a
reflection of environment. If you have a bullish pattern you have
a bullish economic environment and the same for a bearish price
pattern. If you surmise that the environment is bearish yet the
pattern is bullish, you are not accepting the pattern, and your
idea is in conflict with the market. The 4-hour chart of the Euro
in Figure 2 from this past week shows us a bullish pattern with
the corrections being nearly equal. What we can say with some
confidence before that last leg up is that the current
environment for this micro pattern must be bullish. Once you
understand that the pattern absolutely is a reflection of the
fundamental environment, and that they support each other, you
are going to put yourself in a better position as a trader.
Rather than try to analyze last months or last quarter's economic
data you can let the market itself analyze today and tomorrow's
economic occurrences and have confidence that the current price
pattern on the chart is showing you what the current economic
environment is.
You may have noticed that the bullish 4-hour chart in Figure 2
can be called a sub-set of the bearish pattern and bearish
environment in Figure 1. So the billion dollar question
would be how do we know when that micro pattern on the 4-hour
chart will shift in-line with the macro pattern on the Daily
chart? Well, we don't. But we do that when the 4-hour
pattern shifts lower that it will be in-line with the Daily
pattern and we would shift ourselves from looking to buy dips in
the short-term uptrend to selling rallies in the new short-term
downtrend which has the benefit of being in-line with the macro
pattern.
Jay Norris
is a Professor at
IBUniversity.com
and the author of
Mastering the Currency Market, McGraw-Hill, 2009
and
Mastering Trade Selection and Management, McGraw-Hill,
2011
Trading involves substantial risk of loss and is not
suitable for all investors!