Two important ideas I learned from Peter Steidlmayer:

  1. The use of different timeframes in my trading and
  2. The idea of ‘context’.

As a discretionary trader using technical analysis, ‘context’ has made a great difference to my bottom line. Before I explain what I mean, let me first define some critical terms:

  • By discretionary I mean I have a set of rules that I usually follow; but I also have a rule that says “I don’t have to follow my rules”. I have this rule so I have room for my intuition to come into play - especially when exiting. Thirty (30) years of trading means my subconscious sees patterns that my conscious mind fails to see. The trick is to know when intuition rather than my ‘rat brain’ is in control.
  • By Technical Analysis I mean the use of charts to identify who is in control of the markets, the bulls or the bears, and whether that control likely to continue or end.

I place great store in ‘context’; it’s the filter by which I judge my setups - the patterns that tell me when the probabilities favour a trade. I do test and validate my setups through computer backtesting. I start with the raw idea and if that proves statistically that the setup is robust, I test it real-time with small size. If that proves successful, then I test it within a context. Only when the setup passes that gate do I employ it in my plan.

Let me show you what I mean by reference to the current cash S&P.

I use a pattern called a Change in Trend called an Upthrust (see Nature of Trends, page 38). It is one of my favourites and one of the patterns that has a $win expectancy ($2.87). When you consider that the average historical upper end of expectancy is 2.33:1, you see how profitable the pattern is for me.

The 13w chart below shows a classical Upthrust. Normally I would have sold double size and would have been looking for a move to at least the area bounded by the Blue Horizontal Lines and probably a breach of B followed by a subsequent trend down. I’d also normally have followed the trade management process I call the Rule of 3: I would have covered only two-thirds of my open positions after the market reached the blue lines. One-third of my position size I’d have left open because it would be the start of the positions I start to pyramid in anticipation of the expected downtrend.

Upthrust 13w S&P

13-Week S&P

But in this case, I sold ‘normal size’ and have covered half my size at first support reached on Friday. I also plan to cover the rest either at the zone bounded by the blue lines in the chart above or on a buy signal generated around Friday’s zone.

The reason for this is the ‘context’ that is partially provided by the Ray Wave: because of the nature of Wave [2], I was looking for a one of 2 patterns for Wave [4]: Running or Sideways. The market accepted below the maximum Running Zone on Friday Nov 9; that being the case, I would expect the market to go to the zone bounded by the blue lines. If the market breaches B, then we have the first sign that the current bull market is in difficulties and if we get acceptance below ‘B”, this would confirm the 13w Change in Trend Upthrust signal.

13w Ray Wave Count

13-week Ray Wave Count

(By the way, a Ray Wave count is not an Elliott count although I have borrowed some of Elliott’s ideas).

Context then in this case, caused me to hold a smaller than normal size and has me looking for a buy around the 1400 - 1370 area. Can I be wrong about the context? Sure, but my results say I can also be right and I am happy to give context its due.

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