The Art And Science Of Technical Analysis (With Adam Grimes)

Video Transcript

Rayner (01:28)

Welcome Adam to the show….

Before we get started, I just want to say thank you because you have written a book that shaped my trading…

“The Art and Science of Technical Analysis”

I’m not sure if people who are watching this have read this book.

To me, it’s one of the most comprehensive technical analysis books that I’ve come across.

Because you covered things like patterns.

All traders love patterns.

Don’t worry, we’ll talk more about that later in today’s session.

But you dove deeper into trade management and risk management.

It’s a very comprehensive book and packed with a ton of details. It’s not a book that you can finish in one sitting.

Adam (02:50)

That’s right.

Rayner (02:16)

It’s as thick as a dictionary about 600 pages if I’m not wrong.

I read it multiple times.

Thank you so much for sharing your wealth of knowledge. I think it was written about 10 years ago.

It’s fantastic.

I think the biggest takeaway that I had from that book, maybe it wasn’t written in the book, but in one of your videos where you made traders draw some random lines on the chart without looking at it.

Then you look at it and realize how your eyes would find patterns when there are no patterns at all.

That was a very good experiment, it blew my mind. I love that piece of work that you produced.

Adam (02:59)

Thank you for your kind words.

It’s a book that I think has helped a lot of people and this has been since in the decades since I published the book.

One of the most exciting things is hearing about people and just accumulating the virtual stacks of emails from people saying…

“This book was what I needed to push me over to the top”

 So, it’s been an honor.

Writing the book was certainly a part of my journey because I had all of these pieces lying around.

I had all of these things that I was doing.

But as a discretionary trader, and we should talk about that too, there’s a lot to talk about here, I found myself not always doing what I should be doing knowing that I should do one thing and doing something else.

Once you write a book or start teaching in general, you tell people…

“Here is what you should do”

It’s great for teachers too because it keeps you from doing stupid things to yourself.

You will say…

“Oh, I read about that in the book and I was like, I can’t do this thing”

It was a journey for me. It was a great thing to create that on some levels.

I’ll tell you something that I don’t think a lot of people know.

I wrote the book in about forty days.

Rayner (04:16)

Forty days?

No way!!!

I’ve written books by myself and there’s no way…

“Wow, that’s crazy”

Adam (04:21)

What I did, it’s not a superpower that anybody should try to copy.

Basically, with everything I do in my life, it’s either I’m not doing it or I’m doing it all the way.

I committed to writing about three thousand words every single day. It was most of what I did.

I’ll tell you why I don’t think I’ve ever told this story publicly.

I largely wrote this book in an Irish pub here in Jersey City, which is just outside of New York City.

The staff kind of knew me as the guy who was writing the book, and I had my corner in the pub.

I was well taken care of with food and Guinness.

I never worked on anything this big and I had to do a lot of planning.

Now the editing was brutal, and this was where I was fortunate to have a top-quality team of editors and people doing all the production stuff.

That made me a very clean writer.

Have you ever written a book and written the same thing twice in the book?

That was something that I found that I did more than once because I have in my head, that this thing is so important, I must say it.

I didn’t even realize.

The editor was like…

“Do know that this is the same thing you wrote?”

Then every single sentence was carefully massaged. I enjoyed the process.

I’ve written another book largely designed to support this free training course I put out.

I’ve started a few other books on systematic trading and psychology that have not come together for various reasons.

It felt to me that the books that I wrote, were struggling in my head to get out somehow

Rayner (07:30)

You need to go back to the pub soon and get your drinks and food.

Rayner (07:07)

Awesome…I’m just curious

How long did the editing process take?

You said you took about 44 days to come up with the rough manuscript.

What about the editing process?

Adam (07:14)

Yeah, I don’t remember exactly.

I could check my email. But a long time, many months.

Probably a year, maybe nine months.

But it was brutal.

Honestly, the funny thing is the first book was twice as much as what you have when you hold it.

It included a lot of statistical things.

Then again, another funny story…

I don’t think I’ve ever told some of these stories. You go through this entire grueling process and they send you a final copy of the book before it goes to print.

I remember it was a Sunday night, I had gone through that very carefully and I was having some unease about the book.

Because it was a combination of the book you have and a lot of heavy statistical things.

I was having a little bit of unease, but mostly, I’ve just been fighting this battle for a year and I was done with it.

I didn’t even want to think about it.

Within two minutes of me putting down the copy, and being done with it, the phone rang and it was one of my readers, Linda Raschke, who’d read it.

She said…

“Adam, I don’t think you can publish this like it is, you got to go back to the drawing board”

At that point, I went through with Wiley again, she was right.

I would not have made that decision myself, because I just wanted to be done with it.

But I needed somebody else to say…

“All of this statistical work detracts from what you’re trying to teach people”

I think the statistical work is very important.

There certainly is a certain kind of reader, and I’m that kind of reader.

I want to know the numbers, it’s not enough for you to tell me how this thing works. I want to see the numbers behind it.

I bet if I had given you the first version of that book, It would not have resonated with you so much.

I had probably a team of about a dozen people who were working through the book.

I and my friend Joe argued about every single paragraph in the book.

Most of the beautiful things in the book were the results of other people pushing my ideas in the right direction.

Rayner (10:50)

Nice, thank you for sharing.

Maybe let’s take a step back because I think I understand that you’re very involved with writing music, even cooking, right?

Based on the things that you share on social media. Let’s take things back to an earlier time when you were growing up.

What were your growing-up years like?

I’m curious to learn and hear.

Adam (10:14)

I was a bit of a strange child, which will come as no surprise to anybody who knows me.

I grew up very much out in the country in the middle of America and when my family moved out there, I was about six years.

There were no houses within, I think the nearest house was almost a kilometer away.

The consequence of this was that I grew up very much by myself. I grew up spending a lot of time in fields and forests. Like if there’s ever a zombie apocalypse.

I know what you can eat around here. How to find water, trap animals. I have all of these skills.

Now that I live in a big city, those are not necessarily super relevant life skills, but I did spend a lot of time outside.

I was equally interested in music and science.

I think that’s a little bit of an unusual tension because we think that most people who are into music are just into the artistic side, but it was not at all clear to me whether I was going to end up studying music or science or go into the military.

I had a good offer from several of the armed services.

Well, this is interesting.

I was the kind of kid in high school who didn’t go to school and didn’t apply myself.

I got pretty good grades, but I never studied.

I skipped school to watch cooking shows and painting shows.

Anything I rather do than be in school.

We had something called the ASVAB, which is “Armed Services Vocational Aptitude Battery”.

It’s a test of a lot of things, but it was built around pattern recognition.

The kinds of things where you show somebody, here are these pulleys, and here are these ropes, and if you pull this, which way is this wheel going to turn?

Things where you have these shapes are colored this way. If you rotate it this way, what would it look like?

And I took the test, and I completely blew it off.

I couldn’t understand why the military recruiters were showing up at my school wanting to talk to me constantly.

They got me out of class.

I finally asked the guy…

Why are you here so much?

He said…

“Oh, you don’t know?”

I had maxed out that test. I got 100% perfect, which people don’t do.

Since then, have discovered, I think this probably relates directly to trading.

There are lots of different kinds of intelligence and I think the idea that intelligent people make better traders is false.

I’ve seen some very intelligent people struggle at trading.

I’ve also seen some very intelligent people being successful.

But I’ve also seen people who buy their admission.

I was a very mediocre employee and a very mediocre student, I’m not that smart, but they figured out the trading puzzle.

It’s not really about intelligence, but I do think that maybe one particular kind of intelligence I’m gifted with is visual pattern recognition.

I have gravitated to a style of trading and maybe gravitating to new styles recently.

We can talk about that too. But I’ve gravitated to a style of trading that focuses on pattern recognition and on.

I think when I teach people, one of the things that I can see that’s a little bit different in my head, is a pattern because I have seen so many different patterns over the years.

I see all of the ways it can be resolved.

Of course, I can be surprised.

And of course, I can be surprised.

I sometimes have emotional reactions when things don’t go my way.

But I think that I’m very aware when I see a pattern of this almost intuitive, probabilistic way that this pattern is going to collapse down into realization.

I think there is some pattern recognition there that is not normal.

Rayner (14:52)

I’m curious, you mentioned that you aced the test 100%.

Did they follow up with it?

Is there anything along those lines?

Adam (15:00)

I had lots of offers.

But the army wanted to put me into a tank.

I was more interested in submarines. I was talking to the Navy too and had a scholarship. One of just a handful in the state to join the Navy.

I put a suit on and went down to sign the paperwork to accept it.

On the way down there, I was like…

“I think I want to do music”

Because I was also pursuing music very seriously to the point where I was practicing my instrument, I was writing pieces, but I was writing music.

I was spending, as a teenager, probably an average of six hours a day working on my music every day, just full time.

That was important to me.

I was standing there with a pen in my hand, and I said…

“I don’t think I can sign this”

The guy was like…

“There are like five of these in this state, like you got one of them”

Well just sign the paper.

“I don’t think I want to do this”

He’s like…

“What do you want to do?”

I was like…

“I want to be a musician”

He looked at me like it was stupid, and it was probably.

It very likely was the stupidest thing he had ever had anybody say standing there, but that was how my life ended up following the trajectory it did through college.

I went and studied music, piano, performance, and music composition.

When I graduated from college, that was when I started trading.

I had no financial background and no exposure to financial markets.

One of the things that I learned about myself in college was I don’t like casinos and gambling.

I know now, the few times in my life that I had been dragged to a casino.

Even then, I think I had a very clear intuition that the edge was against me.

I worked in college, I don’t remember where it was, but it’s forced me to go to some casino thing.

I just walked up to a table and I put my entire bankroll for the night down on a single bet.

I lost.

The process of playing was not fun. I had intuited that when the odds are against you, the best thing you can do is play as few times as possible.

I happened to lose on that one, but I think there was probably some intuition about probabilities, which I had no formal math education when I did start trading.

Because my formal education was as a musician, the math class that I had was basically what you might call math for poets.

We would learn about mathematical concepts and then think about how they made us feel.

I’m exaggerating a little bit, but I had no real math training to the point that when I started trading, I figured out that this was a game of numbers and probabilities.

I built all of this for myself from the ground up because I didn’t know anything.

It’s like, well, there has to be some way to like, keep track of what usually happens when these patterns happen.

What tools do I need for that?

I taught myself statistics and elementary calculus sitting on my sofa at night with a textbook and a pencil and paper.

I took a couple of years to develop the math skills that I needed.

Interestingly, I was always very interested in computer programming, but somehow, I managed to do that without nailing down any knowledge in math whatsoever.

Rayner (18:40)

Brilliant.

From what I’m hearing, it’s your first foray into trading happened because you went to a casino and you placed all your money on that bet.

That’s where you got started learning more about having age and stuff.

Adam (19:00)

Not really…

I knew that I did not like to gamble, but nobody in my family was extremely conservative financially.

This is pretty common with American families that even several generations back remember the Great Depression and remember struggle.

Now that decades of prosperity there’s still this feeling of you could lose it.

I’m sure neither one of my parents ever had a penny in the stock market.

I had no exposure to that whatsoever.

But when I graduated from college, I got a brochure in the mail from Ken Roberts.

I think maybe he’s on the run from Tax evasion.

The commodity guy with the cowboy hat.

His book was based on the cattle market which ironically the meats, I have never been able to trade very well at all.

I now have a rule that says…

“Don’t trade meats”

I’ve had that rule for 20 years.

A couple of years ago, we were experimenting with some new swing trading on some different time frames.

I thought…

“Oh, you know, let’s throw cattle and hogs in, and let’s see if it works”

Why should I be afraid of these markets?

Sure enough, my win ratio was like… *Sad face*

Now I still have that rule back…

“Don’t trade meats”

But Ken’s thing was based on pyramiding into the market.

You could start with a very small amount of money, a few hundred dollars, and buy a cattle contract that would go in your favor.

You could buy two more and then you could buy four and you could buy six.

Eventually, if the market went in a straight line, you could own tens of thousands of cattle contracts and you could make millions of dollars starting from a hundred dollars.

I didn’t know much…

I would say that kind of marketing is essentially scam marketing. It was brilliantly well-written.

So, I got his stuff.

I studied everything, I studied his charts, and ironically, his trading approach was not the stupidest thing I’ve ever heard.

It was based on what I call like a one, two, three bottom.

The market has been down trending and then makes a higher low and you look to buy it.

Of course, I’ve traded like that sometimes.

There are isolated cases where you can get useful information from that kind of pattern.

It wasn’t crazy, this was in 1995.

I think I opened a $3,000 account.

He was also working with brokers who charge $100 around turn.

For me to do a trade costs $100, a $3,000 account.

I didn’t understand the numbers at all.

Every week I would get a chart book in the mailbox and there would be space where I would update the charts by hand throughout the week.

Then another chart book would come out the next week.

That was my first exposure to charting.

Of course, I don’t have to tell you the story, but I started trading and lost instantly.

Like you just completely blew the account.

But I would say I was trading on the daily chart.

There were mid-end grain contracts but for most of the things…

You’re probably risking $1,000 a trade and you have a $3,000 account, that math is not going to work out and you also have no idea what you’re doing.

That helps too.

I did that a few times and I refunded the account, but there was something about this.

I was like… 

“Okay, I don’t have any idea what I’m doing”

But there’s something about this I like to this day.

I can’t explain what it was, I wasn’t watching charts because I didn’t have a data feed, but it was something about seeing.

I guess I should also mention being the kind of research-minded person I am, I went to the library and I got old historical records.

I was making charts by hand in the library of all of these commodities back in the 30s 40s and 50s and I wasn’t trading stocks, those were trading futures.

I did that a few times, and then I finally figured out that I had to learn something.

I started down the path of kind of figuring things out.

I went to a computer store, a physical store, and bought my first charting program…

I’m sure they weren’t even DVDs, they were CD-ROMs.

My first data feeds were a modem connection.

Somehow, I gravitated into day trading the British pound when the Asian financial crisis hit.

I still had no idea what I was doing, but what I was trading was basically what I do now, looking for a pound to make a big move.

I was trading bull flags and bear flags, and there was enough volatility in the market.

I was stupid enough to not be afraid of risk and to not understand the risk that I was taking that I made what for me at the time was quite a bit of money.

That was how I initially got started.

It was a combination of just some interest, something in my gut.

It was like…

“This is a cool thing that I like”

Certainly, everybody would like to believe as traders luck plays no part in it.

But I was lucky to lose it first.

My very first trade was I’m almost sure it was wheat, but it’s been a long time.

The market had been gone practically parabolic.

I thought, well, it’s gone up so much, it’s going to continue to go up.

My first trade was I bought the top of a parabolic move and I think I was fortunate that I lost very consistently early on.

It was a different world then because there wasn’t the internet and communication.  

You don’t know who to listen to.

The broker would call and say…

“Oh, I’ve been talking to guys down on the floor”

They know this market’s going to do this.

At this point, I had an account that I blew.

There were a few hundred dollars in it and he was like…

“Well, conveniently, like you could buy a call”

He just figured a way out to get me to blow the rest of my account and do another trade with us.

He’s like…

“I’ve been talking to the guys down in the silver pit and they all what is going to happen”

I said…

“My chart says it’s going to go down”

He said…

“Oh, okay, yeah, it looks really good to go down too. Let’s buy a put”

That was the moment when I realized nobody, I was talking to knew more than I did.

I knew nothing.

It was kind of terrifying.

I began to understand the sales-driven nature of being a full-service broker at that time.

I got lucky and figured it out and ended up trading every market there is and it worked out.

Rayner (27:29)

I’m curious because earlier you mentioned that you were drawing charts by hand, and they mailed you a chart book, I’m not even sure what that is, because I have not done it.

But you draw the chart book, I guess bar by bar, as the candle closes each day. Am I right?

Adam (27:48)

Yeah.

Imagine a magazine, because they would keep printing costs down, it would be thin paper almost like tissue paper.

You would have this chart book that would have the different months at the beginning of it might be S&P and then maybe the next two months out for commodity.

You would have about 80-90 pages in the book, and they would be printed. It’s a daily chart.

Nobody’s doing any multi-timeframe thing.

There might have been a moving average or something on it. There was volume and open interest.

But then they would leave a space to the right of the chart so that as each day closed, you could go and draw in the bar.

They weren’t even using candles.

They were bar charts.

Rayner (28:40)

Do you feel that doing the exercise, it gave you a feel for the market since you’re doing it by hand?

Adam (28:42)

I think so and that’s one of the exercises.  

I don’t think that’s the way to do it. I have a few blogs on the topic and I also wrote about a little bit in the books too.

I think it’s a really good idea to keep some kind of swing charts.

You’re doing something like a cheap point figure chart where you decide on a reversal value and you’re going to reverse the line.

There’s nothing wrong with drawing candles or bars on a period of completion, but what I think did it for me was doing that for about a year.

I charted S&P, I was trading the one and five-minute charts and I kept the swing chart that I had all this graph paper all around my office.

This made me pay attention.

I don’t know that there’s any magical learning that reorganizes your brain beyond the fact that it makes you pay attention to every single swing of the market.

Like I draw this line here, what does it mean?

What did it feel like to be involved in a trade?

Did I make the right trades?

Did I make the wrong trades?

What made me make those?

You’re constantly asking questions if you go through this.

It’s not just a matter of, you’re just drawing the line.

If you do it long enough, there are going to be some periods where you’re just drawing the line on the chart just to kind of maintain the practice.

But I think one of the things that people struggle with today is this quality of attention because neither you nor I have picked it up.

Our attention today is just so fragmented in a way that it works against people doing.

I forget who used the phrase “deep work”

There’s an author.

Rayner (31:07)

I think it’s Kale Newport.

Adam (31:10)

The idea of doing this deep work is where the kinds of change that you need to provoke in your brain happen, it’s just not normal for people.

It’s not natural.

You have to force yourself into it.

That’s why I think that is such a powerful exercise for doing.

Rayner (31:26)

What’s your trading methodology like right now, your trading style?

Adam (31:32)

I would like to tell you that my trading hasn’t changed at all.

Let me ask you…

What are you doing?

Are you primarily systematic?

What are you doing?

How are you trading?

Rayner (31:49)

I do both actually, I run a trading system as well as having a discretionary price action on a separate account.

Adam (31:54)

My focus has been almost entirely discretionary, which is funny because I do an incredible amount of systematic work and statistical work to support what I do.

Also, my trading is 100% technical.

Again, it’s funny because I do a lot of macro work.

I do a lot of fundamental work

When I started doing this work in about 2005/2006, I was learning all the fundamentals and how everything’s supposed to work.

Then by that point, it was getting to 2005. It was a little bit harder to fool me because, by that time, I had developed backtesting skills and statistical skills.

I remember walking home, I was in New York at the time, and I remember walking from the subway just thinking about the work that I was doing.

I had found some glimmers of fundamental edges, but then it hit me that all of these edges that I found were at multi-month time horizons.

I’ve always been a short-term trader.

When I was focusing on day trading, I traded a five-minute chart, I traded a two-minute chart.

When I trade on the daily chart, the way I think of it is, that I want to be in a trade for a few days to a few weeks.

I’m not looking to hold something.

Now, I also do long-term investing where I am holding things for years.

But as far as my active trading, I want that shorter timeframe, and I realized that all of this fundamental work, I couldn’t find much of it that worked very well.

But all of it that worked, worked at time horizons that were not very interesting to me.

I was walking home at 10.30 PM through Times Square, and it was like, the heavens opened and angels sang to me.

That was the moment when I knew…

“I don’t have to look at this fundamental stuff. It’s not going to be part of my process”

I would like to tell you that my trading is the same as what I wrote in the book.

But I know as a discretionary trader, systems need to be tweaked and nuanced along the way.

I know that as a discretionary trader, I don’t always know when I’m making those adjustments.

Some of those adjustments are over the years, my stops are a little bit tighter, and my profit targets are a little bit smaller.

I’ve never really tried to hit home runs.

I tell the story sometimes…

I tend to primarily have consolidation patterns. I look for a market to make a big move.

I’m trading a little bit more around levels and on trend lines, but looking for reversals.

I went back to day trading about a year ago and I did that with an incredibly complete focus.

I remembered why I didn’t want to do it because I didn’t want to live my life staring at every tick of the screen.

After doing that for most of a year, I just realized that there are good reasons that I chose not to do that.

I think my next act is that I’m going to start deploying some more systematic and algorithmic approaches, which I’ve traded systematically in the past.

I’ve traded systems and massaged them from a discretionary standpoint.

I’ve traded systems of very small sizes, but I’ve never branded myself as a systematic trader.

When I think ahead to the next 20 years of my trading career, as you get older, you don’t get smarter.

I suspect more of my trading will become systematic, and that’s where I am today.

Rayner (38:02)

I know that for the longest time, you were a discretionary trader who made your decisions based on statistics.

I’m curious at that point when you were a discretionary trader, why didn’t you choose to go with the systematic approach even though you had the background in doing systematic work?

Adam (38:18)

I think it’s hard to understand our full motivations for anything, but I’ll tell you some of the things that were kicking around in my head.

One thing was that I had this idea and I still think it’s true.

When I was starting to figure out trading and had some success and then, I’ll also tell you every single time I switched markets or timeframes or asset classes, I struggled.

It was like a pretty massive relearning.

I would love to tell you that if you can do one kind of trading you can just do another kind of trade.

It certainly wasn’t my experience.

I had the skills to learn, but I had to relearn.

I was fortunate to be able to interact with some of the grand old names of technical analysis who were still active in the 1990s.

I was very confused because everything you would read would talk about the advantages of systematic trading.

This was a few decades back when the turtles were still showing pretty good performance and we were closer to that legendary event.

It was still very mysterious and people didn’t know exactly what they were doing.

There was a lot of stuff about systematic trading. There were also neural nets, which I think is a variation of the more primitive version of the AI that we’re seeing today.

Everybody was convinced that the neural nets were going to take over and they didn’t.

I don’t think AI will now, but I was surprised to see that my discretionary trading was pretty consistently better than my systematic trading.

It baffled me because everything I read said that systematic trading was better and I wanted to do that.

But when I talked to these old systematic people, the answer I got back was some variation of a good discretionary trader is going to do better than a system.

But there just aren’t that many of them and it’s really hard to do.

If you can do it today, there’s no guarantee you can do it next year.

All of that’s true.

Part of it was this idea that I could do better as a discretionary trader than a systematic trader.

Part of it was maybe also just a little bit of arrogance.

I certainly understand that from a systematic perspective, like you built that system, there’s a lot of work there, but it’s a little bit more of a cowboy thing.

To go in and you see the patterns and you make the trade and there’s a feeling of…

“I did this with my own hands”

I think that was very appealing to me.

Maybe also just some inertia you want once you are trading.

Having a long-term trading career and not a long-time frame, it’s a delicate balance consistency ad innovation.

I’ve looked at some ideas that are so strange, we can’t talk about them.

When it comes to what I deploy, I’m pretty conservative.

I’m going to deploy things that have worked for me in the past and things that I’m comfortable with.

I think it was probably just a little bit of inertia, it’s what I know.

Rayner (41:42)

Given what you’ve just said earlier, in recent times you’ve starting or considering making the shift to systematic trading.

So, what prompted that?

This transition that’s in your head?

Adam (42:56)

Thinking about it’s a different workflow.

If somebody says…

“Oh, you do both”

Somebody says…

“What’s more difficult, systematic or discretionary?”

Well, they’re difficult in different ways.

You put the work in different places.

It’s quite difficult for me just in the interest of full confession, it’s difficult for me to trade and do anything else even if I’m trading on a fairly long timeframe.

Say, I’m trading four-hour charts. If I have a bunch of trades on a four-hour chart or potential trades and I’m trying to make a course or write a chapter of a book, it’s very difficult for me to do.

The market takes my focus in ways that I can’t multitask.

I think multitasking is largely a lie anyway, but that’s a separate discussion.

What is attractive to me is the idea of being able to put my systematic work in scientific mode do the development and then be able to step into a very arm’s length risk manager role while the system runs.

It’s not a desire to spend less time trading, but it’s a desire to be able to put that time into different spaces.

Which will then let me do other things that I want lifestyle-wise.

I’ve tried to do this several times, but as I’ve said, inertia is a powerful force, and also the conservativism of knowing what works for me.

I like challenges and I like doing crazy big things.

Rayner (44:24)

Maybe we can talk more about systematic trading in the future when things are a little bit more finalized for you.

But for today, let’s keep it to discretionary trading since that’s where your wealth experience has been over the years.

In your book, you mentioned four particular trading patterns, the failure test, trend continuation, the complex pullback, and the Anti pattern.

I think maybe I’d like you to go through this.

In the book, you covered it pretty well, but sometimes during podcast conversations, we can dive a little bit deeper into the nuances that we might not have read in the book.

Let’s go with maybe the failure test first.

I think that’s a very prominent pattern that you have spoken about in the book.

Maybe for the audience who are listening, you can just give them an explanation of what the failure test pattern is about before we dig in deeper.

Adam (45:12)

I’ll also tell you that I have been doing a series of pretty extensive talks.

One of them was almost four hours on each chapter of the book.

I do talk about these with those slide decks that have hundreds of charts, and hundreds of examples.

I talk about how my thinking has changed in some minor ways on these.

But in reality, I think the market hasn’t changed and my thinking about these patterns is not radically different.

The failure test is a good place to start.

People also might know this as trader VIX to be trade.

You have a market that has defined a clear resistance level.

I think that’s kind of requirement number one, it can’t just be some random level that you pull out of the middle of some previous candlestick or some of the stupid things that you see gurus do on YouTube.

There are point levels out of it.

That’s not a level the market sees. It has to be a level the market sees.

What you want to have happen there is the market trades up through that level and then reverses back down.

What the market has shown us is that there’s no interest in buying above that level.

We went up there, and the bulls had a chance, but they failed, hence the name of the pattern.

There are different ways this can show up on a chart, but that indicates a minor exhaustion above that level, and it’s a really good spot to initiate a trade.

You know your risk.

If you’re right, the pattern accelerates in a very gratifying way.

It’s not a kind of trade where you get into it and you have to sit there and wait and wonder if that happens, the trade’s probably wrong.

It’s the first pattern I put in the book, which is probably why you started there.

I don’t know that I would suggest that beginning traders start with it because…

I thought at one time that they should, maybe I was right, but I think the danger of the failure test is they’re two things.

They’re not all that common

You’ll find yourself looking, trying to force the trade.

This is how you’ll get into using those kinds of suboptimal levels.

A great way to do it might be if you were day trading just use the high and the low of the day.

For whatever market you’re trading, you have a clear level of the markets already shown.

Everybody knows when we go to a new high.

If you go to a new high and fail, it probably says something.

The other problem with it though, is that it locks traders into a counter-trend mode because that market probably was going up to make that new high.

We probably had some kind of uptrend.

Now of course trends end, and there are certainly good trades to be made around the ends of trends.

But I see with developing traders, people get so cynical, and I’m the most cynical person on the planet, so I understand.

But they’ll see any price move and they’ll think it’s wrong, or they’ll just have a desire.

You know, the market’s going up, so they’re just shorting into it and you can trade like that.

Most traders, when they begin, would probably do better to orient themselves toward aligning with whoever’s winning in the market.

I think there’s a little bit of concern with that, but having said that, it’s a great pattern.

I just tweeted yesterday a pattern where this happened at the bottom.

What’s nice is when this lines up with other patterns.

We had a case where the market made a pretty big move on an intraday chart and then made a flag, and there was a failure test at the bottom of the flag.

That’s a nice trade, but that’s a trade that benefits from multiple layers of interactions that feed into the pattern.

Rayner (49:30)

I heard you say that to trade this pattern, one of the key things to look for is to make sure it’s of an appropriate level.

Because you don’t want to just trade off any Tom, Dick, Harry level.

Then for day traders, you talk about the intraday highs and lows.

What about someone who trades off the patterns on a four-hour or daily timeframe?

What are the kinds of levels that they should be looking at?

I’m probably thinking of 52 weeks high, 52 weeks low, etc.

But still, we’d love to hear your thoughts.

Adam (49:55)

One level that I suspect we’re going to be talking about very soon in US stock indexes is all-time highs.

A failure test at an all-time high, if it’s not a signal to get short, it’s at least a signal to ring the register on some longs that hopefully you’ve had for a while.

It has to be obvious. It should not be a level you have to explain to somebody.

If you imagine somebody who has just been trading for two days and they just learned the basics of reading charts and you give that person a chart and you say, point out the important levels, they should be able to do that.

It should be that incredibly obvious.

Just be like significant highs and lows.

Imagine an extended trend, a nice thing is if you get a little double tap of a top or a bottom or something.

Maybe you have a parabolic move and then the market comes off and then goes back up and fails above that. You have those kinds of variations of double tops. Those can be good. It just needs to be a really obvious level.

Rayner (51:10)

Maybe just to push back a little bit.

obvious levels, for example, a five-minute timeframe, that level can be really obvious.

But when someone goes to the 30 minutes or the one hour, that might not be a very obvious level already.

I think there’s a little bit of a disconnect there.

I’m pretty sure you have an answer for it. I would love to hear what’s your take on that.

Adam (51:26)

You’re right.

You can pull up a very obvious five-minute level that is invisible in the 30-minute chart.

It’s just in the middle of the bar, it never happened.

But here’s the thing…

What timeframe are you trading on?

You’re going to put that trade on based on the five-minute chart. You’re going to manage it based on the five-minute chart.

Multiple timeframe analysis is useful, but it’s also potentially confusing.

It’s something that, I don’t do that much explicit multiple timeframes work now.

I can look at a single chart and have a good idea of what’s going on the other timeframes.

In my day trading, I do explicitly use multiple timeframe charts, but the way to untangle all of that is just to make sure that your analysis is on the timeframe you’re going to trade and that you’re not taking information from.

Rayner (52:33)

Got it.

I think just to backtrack a little bit, you mentioned a little bit about how a bear flag pattern was formed on an intraday basis followed by a failure test.

Correct me if I’m wrong.

I’m imagining that there’s a downtrend, a bear flag has formed, and then the price tried to break down, lower testing the lows of the bear flag, and we got a failure test.

Was that what you were saying earlier?

Adam (53:00)

It was a bull flag and it was a complex flag.

It came down and made two touches at the bottom and that second touch where it touched that previous pivot.

The market goes up and then comes down, makes a flag, tries to rally.

Now it’s left a pivot down there and then when the market came back down to that level, it made a failure test with very good momentum.

That was a good buying sign.

It was a buying failure test, it was at the bottom of a bull flag, and then that led to a gigantic historic rally day in the US stock market.

That failure test off of the bottom of that little five-minute flag was an entry that set you up for this entire big move

Rayner (53:51)

That sounds a bit similar to the complex pullback pattern which I think you covered in your work previously.

Adam (53:57)

Yes, it is.

Not every complex pullback will have a little failure test at the bottom, but when you get it, it’s a nice trade.

Rayner (54:06)

Awesome.

Maybe just a couple of more questions on the failure test.

There are a few things to look for.

We talked about finding the right level.

What about looking at how the price approaches a level?

Because there are many ways the price can approach a level.

Sometimes strong momentum, big candles into it.

Some could be just very choppy, stare, higher-highs, higher-lows into a level.

Is that up for consideration as well?

Adam (54:29)

I think it’s a little bit difficult to teach, but one of the things that maybe the biggest thing that I am aware of is kind of the character of the market and how the market is moving.

That’s something that when I have a captive audience for multiple hours and the Hudson sessions, I talk a lot about what I see in character.

I try to quantify it.

One of my frustrations with the way a lot of the things are taught is…

It is difficult and complex, but sometimes it’s left so that it’s so complicated like…

“Oh, I can’t explain it to you”

It’s just something I see, and if you sit in front of the screen for eight years, maybe you’ll start.

That’s not a very good way to teach, and it’s not realistic.

But what it is, it’s a lot of little pieces of information.

All of these pieces of information have to be balanced against each other, and you have to build your way of thinking about the market and looking at the market the way you understand the market, and the way you see the market.

You’ve told me that you absorbed a lot of my stuff and a lot of my stuff helped you a lot, but I guarantee if you and I look at a chart, we’re going to come to different conclusions a lot of times.

By the way, we might make different trades and we might both make money on the trade or we might both lose money.

But you being a discretionary trader, you have to internalize this.

I’ll assess the character of the market as it’s moving up to that level.

For instance, what I don’t want to see is the market grind back up there and then go flat right below the level.

That’s a setup for a good breakout trade.

I’m going to tell you that if I see that, I’m probably not that interested in a failure test.

However, if it does make a failure test and then reverses, if the character of that move could be such that it completely reverses what I told you eight seconds ago and I say…

“Oh, that is a good failure test”

Because, it was a good consolidation, a good setup for breakout, it failed.

Let’s take the trade to the other side.

It’s very difficult, I would say impossible, to give you an exact set of rules.

But what I think I can do over again is show you many examples and talk about the elements.

You can start to see how I’m putting the puzzle together and figure out how to put it together for yourself.

Rayner (57:10)

Those are insightful, so thank you for that.

One last question about the failure test.

We have all sorts of sizes of the candle.

Some can have a huge candle, which is maybe 3 ATR, and some small.

Which is just 0.5 ATR.

What’s your take on that in terms of the size of a failure test?

Adam (57:26)

It matters a lot.

This is one of the ways that my thinking has evolved since the book, and you can Google my name and then “reversal complex”

Sometimes those failure tests can evolve over a couple of bars.

You might, for instance, have a fairly big bar that closes above the level, and it looks like a good breakout.

Then you have a reversal back down the level.

You have a pair of candles, whatever colors you start.

In this case, if they’re both a little bit bigger than say maybe bigger than 1.5 ATR or something.

Those would probably be better signals.

What you don’t want to see is that you have this failure test and it goes like 0.5 ATR above the level.

Then closes just right there, that’s not it.

You want to see a level where traders made mistakes, traders got hurt. You want to see volatility that’s going to be reflected in.

I don’t need to look at volume, it’s going to be reflected in the range of the bar.

You’re correct.

You’re going to see bars that are at least an ATR and in reality, probably bigger more like one and a half.

On the other hand, if you have this gigantic reversal the move might already be done if you have like an 8 ATR bar.

It’s more likely to mean reverting up toward that.

If we just tell people to go look for big bars.

Somebody’s going to find that gigantic bar and they’re going sell the bottom and it snaps back.

They will say…

“These guys are idiots, they lied to us”

You know all of these things, there is a sweet spot in the middle where it’s not too much of one thing or another.

Rayner (59:23)

Happy to hear that.

Let’s move on to the second pattern. I think trend continuation…

Flight patterns…

I would say it’s one of your favorites based on following you for a while now.

I think for some of those listening or watching this video right now, you may not have a good idea.

What is the trend continuation pattern?

I’ll let you explain that.

Adam (59:41)

A trend continuation pattern is just a pattern that you have a market that is trending.

It can be an established trend, or it could also be a market that has been sideways and then makes an upside breakout.

What you’re looking for with a trend continuation pattern is some kind of clause that tells you that the market’s likely to continue.

These go by a lot of names.

They have a lot of different variations. I don’t think it matters what you call them. I used to think it did.

I used to tell people you have to look for the best patterns and you’ve heard that thousands of times over the years.

What’s the best pattern?

We can think about what that is, but it’s probably a pattern that’s kind of symmetrical, and It’s pretty on the chart.

I sat down one night because I had bizarre hobbies.

I was like…

“This pretty pattern thing, like your A-plus trade setups, how big is that edge?”

That was what I sat down to figure out.

Just exactly how much better are the really good-looking patterns than the others?

I went through a decent number of trades, about 800 – 1,000, and separated them according to the visual quality of the setup pattern.

I discovered there was no difference whatsoever.

It added nothing.

There’s some point where the pattern becomes not a pattern.

If we’re looking at a pullback and I might say…

“Oh, it’s a flag, it’s a bull flag, it’s a bull flag, and now it’s not”

 At some point, the pattern integrity is broken.

That’s a little bit of a judgment call. You and I might have different spots where we would make that decision.

But what I have discovered is that as long as the pattern fulfills my requirements for what the pattern should be, it’s an A-plus trade.

It doesn’t matter how good it looks on the chart.

Rayner (01:02:33)

When you trade trend continuation patterns, as you said, there are multiple variations.

One could be the bull flag pattern, “failure test at the lowest of a bull flag”, and one could be just trading the breakout of the bull flag.

Maybe you could walk me through a few scenarios of such trend continuation patterns.

How would you trade these different variations?

Adam (01:02:52)

It could even be a single bar.

We just had a very good example.

Just to put it, Tuesday, November 14, 2023.

If you go back and look at the S&P futures, the 24-hour futures, and you look at the previous day, you will see that the previous day’s bar was a very small bar near the top of a relatively big bar of the day before that.

In that case, that single tight bar near the high of a previous big bar was enough of a consolidation pattern.

Of course, we get into all kinds of multiple timeframes.

If you go down and look at a four-hour chart, it was a clear bull flag.

There are all these different ways to see the patterns.

But what I want to know, first of all…

I want to be reasonably sure that the trend is not likely to end, which is not the same as saying that it’s going to continue forever.

But I’ll look for patterns like exhaustion or one thing.

I’m a little concerned sometimes if a trend is mature.

If we’ve had like eight nice trend legs, well, is this really what we should be thinking about?

If the market has been down-trending and then makes really good momentum to the upside, I need to be sure that momentum breaks that down-trending pattern and now I can maybe look to trade trend continuation to the upside.

That’s the first thing I want to know.

I want to know that there’s some reason for thinking.

I’m going to try to say it again because I think I said it very well, some reason to think that the trend should continue and this is going be primarily good momentum in the direction I intend to trade.

If I’m buying, I’m looking for a market to make a big move up.

I’m not going to feel like I missed that move.

If I’m looking to short, I’m going look for the market to have a big sell-off.

Number two is…

I want to be reasonably sure there’s no reason that the move should fail.

If it is up against a really clear level where we had a former exhaust, I’m talking about with a failure test, I might be a little bit, I won’t say afraid, a little bit concerned about that trade.

If I have those two things, then what I do is switch to the mode of watching the consolidation and assessing the character of the consolidation.

That’s very important.

Let’s talk about how long-term markets made this big move up.

I want to see that it doesn’t sell off that much. If it makes a big move up and then spikes right back down, that was fun.

There was no trade there, nothing to do.

But, If instead, I’ll characterize it as a reluctant pullback.

That’s how I’ll tell the traders that I work with, we’ll look for a market to make a reluctant pullback.

It can just be a single bar.

It can take multiple bars and can take 20 bars.

There’s a little bit of an assessment of that at every point.

Then what I look to do is to enter when the momentum turns in the direction of the trend, almost always.

There are some times when I might position, because what trend are we talking about?

This is what’s confusing. You talk about trends.

You have a market that’s made a move up, and then it starts to make a pullback.

What’s the trend?

At this moment, there is a little bit of a downtrend, right?

But it’s a downtrend within that context of the uptrend, and we think the uptrend is going to continue.

There are times when I might buy, and not very often, but I might buy into that declining trend, at least a partial position.

One of the reasons is that I can read the market a lot better if I have a very small position.

Just having P&L fluctuate, and having some involvement engages a different part of my brain that is more effective than just looking at a chart.

The other times that I’ll buy into, I was like…

“This doesn’t feel right now, I’ll get out right away.”

But I look to enter when the market turns back in the trend direction, and I’m pretty good at using trailing stops.

Look to tighten my stops pretty aggressively.

You can’t be too aggressive because you do have to give the market some room to move. If you tighten too quickly, what you’ll end up doing is accumulating a constant string of very small losses, which add up to a big loss.

Rayner (01:07:30)

We can talk about trailing stops later on…

You also mentioned that you like to buy when momentum is present, meaning that the trend is about to resume itself.

I think a couple of ways you can do it

Number one…

Maybe when the price breaks above the bull flag that downward trend line which I think someone can just draw another one might be a breakout of the pivot high, the swing high.

That’s another option

Adam (01:07:54)

I’m not so crazy about that one because a lot of times I’m looking to take partial profits there.

There are times I will do that and there can be a kind of consolidation that’s like flat up against that.

But generally speaking, I want to buy a little bit lower in the flag.

Maybe a breakout of a previous bar.

It’s great if, again, you can’t choose the gifts you get, but when the market gives you two inside bars.

Taking a breakout of that next bar in the trend direction can be good.

Sometimes it doesn’t work.

Sometimes you get the best breakout level and then that breakout fails and you have to kind of decide if you want to reset and try the trade again.

But generally speaking, I would not look to buy the previous pivot.

Rayner (01:08:34)

It’s more of breaking out of the previous bar high or maybe a mini downward trend line that someone can draw for the bull flag pattern.

When it comes to entry there are a couple of ways you can wait for the candle to close or you can use a buy-stop order.

Which is usually your preferred method?

Adam (01:08:48)

Usually the buy-stop order.

I’ve done it both ways and I traded an approach that worked for many years pretty well and was based on executing on the close.

What I would practically do is not execute on the close, but I would try to execute on the next open.

I wasn’t trading such tight consolidation patterns.

What happens a lot of times if you wait for the close of the bar, enough of the move has happened.

You can make a trade, but it’s a different trade.

It’s not the trade that I’m looking to make.

I’ll generally enter on a stop order, or sometimes I’ll have alerts set and do manual execution.

Rayner (01:09:32)

Earlier you also mentioned that sometimes you enter on a pullback.

You gave the example of a failure test at the lowest of the flag pattern.

What about the Moving average?

Do you like maybe waiting for a pullback towards a moving average?

Like a 20-period moving average etc.?

Adam (01:09:47)

I do have on all my charts, I have a moving average and Keltner channels and I’ve changed the setting on those a little bit over the years, but it doesn’t matter.

It’s just a little bit of variation, I think to keep my eye fresh.

There’s just no statistical edge to a moving average, and I know that people publish a lot of work showing the opposite.

But, face it, if it worked, you’d just run a system that was like mine at the 19-day moving average.

You wouldn’t need to do system development.

I am aware of a moving average as it does show that the market retreats from an extreme.

I won’t tell you that I never buy when the market comes to a moving average, but…

I don’t think I’ve ever executed at a moving average anytime in the last 15 years.

Maybe I can’t tell you I do that.

But I’m also very aware from my statistical work that I have to be careful to qualify that and say…

“Hey, there’s no edge to this”

Like if I make this trade right on the moving average, that’s not a trade.

There’s no statistical edge.

Rayner (01:11:05)

Let’s move on now to the third pattern.

The complex pullback…

We talked about that a few times earlier.

I think it’d be great if you just give a brief explanation of what this pattern is before we dive deeper.

Adam (01:11:15)

That’s probably a pullback where we lost money already.

What happens is the market goes up and makes the pullback and then turns to the upside usually to get people like me to buy the market.

Then the market turns back down and many times we’ll make a lower low.

There are many times that you’ll be stopped out of that.

These do tend to occur. There’s some degree of probability here that If there’s an urgency to the market, so say…

“You’ve just had a big breakout or a big trend reversal and then new upside momentum, you will tend to not see complex pullbacks there, you’ll tend to see simple pullbacks”

But if a market has been in a more mature trending phase or if it’s done a kind of a parabolic move, a little bit of a parabolic move, then a lot of times you’ll need a complex pullback to kind of absorb that.

In those moves, what I’ll do, I won’t take the simple pullback, because I know the game here.

I’m not going to participate in this game where I lose money.

Of course, sometimes you’ll do that in the market.

You’ll say…

“I’m not going to take the trade”

The market just explodes and you can’t be bothered by that, because one of the aspects of this, I think, that’s so important is why thinking and probabilities are so important because you just realize you literally cannot be right all the time.

I think a lot of traders beat themselves up for trading mistakes that were not mistakes.

I’ve seen people do elaborate trade reviews of things that were just not their mistakes.

Like…

It was just simply a losing trade.

Why are you agonizing over it and figuring out how to avoid it in the future?

It also works the other way.

You had a big winning trade and you just got lucky.

The idea of figuring out how to do more of those trades might not necessarily be the right thing to do.

But the complex pullback is, I think I hinted at this before and I said with the failure test, you want to look for enough volatility to show that people got confused or traders got hurt.

It’s kind of the same thing in the complex pullback.

You want to see the market attempt to resume the trend, but that attempt failed.

A lot of people are probably just disgusted and walked away.

That sets the stage for FOMO when the market turns back to the upside.

All those people who were kicking their waste paper basket a minute ago, now they going to get back in the market because I already knew how the pattern was going to work.

I am already long and now I can sell it to them when they start to get itchy fingers on their mouse.

Rayner (01:14:07)

You say that you are already long, which part of the complex pullback would you be looking for your long entry?

Adam (01:14:13)

It’s great if you can get a failure test at the bottom.

It does not happen that often.

I don’t think you could build a trading career around just that idea.

It’s one of the best trades out there, but it’s quite rare.

What I’ll do is…

You have this first move up and then you have the failure.

You have to watch that failure.

What happens to the failure if it fails and then it accelerates to the downside?

The Bears start winning

There’s probably no trade there, but if it goes down and then kind of stabilizes, then I’ll start to look for ways to get into the trade and I’ll say…

“Maybe we’ll get some volatility compression an inside bar or something”

Some kind of little double top and within the pattern that we could then take a break out of that.

I’m looking to enter with the momentum to the upside.

I’ll rarely do it, but I’m not interested in just buying that second leg and hoping for the pullback to work.

I want the market to show me something.

I want to see that there are Bulls interested in this market.

The way that shows up is the market makes a move and that means that I’m not entering at the best price anymore.

That means, I’m not entering right down at the bottom. I think one of the things that a lot of traders struggle with is the market.

They want to use a tight stop.

I guess you can do that.

I knew a trader who, I didn’t think would work…

But he had traded a fund, tens of millions of dollars, a small commodity fund, but his whole win ratio was something like 11%.

Which is horrifying.

But what he would do is he would basically get into a trade and just give it no room whatsoever.

If it didn’t work, he would get out.

He was pretty good at trailing a stop and that worked out for him.

The problem with that approach is, with the way I trade, which winning a little bit more than 50% of the time, it’s not like 80%, but it’s not 30%.

I don’t have to take every trade. That’s one of the other lies that people tell you.

“Oh, you got to take every single trade, because it could be that one trade that makes your year”

I gravitate toward and I strive for consistency.

No one trade is going to make my year.

But one trade could. Can I swear here?

Like, what are the rules?

I try to restrain myself because I never know who’s listening.

“One trade cannot make my year; one trade can fuck up my year very badly”

I always know that no matter how long I have done this, no matter what I’ve done right, no matter how much money I’ve made, I could destroy myself with a single trade if I got stupid.

This answers a lot of the discipline problems.

Just knowing that you have the sword hanging over your head by a hair, keeps you from getting stupid.

But what he had to do, because his win ratio was so low and his wins were so important, he did have to take every single trade.

At the end of his story, I don’t know what happened with this trading, but he had a few cases where he missed two trades that really would have made his entire year.

I do think there’s some vulnerability with trading those strategies that have a very low win percentage and very big wins.

It’s why I’ve decided my life otherwise.

But I am not going to use a super tight stop because I’m going to wait for the market to already be moving back in the direction.

We’ll see if it’s right.

Some complex pullbacks have three or four legs and then it becomes a question of how many times am I going to do this?

Sometimes you give up right before it works and sometimes you get it the third time.

Rayner (01:18:42)

From what I’m hearing about the complex pullback again, you like to see momentum moving back in your favor before you look for an entry, and of course, the stops are not so tight.

Let’s say if you were to look at a complex pullback on the daily time frame, it would probably be like I’m guessing 8, 10, 12 candles.

It can be hard to see the price action because it’s all on the daily time frame.

Were there instances where you go down to a lower time frame like the 4 or 8-hour time frame to get a clearer perspective?

Adam (01:19:04)

To me, that’s not necessary because I can see it in the daily timeframe.

When you said you can’t see the price action, what did you mean?

I think you mean like; you don’t know what’s happening inside those candles, right?

 You don’t know what the character of that market is.

You know, this goes back to me…

“I’m going to make the trade on the daily timeframe”

I’m going to assess the market on a daily timeframe and in most cases all of the information is there.

The times that I will go down to a lower timeframe, like when I’m showing the traders that I teach an example, I might go down to a lower timeframe to show the price action.

By the way, sometimes I do like all of this work out in the open, I generally don’t prepare much in advance.

There are times that I’ll be like…

“Oh, look at this nice little consolidation. This hides a lower timeframe consolidation”

I’ll punch up an intraday chart.

I’ll see, well, shit, it doesn’t. *Laughs

What I thought would be there wasn’t there.

Those sorts of things happen sometimes.

Eight bars are probably a short complex consolidation, but it could happen.

I would say you’re probably looking at 10 -25 bars.

What happens is there’s kind of an interesting situation.

It’s not a complex consolidation.

There’s this long slow drift up in orange juice futures right now.

People can check the date if they’re listening in the future.

I don’t know how it will resolve, but orange juice has been in a big uptrend, had a big blow-off candle at the top, and then reversed down.

It’s been making this little bounce up. It’s gone longer than I think it should go, but I’ve learned over the years that a lot of these pullbacks, this is one way I think the market tries to kind of trick people.

These pullbacks will go just to the point where you stop watching them.

I’ve seen so many times that I’ll be stalking an entry, I’ll be working my entry orders, and I’ll be doing this for a few days, and I’ll be like…

“Are we really, okay? it’s not going to happen”

Then of course the next day is the day that it goes.

What I have learned is that I nudge things just a day or two past the point where I feel like I should stop watching that market that tends to kind of be a sweet spot for some of these breakouts.

Some of them go on for a very long time

Rayner (01:21:34)

Let’s move on to the final pattern…

The Anti-pattern.

So yeah, please tell us more about it.

Adam (01:21:39)

I also wrote about breakouts, but we’ve been talking about those all along.

The kind of cool thing about the breakout is maybe you did this deliberately with your questions.

It’s nested in all of these other things that we’re talking about.

It’s an element of all of these other things.

I recently renamed the snap pullback.

This is going to be a little bit hard to describe without charts, but the Anti is a pattern and you can Google it.

The term comes from Linda Rashky’s book, 1996, Street Smarts.

It was she and Larry Connors I think wrote the book.

There’s a trade in there that was based on the slope of two indicator lines.

You would have the long-term line turn down for the first time and what that momentum is indicating is that a longer-term trend has just turned down.

Then you would have the short-term line pull up against that, so the name ANTI. They are going against each other.

What this shows is that the longer-term trend has shifted to the downside, and we’re assuming the market is going to resolve in the direction of that longer-term trend.

The fact that the short-term momentum is against it gives you a bit of an entry edge.

What I’ve found over the years is I don’t use the indicator that much.

The only way that I use the indicator, frankly is to teach and to illustrate momentum.

I can say…

“Oh, this market made a big move and you can see it on the MACD”

I didn’t see it on the MACD.

I saw it in the price structure, but having an indicator can be a great way to structure this.

I found myself not using the indicator and I found myself using trades that would occur in the price structure with that concept that did not show up on the indicator and ignoring many points where the indicators signaled the trade.

At that point, why are we even calling this Anti anymore to begin with?

The other beautiful thing about this trade is and I do think that this is a trade where I’ve known several people over the years who have built a trading career just around this pattern.

It’s not that common, but the way that I rethink it in the snap pullback, it’s not substantially different, but it’s this idea of looking for a trend that is exhausted, the first momentum against the trend.

If you read Street Smarts, you should read the book, the book is still in print, so you should go buy it rather than pirate it.

I hate all the pirating stuff out there.

You should go buy that book and you should read it.

There are good ideas in the book.

It’s a good framework to think about the market.

But that idea of focusing on what’s happening with the price structure became the primary driver for the trade and when it works, it resolves fast.

It’s the best feeling to be in those anti-trades, or as we’re calling them, snap pullbacks.

I named it Snap because of the way the resolution is so sharp.

Rayner (01:24:50)

From what I hear, you’re looking for a trend to show like a sudden swift reverse maybe the uptrend got a sudden one big candle reversing the last two or three candles of gains.

Then I think the next thing you’re probably looking for it’s if I’m not wrong, is a pullback again like a bear flag.

Taking into account that…

“Hey you know this downtrend could resume down lower”

Adam (01:25:15)

Right. Exactly.

One of the differences between this and a standard pullback is a lot of what catches my eye is a standard pullback.

The market will have to make enough momentum to get to one of the Keltner channels that I use.

You can almost use that as a trigger, not for a trigger to enter, but a trigger.

I’m going to be very clear about that trigger, for when to start looking for a pullback.

If the market can come down and touch the lower Keltner channel, I will then watch for those bounces to set up bear flags.

It’s not 100%, but it does when we were talking about pullback.

I want to see there’s real momentum, it’s a way to quantify the momentum.

What you will see with the ANTI or the SNAP pullback is that many of those will set up around the moving average.

You’ve had this market that’s been trending up, it’s volatile, so the bands are wide. You will have this giant reversal.

Maybe the market was above the upper channel, and now it’s down below the moving average in three bars. 

It’s been a big move.

But then this bounce starts that now goes back above the moving average.

You’re kind of sitting here in the middle of the channels. If you’re just evaluating it based on the channels, you didn’t have enough momentum to get to the bottom of the channel.

It’s not in my standard pullback range.

But that move, which collapses from the trend extreme did set up enough momentum that you should have continuation.

That’s what makes all of these continuation patterns work.

I’ll go back to assessing character, you want to assess that the move that sets up the pullback should have a continuation.

I’ve said that before, I’m deliberately repeating myself.

Then you want to assess the character of that pullback is a reluctant move against that momentum that you just had.

You can see that it’s very hard to talk about.

I have lots of free blogs and things you can look at to see.

Rayner (01:28:05)

We spoke a lot about patterns and entries in the earlier section.

Let’s move on to the other aspect.

We talked about trade management and stop-losses.

Let’s talk about stop loss first because that’s also very important besides your entry.

I think stop loss, if I’m not wrong, after following your work for a while now, your stop losses are usually just below the pivot low or the pivot high.

Did I get it right?

Adam (01:28:28)

Yeah, there’s a little bit of room.

But I’m usually outside the pattern.

The exception to that is the failure test, where if you go back to that failure test, you went up above the level, it’s looking at short, you went up above the level and then you collapsed.

I usually put my stop inside the high of that bar.

Rayner (01:28:50)

Could you expand more on “inside the high of the bar?”

Do you mean just above the high or below the high?

Adam (01:28:53)

It’s counterintuitive.

I will put it literally below the high of that bar so I am inside that bar.

The reason is because, frankly, if this trade works, it’s going to work pretty quickly.

If we start to work back up into that bar, we really should not be there.

If my stop is outside the high of that bar, there are very few cases where the market will come right back up to that high of the bar and then reverse and I have a good trade.

Usually, I’m f**ked if we get back up to the high of that bar.

But if I have my stop outside the high of that bar, what I’m inviting is to get hit on really good momentum and have bad slippage.

If it’s the daily chart, to have a gap opening above that and then end up with like a two-hour loss on some stupid trade that I knew wasn’t working to begin with.

I will, in that particular case, and this has gotten me a lot of hate.

I have some people online who will be like…

“That’s a really stupid thing to do. You don’t know anything about reading price”

Okay, I guess, whatever.

But that’s a counterintuitive thing that I think makes sense. I

think it’s not so counterintuitive when you think about it.

For consolidation patterns, my stop will generally be outside of the pattern.

If I’m buying a bull flag, the exception might be if something weird has happened in a complex pullback, because you can’t have a complex pullback that kind of begins to turn in the trend direction.

It sets up some price structure that’s actually above the low of the pattern.

I might then work off of that.

But my goal is not to get the tightest stop possible. I’m also not looking for a crazy wide stop.

I don’t need to give up a lot of room on that little bit outside of the pattern, and then I will look to tighten the stop aggressively.

I have a lot of limitations as a trader.

There are a lot of things that I could do better, that I wish I did better, but I think one thing that I do well is this discretionary trailing stop approach.

The only way I’ve found to teach it is through multiple exposures.

Show people a bunch of trades and you say…

“Here are the trade management decisions I would make and here’s why, and you kind of talk through them”

Over time, it kind of becomes like an apprentice thing.

People see this working.

But the principles are that, so I’ll get into the trade and write…

“What I want to do is reduce risk”

Now, I’m not thinking that I want to get to a breakeven stop because…

A break-even stop is just some number I made up.

The market doesn’t know that you know?

Now in some cases, maybe I took my trade at an actual breakout level and the market does know it, but let’s assume the market doesn’t know it and it keeps us humble to say it’s just kind of a level that I made up.

There’s a necessary goal to drive toward a breakeven stop.

But what I will try to do, let’s say the kind of uncomfortable thing happens that you buy a breakout of a pullback, and then the market just sits there, it doesn’t go anywhere.

In that case, what I’ll probably do, is I haven’t evaluated my stops in terms of ATR in a long time, but I’m guessing my stops are probably maybe two ATRs, just to give you an idea of what they would be.

I think of everything in terms of R: R is the initial amount that I’m risking on the trade, we could express that in dollars.

What R is though, it’s the amount of movement on the price chart.

That’s how I think of R geometrically, but then we multiply it by position size to get your P&L impact.

But what I’ll try to do, I’ll just make some concessions.

If that trade doesn’t go anywhere, which is a little bit unusual.

I’d say maybe 20% of trades do that.

I’ll tighten stuff like 0.9R or 0.8R.

Just to take a little bit of risk off the table, I probably won’t have a 1R.

You have to say probably because you get slippage or whatever.

But once the trade moves in my favor, once there is a really big bar in the direction of the trade, which of course is nice, then I’ll move my stop up into that bar.

One of my rules is…

“I will very rarely move the stop in the direction of risk, so I don’t widen the stop, I’m always tightening the stop”

There are some times that maybe I’ll make a decision and the next day it’ll look like a mistake, and whether it was a mistake or not, I don’t know.

I would say it’s quite rare.

I have a case where I widen a stop a little bit never past the initial stop.

She’s like…

“Maybe I tightened it too much the day before and there’s a little bit more to it”

But that’s the idea basically when the market starts to show me good momentum in the trade direction.

I’ll start to tighten quite aggressively also one of the things that has worked pretty well is to just take full profits at 1R.

This takes a lot of the trade management issues off the table because you’re of course you’ll never have big wins but you’ll be driving toward more consistency there.

Rayner (01:34:40)

Just to backtrack a little bit, from what I’m hearing you said that if the market doesn’t move in your favor you just kind of like just tighten your stops to maybe by 0.8R or 0.9R.

Just to manage your risk and if it does move in your favor, let’s say you get a momentum candle assuming a bullish long trade, you will tighten your stops or trail your stops using the low of that recent momentum candle.

Did I hear that right?

Adam (01:35:00)

Not necessarily the low, sometimes I’m in the bar and sometimes I’m a little bit beyond it.

There is some consistency to it, but a lot of times, if there’s a very big bar, my stop the next day is in that bar usually, maybe in the bottom third of that bar.

Rayner (01:35:17)

In that bar, is there an objective way that you quantify which part of the bar you set your stops or that’s discretionary?

Adam (01:35:21)

It’s discretionary.

I think I’m pretty consistent because I have thousands of trades and all of these are recorded publicly.

People have gone back through and evaluated and I am consistent, but I don’t think it can be reduced to a rule set.

I wish it could, especially as I think about more systematic approaches. I’d love to systemize it, but I think there has to be a discretionary input to it, fortunately.

Rayner (01:35:50)

Earlier you also mentioned that your take profit level is I think almost at 1R.

Is that like regardless of the price structure on the chart?

Whether is it at support or resistance?

Probably you know that’s quite a subjective level.

Do you take into account price level or just you know flat 1R takes profit for most trades?

Adam (01:37:10)

I am aware of the price level and I’ll structure the trade around that so there’s no huge issue with that.

Rayner (01:36:21)

In other words, your 1R is usually, would be…

Let’s say, for example, resistance.

You’ll be below resistance and not above it, right?

Because if that’s the case, the market has to work harder to reach your 1R.

I get what you mean, awesome.

I want to talk about a post I think you made on Twitter and Facebook…

I saw you posted a bull flag pattern on the S&P 500 in the five-minute timeframe.

Surprise since you mentioned day trading earlier.

Adam (01:36:30)

Generally speaking, yes.

Rayner (01:36:34)

When you’re trading on an intraday basis, from my understanding, the opening and the closing are more volatile compared to say the noon session where traders are away for lunch.

Let’s say you have a potential day trading setup, maybe trading the bull flag pattern.

Does the time of the day matter when you take your entries?

Adam (01:36:58)

I tend to be pretty consistent throughout the day.

You have different expectations that follow through at different times of the day, but I’ve never really been a trader who just trades the first hour or something like that.

I think there are opportunities spread throughout the day.

Rayner (01:37:17)

Maybe back a little bit to the take-profit level.

Let’s say this time round you enter a trade and the market is bullish right at all-time highs, there’s no price structure that you can reference from is it still going to be a 1R take profit or you might have a different approach to that?

Adam (01:37:30)

I might have a different approach.

I think there are times like I have been doing over the past previous weeks and months, I guess even, a lot of shorts and stock indexes.

I have sensed that those shorts are counter to the bigger picture potential.

I expect the market to reverse and rally.

In that case, I’ve been very aggressive about taking one-hour profits on the shorts.

This is not a case where I was looking for stocks to just absolutely collapse and continue to sell off.

However, that we’ve turned, I think it makes sense to stretch profits on the upside.

You can do that in lots of different ways.

You can take partial profits at one hour and then trail on some, or you can just trail a stop.

But I definitely, I guess this is a kind of multiple timeframe analysis that if it’s not explicit.

At least it’s baked in there that I’m making some kind of assessment that based on the price structure on the monthly or weekly chart, I think the daily trend has more potential in one direction or another.

That’s something that I am aware of.

Rayner (01:38:40)

Judging from what is said, you trade off the lower timeframe as an intraday trader as well as in the higher timeframe.

You have experience trading across this different timeframe.

But for people who have maybe a year or less of trading experience, there’s going to be a difference across these different timeframes.

What’s your take on it?

Adam (01:38:59)

I honestly don’t know.

I think that everybody wants to be a day trader, but I think day trading is the hardest trading to do for so many reasons.

Over the years, I’ve had hundreds of traders tell me something like…

“I tried the day trade, I tried for years. As soon as I moved to a swing trading approach on the daily timeframe, I did so much better”

I also had, for many years, I did a lot of work with institutional clients.

Some of that is a lot of that I still can’t talk about, but these were traders.

This is both discretionary and systematic.

I sold trading signals to a lot of hedge funds whose names you would know.

They would buy algorithmic signals from me to then deploy in there, which is funny that I haven’t done much systematic trading.

I’ve developed systems for them. But I would have many conversations with these teams.

Where they’d be like…

“What timeframe do you trade on?”

I’d say…

“Well, I did everything”

 But I found the sweet spots kind of like two days to two weeks.

Time and time again, I heard…

“Yes, us too:”

These teams had, in some cases, literally dozens of PhD-level quants, crunching numbers and doing things.

Now, of course, some funds do HFT, and that’s quite a different thing.

But I think if you’re making systematic approaches, there’s probably objectively a better edge, a little bit easier to conquer the psychology of trading on the daily timeframe.

But I would not tell a new trader to avoid day trading.

I would remind them with constant caveats that the statistics overwhelmingly say you’re not going to make money as a day trader.

Maybe you’re the exception.

But as long as we can be crystal clear that the deck is very much stacked against you, I think you can approach it as a learning opportunity because the advantage you have as a day trader, you have to make a lot of decisions.

Even if you’re a slow-moving day trader, you’re still making two to three trades every day.

You’re taking those trades from conception to completion.

If you’re trading on the daily timeframe, you might have to go a month to get that much or maybe even longer.

You can trade more actively, you could do 10 to 20 trades a day.

Theoretically, there’s an advantage, I think that this is something that I certainly benefited from, but I do think that a lot of people, you can develop a lot of bad habits, you can develop a lot of bad psychology day trading.

Yeah, as you can tell, I don’t have one clear answer to this.

But I think it’s very important for somebody.

I think the only way that I would raise red flags is if somebody thought they were going to start trading as a day trader and make a lot of money very quickly as a day trader.

You’re still going to struggle for years, and I would bet if you do find success as a trader, it probably will not be as a day trader, but it doesn’t mean that, it doesn’t mean you should not try to climb that mountain, because who knows?

Rayner (01:42:23)

Away from day trading, let’s talk maybe generally about discretionary trading.

If someone wants to get better at discretionary trading, there are many ways they can do it.

They can stare at the charts all day, journal their trades, read more books, courses, etc.

If you were to maybe start your discretionary trading career over again, what would you do differently, or how would you approach it?

Adam (01:45:48)

Are you going to edit this or is this going to go up in one continuous?

Rayner (01:45:50)

I plan to just upload it as a two-hour show in this case.

Adam (01:45:59)

The reason I ask is I don’t necessarily want to plug a course, but I recently created a course to answer that.

Do you want me to talk about what?

I’ve thought about this for years and I put out so much material to teach people how markets move, to teach people how to think about the market, how to think as a trader.

The questions I kept getting people would say like…

“What should I do?”

“How do I develop the skills of being a trader?”

I had pieces that I had used over the years, training traders, I did a lot of work when I was at the New York Mercantile Exchange and I’d left.

A lot of the floor had completely closed down.

There were a lot of floor traders who were trying to make the transition to the screen.

I helped a lot of those people, and a lot of them frankly couldn’t figure out how to make the transition for different reasons, but I had worked with so many traders that I had this framework that I finally put together this year.

If you want to see it I will give you access to it.

Just email me.

I’ll set you up. This is the best thing I have done training traders by far.

What we do with this is we approach the problem from several directions at once.

The first thing is…

I am convinced that many people struggle as a trader because they’re trying to do something that is not right for them.

I’ll tell you a story…

I had a guy who wanted to trade the NASDAQ futures, he was very specific, and he wanted to trade very actively on a five-minute chart and he had a job.

This was the problem where he could escape into a closet, literally a closet in his office where he had a computer and he could day trade.

His problem was that he was a safety manager for a steel refining plant.

I said I can’t work with you because we’re going to get somebody killed.

There’s just no way…

You see people who are trying to do things that are incoherent with their lives, or frankly, people who have deep-seated issues with money or self-worth and all of these things.

I think one of the things you have to do like people just want to learn the patterns.

You want to like, where’d I push the damn button?

But we approach this, first of all, from the standpoint of doing a lot of introspection, a lot of thinking about what has brought you to this point in your life.

How you want to structure your life going forward.

I also included a lot of work with meditation.

I think a lot of meditation is, I’m utterly convinced it’s not the solution to all of your trading problems.

There are certainly people who say…

“All you have to do is do mindfulness meditation and you’ll trade better”

Well, that’s not true.

It’s not true. Just because there are a lot of people who are fantastic meditators who could not make a penny trading.

There has to be something else to connect the dots. But I figured out this framework that will connect it.

Then what you do is cultivate pattern recognition through the questions you have asked me about these patterns.

My real answer to you would be if you were asking me, it’s not the experienced trader you are, but as a beginner.

I would say…

“Ok, let’s learn these patterns”

Now you spend a lot of time.

What’s a lot of time?

40-50 hours maybe, you go through hundreds of charts, you find examples of these patterns historically, so we’re training your pattern recognition.

We’ll do this with several different patterns, and you’ll develop, you will start to write your trading book, so you’ll have these examples of patterns, we’re not done yet.

The other thing that we will do is this issue of random outcomes that we discussed.

You will start with…

I have a deck of cards here on my desk.

This is a key part of the program.

We start working through decks of cards, seeking to understand what random outcomes feel like.

You’ll generate strings of trades; we’ll weigh them in different ways.

I have this set of 13 trading drills that begin with a deck of cards and then move you to the point where you’re on a trading simulator and you’re generating trades with a deck of cards.

Think about what that does.

The problem for the day trader is you have a system.

You fund the account.

You do a little bit of work on the demo and they’re like…

“Okay, whatever. We know how the demo works”

Then you’re live.

You do all of this work.

You wait for your pattern.

You wait diligently.

You see a trading signal you put on the trade and you’re all nervous.

Then what happens? Then you have to manage the trade.

But now the problem is that all of these other things are focused on your psychology.

You’re not just managing that trade; you’re managing your entire hope for your future success.

It’s very, very difficult.

However, what if I tell you, pick up a deck of cards and you pull a black card, so you push, you mash the buy button?

Now, what analysis was involved in making that trade?

What investment do you have in that trade? None, right?

Now your job is, to manage that trade.

Once you’re done with that trade, you pick another card and there’s another long, the card’s black, so you put another long trade, and red you put on a short trade.

What we’re able to do is separate aspects of trade entry and trade management.

There’s this whole very disciplined framework where then we also turn it around.

Now you’ve been doing work on pattern recognition.

Now we use that to generate trades, but you’re not responsible for managing them.

Also, you can see here that for many traders there’s this idea of a gray box system.

Do you know what that means?

Is that a term you’ve run into?

A black box is a system where there’s just computer code. You don’t know how it works.

It tells you to buy or sell and those never work very well for people for very long generally.

A gray box is a system that will give you an entry signal or you might be able to work it the other way and you manage it as a discretionary trader.

This is an aspect of blended systematic discretionary trading that a lot of professional traders use, but people don’t think about it because they think either I have to be fully systematic or fully discretionary.

This way, it lets people experiment with both sides and some people will find that they will gravitate toward some kind of gray box.

Where at least part of the trade management, and you could do it the other way.

You could look for your bull flag and you could enter your buy signal and then you could hand that off to some kind of, a lot of platforms have some kind of trailing stop methodology that will take the trade management out of your hands.

I worked with a trader for years where he was responsible for the trade entry and I was responsible for the trade management.

It worked beautifully because neither one of us had any attachment to the trade.

He would do all of this fundamental work. You come up with all of these reasons to buy the trade. He would put the trade on.

I would get it on my trading screen.

Well, I have no investment in that trade. I’m able to look at it and evaluate very clearly a good pattern or bad pattern.

If I think it’s a bad pattern, I just get out of it.

We move on to the next trade.

This idea of being able to separate your responsibility for entry and exit.

While you’re doing all this, it’s an enormous amount of work.

This program done properly is hundreds of hours of work. You are also building a trading plan.

With all of this work that you’re doing on yourself psychologically, I also am a professional hypnotist.

That’s another thing that I haven’t talked about much, we didn’t talk about it all tonight, but there are some tools in there for reorienting your experience of risk or your beliefs about trading and all of this together.

This is the best framework I’ve ever seen for training traders.

It’s not brand new, but it’s been out a few months.

We’ve had a couple of hundred traders go through it and the reviews are just outstanding.

I expected this to be good because I knew when I was making it, I was like…

“This is the best work I’ve done”

This is better than the book.

But the feedback that we’re getting from people exceeds my expectations.

If you want to see that, drop me an email, and I’ll make sure you get access.

Rayner (01:52:05)

Where can traders find out more information if they want to learn more about the program you’ve just shared?

Is there a link or website?

Adam (01:52:14)

You can go to my blog…

www.adamhgrimes.com

You also can check out my company.

www.marketlifetrading.com

Everything is linked there.

Follow me on Twitter. It’s a pretty good thing to do because I try to tweet everything.

We are coming here at the end of November. We’re going to have some sales.

Hang out for a week or so until we get our Black Friday sales out.

We have some pretty good discounts.

A lot of the statistical research that I’ve done is, I think almost all of it’s available to the public.

You can see the work, you can see the numbers, and I would love nothing more than for someone to show me something I’ve missed. 

I’ve had over the years some people say…

“Hey, I don’t think you’re thinking about this right”

My thinking has evolved and grown from…

Because there are certainly people out there who have stronger math skills than I do.

It’s great to get feedback from people.

That program is called Tradecraft.

You also can Google my name in Tradecraft, and that will pull up information on the program.

Rayner (01:56:55)

Maybe just a couple of more questions before we close up today’s session.

What significant changes have you seen in the trading industry over the last few years?

 Anything in particular?

Adam (01:57:07)

It’s a great time to be a trader.

The access to information, even when I was trading, when I started trading S&P.

When I was trading the British pound, I was on a dial-up modem, and I had a separate phone line to call my broker or eventually to call the clerk on the floor to put in trades.

I would speak to a person to execute the trade.

I was day-trading a five-minute chart.

How did this happen?

I don’t know.

Many times, I would put in my order and then I would have to call to get out of the trade before I got the trade confirmation back.

In the early 2000s, when I started trading the S&Ps, brokerages would just shut down and there’d be no tech support.

But now there is so much information out there and some of the information is not good.

Because now, there are a lot of people who are claiming to make money who don’t make money, and there are a lot of people who are teaching things that just don’t work.

You have to sort through that.

But just thinking in terms of connectivity, you have access to free information that only insiders would have had ten years ago.

You have access to all the price data all over the world for very low cost and transaction.

The commissions are zero in many markets.

I think it’s a really good time to be a trader.

If you’re in the U.S., the micro futures are pretty liquid and you know before you might’ve had to try to learn to trade with a $20,000 account.

Now if you limit your risk, you can learn to trade with a $2,000 account.

I think that’s one thing.

I think the new asset options are becoming a bigger piece of the puzzle and there are more possibilities for ways to trade options.

I said there’s some of the scam stuff out there, fake gurus, but there’s also a lot of really good research being published.

There are a lot of academics that are publishing fully legitimate research that you can just execute.

The funny thing is when it’s published, it usually stops working, but at least it can provoke ideas for you to research.

There are people like yourself who are teaching people how to develop systems, and how to manage risk.

I think some people are doing the work that you’re doing where you’re advocating for…

A sane approach to trading that somebody can do over and over for a long time.

It’s not just about flashy marketing and a way to get rich quickly.

Some people are telling the truth and telling it like it is.

I think that was a little bit harder to find when I started. There’s not so much information.

Rayner (02:00:29)

Earlier you spoke about that you’re more than happy, like for example, the moving average, you have data to back it up.

But were there instances where maybe someone reached out to you…

“Hey, Adam, maybe this is something that you’re missing, or this is my piece of research”

That led you to maybe change your mind.

Did that ever happen?

Adam (02:00:39)

In some cases.

We developed and now published something called power levels, which are based on geometric interpretations of short-term price action that are super effective support and resistance levels.

I try to strike a balance between being open-minded

But not being too easily misled by things and I’d looked at all of the levels that people publish, like the Camarilla levels and the pivot, all these different pivot levels that people publish over the years.

I found that none of them had any statistical edge, but somebody pointed out…

Sent me an email and said that in his work, he had found some edge to some levels that I had hinted at in my work and suggested that I do more research on them.

That project was provoked by somebody who suggested I look deeper at something I’d done myself.

The one thing that I like is the Fibonacci levels, but I also don’t find any value in those.

Interestingly, you don’t get mathematical refutations of those.

The people who email me about things like that will tell me about the great trades they made based on Fibonacci levels, which of course is not proof, but they’ll talk about how mathematical it is.

But they don’t have mathematical backgrounds.

It’s a little bit unusual.

People sometimes send me manifestos of trading ideas or some secret they figured out.

Somebody sent me something where they had tied cycles into some relationship with the pyramid at Giza.

You do get a good deal of semi-crazy stuff, but who knows? Maybe some people sent me some things that I missed the value of, but I find more than specifics.

My interaction with people provokes me to be careful and precise in my thinking. It’s made me nailed down and people have sometimes pointed out some things that I might be missing.

Rayner (02:03:14)

I find that you’re a pretty straightforward, NO-BS person and with such a personality, it’s bound to offend people, especially if they hold certain beliefs that are very dear to their hearts.

I won’t be surprised if you get several hate emails coming your way, because you kind of crush their beliefs.

Have you ever encountered such emails and how do you deal with that?

Adam (02:03:35)

One of the things that I know about myself, and this goes back to the Tradecraft course that I took.

We have people take a personality test early on.

I know from my personality profile that measures of politeness, I’m very low.

I think I’m in the second percentile in politeness.

It doesn’t bother me to offend people.

I’m kind of okay with that, but over the years, some people have gotten upset.

When I was publishing macro research and institutional research, I correctly called the top of the gold market years and years ago, and I got death threats.

More than one person thought that it was appropriate to send me an email threatening to kill me because I called the top of the gold market.

What happens, I think…

Like if I make a statement, like there’s no objective edge in Fibonacci levels, people are more likely to be just dismissive.

They’ll say…

“Oh, that guy’s stupid. He doesn’t know how to use Fibonacci levels”

The famous thing you’ll get thrown back is…

“Well, you’re just using them wrong”

Maybe they don’t work for you, but they work for me.

There could be some truth to that too, but they’re also

I guess when it comes to doing quantitative work, the thing that I have lived by is that you can’t have something that is both significant and invisible in the data.

If you tell me that Fibonacci levels are super important, I should be able to structure some kind of test that shows there’s some kind of unusual activity around Fibonacci levels.

If I can’t and if we keep going at this, and what you can’t come back and tell me is…

“Well, you can’t see it in the data”

It can’t be both really important and invisible.

It just doesn’t work like that.

For instance, if you do intraday tests with Fibonacci levels, you’re going to find they look like coin flips.

If you do intraday tests around the intraday high and the low, you’re going to find they don’t look like coin flips.

There’s very definitely an influence there. And if you do Intra-day tests looking around round numbers, you’re going to find something that’s somewhere in the middle.

I don’t know how we think about that.

You’re not going to find something that’s statistically significant, but it at least shows some hint that there’s something granular happening there.

I try to think about trading problems in a scientific way because when I put on a trade, every trade is a test of a theory.

If I put on hundreds of trades, if I had the wrong idea about the way things work, I’m probably going to lose money on this trade.

It’s worth my time to figure it out, and I guess to figure it out correctly without losing money on it.

I have tremendous respect for tradition.

As a musician, I very much live in tradition and you mentioned cooking, I’m trained in classical French cooking and that’s a very important part of how I think.

I cook Japanese and I cook Italian and these traditions are very important to me.

But I think in technical analysis, what we have or in trading in general, what we have with tradition is kind of this mishmash of stuff that a lot of it just doesn’t work.

I am pretty willing to look at some deeply cherished belief of trading and if I can’t make it work, I’m not convinced that the person who wrote it was as deserving of honor as we might think.

Rayner (02:08:10)

Awesome.

Thank you so much for your time today, Adam. I appreciate the depth and details that you go into, especially when we talk about the patterns, the way you manage your trade, and your risk management.

Very interesting to learn about your personal life, to know that you’re born in places where there are forests, there are trees.

Not like now, everywhere is urban.

I’ve been wanting to ask you earlier, how it must be really good, I mean, at least from my point of view, to be around nature where the mind can just relax and not be around those high-rise buildings and cars, which is what I’m experiencing right now.

I think that was beautiful to know that was the environment you grew up with, which is something that I think most of us are lacking right now, given the circumstances that we are in.

Anyway, thank you so much for your time again, Adam.

I appreciate you.

Thank you for being on the show.

Take care and I will talk to you soon.

Adam (02:08:50)

This was fantastic. Thank you, so happy to be here. I’m honored, thank you.