What is space in trading? And why does it matter??
Should traders pay attention to space?
Is it something you must know about, and “see” on the charts to find good trade setups?
Or is it a load of hooey??
Find out what Darren and Walter think about space, and whether it is something you should pay attention to when you analyze the charts.
Download (Duration: 19:48 / 22.6 MB)
In this episode:
01:37 – space
06:37 – potential buy
08:28 – technical analysis
09:06 – human behavior
11:13 – consolidation
13:09 – space versus consolidation box
14:45 – filters
15:40 – mental obstacles
18:19 – no control
19:27 – letting go
Space can help you identify turning points in the markets. [Click To Tweet].
Too much analysis can lead you to feel responsible for losing trades. [Click To Tweet].
If the market is consolidating, it is probably not reversing. [Click To Tweet].
Darren: But for me, that’s exactly the time that you should be taking the trade. In other words, it doesn’t look as nice to trade, it doesn’t feel right and in my experience those were the trades that win for me.
Announcer: Two traders, Darren and Walter, pull back the curtain on profitable trading systems, consistent money management, and profitable psychological triggers. Welcome to the Two Traders Podcast.
Walter: Welcome back to the Two Traders Podcast. I’ve got Darren on the line. How are you going today Darren?
Darren: I’m pretty good Walter.
Walter: So we’re going to talk about space Darren. First of all, let’s start with this, I know a lot of traders like myself, like to trade reversals. They like to find trading points. I know that you do a lot of that too or some of that anyway. It doesn’t really matter if you’re talking about a reversal point inside of a trend or just a straight up. This is where the market is going to turn around here or go away from this spot. A lot of traders like to hang their hat on, you know, the fact that “Hey look, I found that spot on the chart were reverse” and they feel like they’re getting on a reversal.
For whatever reason, it’s easier for most traders that I’ve come across, to find reversal trades than it is for them to jump in with the trend. Even if you’re trying to trick yourself and say “I’m getting this reversal where the market is going counter trend here and I get on in this reversal even if it is in the midst of a strong trend.”
One of the things I look at is what we call space. The room to the left. We don’t know when there’s a turning point on the chart but we know they have certain characteristics. One of them is that they have space or room to left, which is where the markets recently printed an area on the chart where it has not been there for a while. It’s starting to roll over and trim away from that area. It doesn’t matter if it’s making a little valley or a little peak but this is something that I look for in terms of highlighting a possible turning point trade or reversal trade.
My question for you is, Darren, how do you view space? Or do you even use it when you’re looking at finding these exact same places on the chart? Again, it doesn’t really matter if it’s a reversal within a trend like a little retracement and you’re getting in the reversal of the retracement or if it’s just a turning point on the chart. How do you use space or is it something that you even use in your analysis?
Darren: Well, I don’t use it myself personally. I tend to take the approach of trading all of the reversals and hopefully price will have to move away at some point and that’s where I make my profit. Obviously, sometimes it doesn’t always go my way. Sometimes I’m just paying for the losses I made from the failed reversals.
The thing that jumps out of me initially about it is, when you look at the charts, there’s reversals where price hasn’t been anymore… I mean, hasn’t been for a long time. Visually they look more appealing and I imagine that, that reinforces people’s belief and use in something like that.
If you look at the human side of it as well, if price hasn’t been at that level for a long time, then the people were looking at a reversal from the high, the people have been buying. Well obviously, also be looking and feeling that perhaps it’s a bit extended and they want to take profit or cover their profits etcetera. Imagine fear will be creeping into the people buying and the people will be looking to sell. To them it looks attractive. Visually it will stand out because it’s sticking out the top of everything.
Whether there’s a statistical advantage in trading them or not, I always sit on the fence with those sort of things. If you tested it fairly enough then, there’ll probably might be a small advantage in it. Imagine when you scan a chart, those areas when you look back over price, look really attractive.
I think your mind may just discount the areas where it also be doing that but it didn’t turn around. You’re focus on the ones that worked out and discount the ones where it didn’t quite work out.
Walter: Yeah, sure. That’s a hindsight bias or a confirmation bias that we could be using. Let me get this straight, let’s say that, you saw a chart where there was a swing high – we’re talking about the EUR/USD and I don’t know, there was a swing high at 1.20. It turned around and started going lower. It made a swing low where it turned around at certain point higher, at 1.15. Then it came back up to 1.18 and made another swing high.
That 1.18 swing high and let’s say, the first swing high at 1.20 like hadn’t bent there a long time so what would you call space. It have room to left. So the 1.18 is actually just as valid to you as the 1.20 then. You just take them all as long as it’s bending on the chart, you’re in it?
Darren: Yeah, 100%. To me, there is no difference because let’s be honest, a large percentage of the people looking at that chart will be discounting the chances of it going short there. Like you say, made a new high but for me that’s exactly the time that you should be taking the trade. In other words, it doesn’t look as nice to trade, it doesn’t feel right, and in my experience those are the trades that win for me.
I don’t rely on my feelings to lead me and correct me when it comes to trading. For me, that would be just as valid a point to sell.
Walter: Yeah, right. If it came back down and made a swing low at say 1.14, a hundred pips higher than the previous swing low at 1.15. Now it’s tightening up. It’s making a higher lows and lower highs. It’s starting to constrict here. You would still take that high, like that swing low would be a potential buy then right? Is that right?
Darren: Exactly. If the market turns around and breaks out then I take the trade. I don’t really look at what’s happened in the past. I want to be really clear that, that doesn’t mean doing some analysis on how price is moving could not be something you can use really successfully. The important thing for me is, I think, it’s really difficult for people to do that, then execute a trade then manage the trade and then exit it.
I’m just trying to discount as much information as I can. Just leave me with a simple call I can execute well. Also, if my trade doesn’t work out, I’ll find thing in a lot of analysis, a particular technique for analyzing the market, that I worked on and now, start to feel confident about. If the trade doesn’t work out, your gut instinct is going to be: to blame yourself because you must’ve made some mistake with your analysis.
Quite often what you’ll do is, you’ll look at what’s happened after you took the trade and with a bit of hindsight, you’ll say “Oh, well okay, didn’t quite fit my criteria”. You’ll start making excuses. Whereas, I like to say “the market decides at the end of the day” and really what the best I can do is just execute my plan and owns the pie of that one market. That’s something really out of the ordinary way.
My reasons for not liking that is really because I think humans find it difficult to do that. I suppose that, it must be true because a lot of people, trade using technical analysis and they find it very difficult to do. I just want to stress it’s not because I don’t think it doesn’t work.
Walter: Right, yeah. A lot of people probably would say that fundamental analysis is quite popular too. I don’t know how to go with that either. Like, they’re going to be lowering, the Reserve Bank of Australia, is going to be lowering rates for the next couple of years so we’re just gonna sell the odds here and takes off.
Darren: Can I just ask you to be clear, the reason that you like to use this idea of space, is that because of human behavior? And because you think the fact that it’s trading at new level means that, the seller is going to have this feeling that they want to cover their profits or take profit. Is it a good value place buy or is it something else going on in your head with that?
Walter: Yeah, great question. For me, it always comes down to two things. Space will be like further on down the list. But, the most important thing is, if I’ve got a place on the chart where it looks like to me and, everyone is going to look at it differently, but if it looks like to me that price is repeatedly reversed okay.
For example, if you’ll look on the EUR/USD 1.19 around 1.19, 1.19/30 that’s the spot where the EUR/USD has historically found support and resistance. Everyone can go back on your chart and decide for yourself.
Somewhere around 1.19, 1.19/30 is usually a spot that people can identify. Let’s say, the EUR/USD hasn’t been to 1.19, it’s going to be above 1.19 for five or six years. Then all of a sudden it comes down to 1.19 and it prints what I would consider to be a reliable viable reversal pattern at 1.19. Then to me that’s a really good spot to buy. It’s more because, it’s on the support and resistance level. It hasn’t bend there for a long time and that’s what space defines for you is that, it hasn’t bend there for a long time.
I would challenge anyone who is listening to this to try and find these spots. Try and go to your charts. Try and find a spot where the market has repeatedly consistently hit a level over and over and over again. Doesn’t matter if it’s the bottom or the top and it’s hit it over and over again. When I say over and over again, I mean, if you’re looking at say, 10-20 candles, half of those candles or 40% of those candles are hitting that level. Those spots are generally not reversals.
If you can draw a box around some price action on your chart, those spots are usually not a spot where the market goes there and then doesn’t come back for a long time. Usually that’s a consolidation. What we call consolidation usually that’s just the market is gonna keep going from there right. That’s not the high or the low. In other words, the market generally in my opinion, doesn’t hit a high 10 out of 20 candles. Then go away from there and not come back there for 6, 12, 18, 24 months. That’s a rare thing to happen.
Now contrast that to what we’re talking about here, we’re just like a really sharp probe into the.. When I say sharp, I mean one or two candles hit it and then it immediately turns around from there. Doesn’t matter if it’s top or bottom but it hits there and then it quickly goes away. The candles don’t come back and hit it. Yeah, sure, could be a double top or double bottom but it’s not where it hits it 15x.
That’s all I’m saying. Your point about seeing these only when they work out is absolutely true. If you go back and scroll back on the charts you’ll say “Oh wow this happens every single time”. What you don’t see are those times when the market hits that level, sharply turns around and then later on blast through the level and keeps going right? That’s definitely the case.
Walter: Yeah, you’re mind kinda skips over those and you do and even know you’re doing.
Darren: That’s right. Skips right over those. That’s absolutely right. Just because it’s printed a reversal on the zone, space doesn’t mean that, it’s gonna go 700 or thousand pips away from that area. Sometimes it may only go a 100 pips or 200 pips or whatever then reversing keeps going. In other words, it’s what’s on the trend and that is just the pull back in the trend. You just don’t know.
All I’m saying, if someone puts a gun to my head and say “Hey Walter, now look you’ve got to find a reversal on the chart”. If I have to broadly define what was more likely to be a reversal whether it’s a sharp probing reversal like we’re talking about.
The sharp bounces with space versus a consolidation box where it hits that level over and over again between 40-50% of the candles radiant. I’ll always go with that sharp reversals that has space rather than that consolidating box you.
I believe that my testing and my training has shown those consolidating boxes were more likely to be just the market is going to eventually blow through there and keep going.
It’s not going to be the spot where the market ultimately finds the bottom. Everyone has to do testing and everyone have to see, you have to see for yourself on the charts. I guess the big deal to me is that, it’s the pattern plus the spot on the chart and then the space only just answer that “well, yeah, this is another which is really a sharp thing.”
Do you know what? It doesn’t have to be that complicated guys. If you’ll look at the line chart and I’m guessing if I were to ask you Darren, you’ve got a couple of reversals on the chart or turning point on the chart. Facto high or facto low whatever you wanna call it. You don’t actually qualify them and say “well, this one is better than that one because the line chart shows a sharper turn”. If it’s kind of rounded and slow to turn around, would that be any worse a signal than a really sharp one that has really a strong angle.
In other words, it was a candle up and then a candle strongly down would make that sharp angle. Whereas, the other few candles are just sitting there and they slowly rolled over to be more rounded peak high or peak low. Does it matter to you?
Darren: No, makes no difference at all.
Walter: Yeah, right. That’s what I figured. I figured you’ll gonna say that. I guess, one thing that I wanted to ask is, if you trade like I do and you have these filters on which are like, “I think I can find the better spot to take a trade so I won’t take this one”. Versus you, where you’ll say “look, I’m just gonna take them all, and some of them gonna shake out”. What would be some of the things, the mental hurdles that you have to overcome to trade the way that you do?
I have some in my mind right now but I’m not sure if you consistently see that traders would do this. For example, when you trade like I do, some of the problems you would have would be, you blame yourself. Cause you go all, I had identify this is really a good signal or didn’t work out. Maybe I gotta change what I do, maybe I blame myself for being an idiot or whatever.
I mean people play these mind games but when you trade like you do, where you’re just letting it go. What would be some of the mental obstacles or difficulties that people would have to push through to consistently apply this strategy?
Darren: There’s two main ones I think. One is, what we’ve learned already. When you come to trading, you read books about trading. You go on forums and you learn stuff. Obviously this stuff that appeals to you initially will always have like a bit of a luck on you. It’s quite hard to start right now of, as good information.
That’s quite difficult and usually that’s associated with whoever is teaching it to you saying “It’s simple. Look how well I did. I’m making lots of money” so you know already you’ve kind of bolt in to that information. It’s very hard to take on anything that contradicts that. So, that obviously is the first hurdle.
Also, that is teaching you that although most of the time that information has an add ons saying psychology is important. It’s not the way they don’t put over in a way that is equally as important as a particular chart patterns or entry techniques or things like that. So, that’s one of the hardest things.
Then going beyond that, when she get past at and usually, I find that most of the people who start to look at my style of trading have been through that for a long time. Really tried and tried and not being able to get to grips with it or make progress. Now that kind of thinking “well I’ve got to try something different because I can’t go on like this”. So that kind of helps, deal with that.
The other one, is accepting that you’re going to make your money out of something that you have no control over at all. Essentially my style of trading, it relies on what the market does this week. If the market is choppy this week, you’re going to lose money. If the market moves in a sustained swing, it could be up and down but as long as it makes a decent moves away from one price point to another, you’ll make money.
That seems great at first but when you start observing the fact that let’s say, you’re looking to make your living now with trading when you’re trying to give in to the notion that you’ve got no control over it. That’s quite hard to take on when you put your money on the line.
You can have an influence because when short in the trade. You have to make judgment calls about when to take profit and when to manage your risk. But even with that, there’s no definitive answer. You have to wait and see what the market does.
Then you have to make your best judgment call using techniques of assessing yourself, looking at higher feeling, looking at the market. A little bit of experience from before, from watching markets move but with all of that there’s a complete lack of control that you can nail down and rely on. That is a really hard thing for a lot of people to do.
Walter: Well, that’s all the time we have now for Part 1 of Trading With Space but in Part 2 you will hear why being in control is dangerous for Forex traders. You’ll also see why Darren doesn’t care at all about missing out on the big market move. Finally, how traders get paid by putting money behind insane ideas. All these and more in part 2 of Trading With Space.