Dalton Unplugged

James Dalton (aka Jim), author of Mind Over Markets, is a discretionary trader and uses the Market Profile to organize the Data. He has over 43 years of experience trading the markets and though he retired from the full time business, he was in Bangkok in 2016 for Traders Carnival to talk about his approach, nuances, tips and common mistakes, as he believes to teach how to catch the fish rather then feeding a fish.

Jim talks about the auction process and how the purpose of the auction is to travel from balance to imbalance and back to balance.

In a two way auction process the market participants of a day time frame tend to play to the exactness of levels and in that process tend to break value area levels by few ticks and come back into value leaving an auction failure. Markets hate precision. The people who are obsessed playing to the exactness of levels can enter into emotional trades and the other players are waiting to jump in so that they can be wiped out.

Most traders are anxiously looking and trying to find a trade, and if you're trying to find a trade, you will probably find a trade but it won't be the right trade. It takes a lot of maturity to understand that if you get into the flow of the market when the trade is right for your timeframe you will recognize it.

He talks about how volume is key. If we break out of a trading range and volume decreases, probably it's not going to be a successful break, but if you break out of that range and volume increases then we've a good chance to get a successful breakout.

Jim mentions the three biggest mistakes most traders do. First mistake is being 'too anxious' to trade in the morning. If we're within yesterday's range in balance we want to have some patience, but if you're outside of yesterday's range the chance for a big day are much higher. Second thing they do is trade 'too often'. Instead of looking for 2-3 trades a day, a lot of these traders are looking for 10 trades a day.

The third big mistake traders make is putting their stops 'too tight'. They believe that they're being prudent by having a tight stop when in fact they add up a series of unnecessary losses. They're spread between bid and offer and all transaction costs and it gets quite expensive.

He use market profile to identify market structure and place the stop near someplace that would violate that market structure. He believes that's the best way to control risk. The worst stop we can use is just the money stop. The second worst thing is move the stop to break-even and that's actually a terrible thing to do because it's random.

He talks about preparation. We should prepare every day by writing three potential scenarios that could happen. The worst trader is a trader that has only one idea. He may get lucky but there's too much randomness in the market. We don't know that's going to happen and if we don't have contingency plans for the unexpected, we're scrambling and when we scramble we do some really silly things.