Section 03 | Trading PALS – Price Action, Levels, …sceeto
Putting it all together into a Trading Strategy
If Bugs Bunny were a trader, I have no doubt that he would use PALS to trade.
We all know that Bugs Bunny was not only smart, but he also had a knack for readily surmising the lay of the land, which allowed him to be one, or more, steps ahead of his nemesis, Elmer Fudd.
Bugs always knew what the deal was.
While Elmer was busy laying a trap for Bugs, Bugs was already deep into a delicious carrot while proudly ogling his uber-response of a trap for Elmer.
The fondness that I have for the cool preparedness, and easy execution, of the time sensitive tasks that Bugs Bunny possessed is the same fondness for the cool preparedness, and easy execution that I have for PALS.
We use the PALS moniker because it comprises an easy to remember, handy check-list of the ‘must haves’ that need to be present before a trade can be entered.
PALS is simply and acronym for:
Chunking | How to organize your market data into relevant components.
PALS is a sequential market analysis model that allows you to leverage and combine all of your Tape Reading skills.
One key challenge into using a sequential, bar-by-by analysis of the market is that you collect and analyze lots of information.
PALS leverages ‘Chunking’ to help organize all of this data so that you can tackle every trader’s conundrum of too much information.
The following is from Wikipedia:
Chunking , in psychology, is a phenomenon whereby individuals group responses when performing a memory task.
Chunking is an easy way to organize the market data that you bring into your thinking as the trading day (or night) evolves and marches on.
Studies, such as George Miller’s The Magical Number Seven, Plus or Minus Two: Some Limits on our Capacity for Processing Information have shown that the probability of recall is greater when the “chunking” strategy is used. As stated above, the grouping of the responses occurs as individuals place them into categories according to their inter-relatedness based on semantic and perceptual properties. Lindley (1966) showed that the groups produced have meaning to the participant, therefore; this strategy makes it easier for an individual to recall and maintain information in memory during studies and testing. Therefore, when “chunking” is evident in recall tasks, one can expect a higher proportion of correct recalls.
The word chunking comes from a famous 1956 paper by George A. Miller, The Magical Number Seven, Plus or Minus Two: Some Limits on our Capacity for Processing Information . At a time when information theory was beginning to be applied in psychology, Miller observed that some human cognitive tasks fit the model of a “channel capacity” characterized by a roughly constant capacity in bits, but short-term memory did not. A variety of studies could be summarized by saying that short-term memory had a capacity of about “seven plus-or-minus two” chunks. Miller wrote, “With binary items the span is about nine and, although it drops to about five with monosyllabic English words, the difference is far less than the hypothesis of constant information would require (see also, memory span). The span of immediate memory seems to be almost independent of the number of bits per chunk, at least over the range that has been examined to date.” Miller acknowledged that “we are not very definite about what constitutes a chunk of information.”
Miller noted that according to this theory, it should be possible to increase short-term memory for low-information-content items effectively by mentally recoding them into a smaller number of high-information-content items. “A man just beginning to learnradio-telegraphic code hears each dit and dah as a separate chunk. Soon he is able to organize these sounds into letters and then he can deal with the letters as chunks. Then the letters organize themselves as words, which are still larger chunks, and he begins to hear whole phrases.” Thus, a telegrapher can effectively “remember” several dozen dits and dahs as a single phrase. Naive subjects can remember about only nine binary items, but Miller reports a 1954 experiment in which people were trained to listen to a string of binary digits and (in one case) mentally group them into groups of five, recode each group into a name (for example, “twenty-one” for 10101), and remember the names. With sufficient drill, people found it possible to remember as many as forty binary digits. Miller wrote:
“It is a little dramatic to watch a person get 40 binary digits in a row and then repeat them back without error. However, if you think of this merely as a mnemonic trick for extending the memory span, you will miss the more important point that is implicit in nearly all such mnemonic devices. The point is that recoding is an extremely powerful weapon for increasing the amount of information that we can deal with.”
Expertise and skilled memory effects
Studies have shown that people have better memories when they are trying to remember items with which they are familiar. Similarly, people tend to create chunks, with which they are familiar. This familiarity allows them to remember more individual pieces of content, and also more chunks as a whole. An example of this is a distance runner attempting to memorize numbers. Runners may chunk the numbers into different relevant mile times. This allows the expert runner to memorize more numbers by making them relevant to him or herself. As a result, the runner will be able to remember more chunks. A person who is not an expert or familiar with running times would have difficulty with that and ultimately be unable to memorize as many numbers.
For PALS we organize all of our market information by categorizing it into the following ‘Chunks’:
By organizing our market data into these chunks we can more readily track the markets movements and have known reference points which we can use to monitor the market for a trade setup.
In the PALS method there are only 2 entry setups. Reversals and Continuations. By limiting all entries into these 2 distinct chunks we rid our minds of undue clutter.
These 2 trade entry categories keep our minds focused on determining whether the market is more likely to continue on in its current direction or whether it is going to reverse direction.
If we are observing ‘Market Data’ chunks ( Price Action, Levels, …sceeto ) that generally correspond to an ongoing trend, then we will be looking for an entry location that will allow us ride that trend.
If we are observing ‘Market Data’ chunks ( Price Action, Levels, …sceeto ) that generally correspond to an the end of a trend, then we will be looking for an entry location that will allow to take advantage of a reversing market.
The logic behind PALS is pretty simple, yet very robust as it includes, what I believe, is a placeholder for the data most relevant to price movements.
This is the data that you need in order to make an informed trading decision.
Here’s the beauty of the flexibility of PALS. For each category in PALS (Price Action Levels, and …sceeto) you can choose from a plethora of events to meet the criteria for each category.
As long as each PALS category criteria is met with market information that you deem viable, you have a setup.
You can mix and match the events that occur within each category\chunk (Price Action, Levels, …sceeto). This ability to mix and match provides you greater flexibility when trading.
Another key difference between PALS and a standard technical analysis setup, is that in a standard technical analysis setup, you need specific events to line up at the same time.