Part A · Read — Chapter 4
Regime: trend vs range vs chop; fair value
After this: classify any chart as trend, range or chop in one look, and switch tools to match.
Green, red, orange
He circles periods by regime: green is up, red is down, orange is sideways. "The way you screw up in markets is by trading these red periods as if they're green", or by treating orange as if it's about to turn. A trend is a persistence assumption: if it's heading top right, assume it keeps going top right until it stops.
Match the strategy to the environment
Don't mean-revert in a strong trend, don't buy dips in a downtrend, and don't run a trend system in a market that isn't trending. "Think big enough during expanding periods" and not too big in contraction.
| Trend tools (200s, buy HLs) | Range tools (lows→mid→highs) | |
|---|---|---|
| Uptrend | ✓ | ✗ (you sell too early) |
| Downtrend | ✗ long-only: stand aside | ✗ no dip-buying |
| Range / chop | ✗ whipsawed | ✓ or step away |
▶ Rational 2:02 ▶ Rational 2:36 ▶ Rational 5:34 ▶ Transition 6:23 both
The "magic trick": MAs draw the circles for you
Hide the circles and show only the 200 MA/EMA, and they depict the same regimes. A trend has to skew the averages. Sideways shows up as price braiding through them.
Count your trends
Count how often your bias flips. One bias for ~35 days over 40% of price is a trend. Four bias shifts in a week over ~8–10% means the environment changed. "10 days, one outlook; three days, three different outlooks: maybe you're just getting chopped." Once you're at three flips, stop doing trend analysis and draw a range. "Fool me three times, we're probably not trending anymore."
▶ Rational 13:16 ▶ Transition 13:39 ▶ Level to Watch 15:13 ▶ Fear of Chop 4:45 ▶ Transition 16:05 both
A weak reclaim is a tell
After a −30% week, a trend reclaim that gives only +5% ("abysmal") and then breaks back down makes that high a deviation. A reclaim should resume the trend by a directionally proportional amount. If it doesn't, expect chop.
▶ Rational 12:56 ▶ Transition 11:12 ▶ Fear of Chop 1:55 ▶ Fear of Feb 2:16 swing
Range mindset, or step away
Nothing significant happens inside a range. He stopped caring about the 15m 200s in a ~5% range, and only the break matters. "Confirmation" just means higher probabilities, nothing is ever confirmed. In chop, "take two steps back". If the range breaks down, use "vacation mode": take weeks off and come back to buy 20–40% lower.
▶ Rational 15:03 ▶ Level to Watch 16:13 ▶ Level to Watch 16:47 ▶ Level to Watch 16:09 ▶ Fair Value 3:28 both
Range = fair value being built
A long range is "value being built, it's fuel, the market deciding that this is a fair price". Anchor a VWAP where the range starts and it traces fair value. The longer price spends there, the bigger the move when it leaves: at least 30–50%. Repeated tests of the range lows aren't strength.
▶ Fair Value 0:41 ▶ Fair Value 1:06 ▶ Predicted Drop 4:46 ▶ Predicted Drop 8:11 ▶ Fair Value 1:29 both
Expansion = repricing. Don't fight it.
A break out of fair value means the market has decided price was mis-valued. "Eventually this sideways will expand… you don't want to fight it." No revenge-shorting the leg, no fading it. His history: a ~2-month range led to an exaggerated leg up, a ~3-month distribution led to −50%, and the 2018 bottom (~130 days at ~3.8k) led to ~+230%.
▶ Fair Value 0:10 ▶ Transition 17:25 ▶ Predicted Drop 5:59 ▶ Predicted Drop 6:59 ▶ Predicted Drop 9:01 both
If → then
- Bias flips ≥3 times in a few days → stop trend analysis, draw the range.
- Trend reclaim gives a measly move and fails → it was a deviation. Expect the old trend to resume.
- Inside a range → ignore LTF MAs. Act only on the break.
- A long time at fair value (AVWAP from the range start) then a break → don't fight it. Expect 30–50%+.
- A major range breakdown → vacation mode. Rebid much lower.
- Range lows tested for the 5th+ time → overcrowded. Wait for LTF strength first.