What is Neoclassical Trading?

01/26/2013 7:00 am EST

Focus: STRATEGIES

L.A. Little

Contributing Editor, Minyanville

LA Little explains what neo-classical trading is and how it differs from pure technical analysis.

I’m here with LA Little talking about the neoclassical approach to trading.  LA, can you tell me a little bit about that?

Sure, neoclassical is a concept that I came up with over the last two or three years that attempts to look at supply and demand via the charts.  Classical technical analysis actually really didn’t do that, if you think about the patterns, things of that nature.

Right, right, it was about head and shoulders, breakthroughs…

Head and shoulders.  Now, some of that looked at supply and demand indirectly, but not directly, and so neoclassical tries to do that.  It does that through something I call anchor bars and anchor zones.  Anchor bars come in three types.  There’s wide price spread bars, there’s high volume bars, and there’s swing points, and swing points give you the ability to determine trend transitions, direction; anchor bars, anchor zones give you timing.

Well LA, there’s trend identification, but then there’s trend timing or entry timing.  How do the anchor principles that you use apply to that quandary that we all find ourselves in?

Yeah, it’s a particular problem that all TA deals with.  The zones typically end up where supply and demand is because high anchor bars, high volume anchor bars, or wide price spread bars tell you there was significance in that area, and so if there’s significance there, volume and price, that’s where you want to be looking, so when price comes back to that or price breaks over that, that’s a good place to be looking in terms of your timing and that’s where you can get the knowledge you need to make your move.

When you do your analysis before you write something for MarketWatch or MoneyShow.com or whatever, what time frame charts are you concentrating on?  Are you looking at the big, big picture, the daily and the weekly and the monthly and then dropping down from there, or do you spend all your time in one specific time frame?

It’s all three.  Actually, I have something called the trading cube, which is a visualization of three time frames across the individual stock, the sector itself, and the general market.

That’s really an efficient approach to capture a lot of information quickly.

You have to, and it basically is looking at nine charts across three time frames, three different things.  What you really want is, the research I did shows, about 80% of the time that if the markets going to go up, then general stocks are going to go up, too, so you certainly don’t want to be buying something if the market’s going down and right here in late-middle 2000, November, that’s what happening and people are panicking as a result of that.

Well, I know I don’t want to be caught buying something when the market’s going down, so thanks LA.  It’s great to talk to you.

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