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Is There Power Behind That Move?
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Trading is simple. You look at a chart, make a decision, call your
broker and place your order. What can be simplier than that?
Yet, somewhere between looking at the chart and hanging up the phone
with our brokers seems to not be working quite right. This becomes
evident when the market is moving in the complete opposite direction to
where we wanted to go.
Now there is much to be said about trends, and the sayings abound as to
how we should be trading trends, 'in the direction it is moving!'
Yet, isn't it true that many will throw out that simple proverb to ride
every wish and wash the market throws their way? Look, back up a bit,
okay? It is really a simple thing to do!
Which way is the current trend going?
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1) UP - This is indicated on any time frame by the market making higher
bottoms and higher tops.
2) DOWN - This is indicated on any time frame by the market making lower
bottoms and lower tops.
Okay, we now know which way the market is going, right? Where do we get
in?
The best place to do this is after a retracement/rally. Using the
example of a market making higher bottoms and tops (reverse for down
markets), we would be waiting for the market to pull back down a
percentage of the last run up (range). We would expect this pull back
NOT to exceed 100% or the last move up. Therefore, we need to know what
price levels on the way down may actually cause the market to bottom so
we can enter. Once you solve for your price levels (and even better TIME
as well), you wait for confirmation where it starts to go back up again
and enter. Simple!
What is really nice is when it comes all the way back to the last
bottom. Now you have a double bottom that can turn into a powerful
upward move. If it starts to turn up after that second test of support
on the old low, jump in with a exit stop for risk control below the
bottom.
Okay, we have trend, we have entry at support (up market), and now we
need to know power.
What is power?
Power is the energy (masses of traders) actually moving the market. We
can note this by looking at volume. When the market is pulling back, we
want to note volume dropping off. When it turns to resume the upward
move off support, we want to see volume picking up. This confirms we are
going in the correct direction.
Also, we we are about to test resistance while going up, also note
volume should be greater when testing then it is when failing to break
through. Heavy volume the other way spells a weak force or power and
you'll want to plan your exit.
Again, reverse most of this for downward trending markets.
Happy Trading and...
Cheers!
:)
rick
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