Throw our that hard-to-understand book and expensive software. Learn how to analyse price movements and play the market in a few easy lessons.
"There is less to trading than meets the eye" was a statement made by Richard Dennis, a man who stated with only a few thousand dollars and took more than US$200 million out of the share and futures markets. He was saying that profitable trading and price movement follow a simple set of rules.
"I only use what works at the beach" remarked Larry Hite, one of the top hedge fund managers in the world in an interview with Futures Truth Magazine. He meant that at the beach the tide ebbs and flows, the waves crest and recede, and the sun rises in the East and sets in the West. These are never-changing phenomena.
In further discussions, Traders Tool Bow will reveal what works at the beach with redard to trading.
What is price?
Price is force. Price is power.
Traders constantly act on decisions to buy, sell or stand aside. There is a never ending flow of news, rumors and emotions that affect the markets. When bad news hits the markets and price fails to go down, that means it is a sold-out market and the market may soon go up. If price has risen strongly and more good news hits the market and price fails to go up, that means the market is over bought, there are no more buyres and the market may soon plunge.
Three models of price action
1) The first and simplest model of price action is the price movement within a single price bar. It defines the range of price movement from high to low and gives opening as well as the settlement price.
It is measures of the supply and demand forces of the day. On that particular day, the price closed in the upper part of the bar, telling us that ownvvers of this share expected higher prices in days to come. This simple one-price bar price movement is a fundamental model of price action one of three.
2) The second model of price action is line relationship.
Line relationships require more than one price bar. When a shares takes out a previous day?s high and closes higher than the high of the previous day, it is called line continuation up. There is no guarantte that price would go higher but probability favours more advances based ont eh one-day continuation. No matter how great the probability of a price advances, you must always protect your capital by defining yoru risk before entering the trade. The second examples is line continuation down. When a share takes out a previous day?s low and closes lower than the previous day?s low, it is said to be a line continuation down. It means sellers were strong enough to break resistance and close the warrant lower. This should alert you that the price may go lower. In the shares market, a 1-day line continuation up or down is not as significant as a 5-day line continuation. Five trading days represent a week of trading and for the price to take out five days of highs is very significant and is a situation that should be acted upon.
3) The third model completes the picture.
The third model of price action is the swing. The swing model combines the single price bar model with the line change model and adds a pivot. It is use by many professional traders and works well in all time frames.
The pivot is defined as a low after the market reverse direction. It provides a strong support point for you to place your protective stop loss under. A possible trade would be to buy a re-test of the support provided by the line. Re-test means to come back to a support or resistance level. The reason this happens is because professional traders want to see how strong the support or resistance is before adding more positions.