Understanding the Patterns – Price

Price Patterns


Technical analysis, by its very nature, deals not in certainties but in probabilities. The key to success in trading lies in focusing – more often than not on what has already happened in the market. Too often investors buy and sell a stock not knowing whether it is in an uptrend or in a downtrend, near a top or near a bottom, or at a resistance or support level. That is where price patterns come in picture. Knowing what to look for as prices change helps the investor make better informed buy and sell decisions.

The four basic price patterns are:

Rising prices (Upside)
Declining prices (Downside)
Sideways prices, and
Repeating cycles of rising and falling prices.

Contrary to popular belief, you do not need to know what the price will be in the future to make money. Your goal should rather be to improve the odds of making trades. The use of technical analysis will give you an edge; an edge that you would not have gained without technical analysis, even if your analysis is as simple as determined the long intermediate and short term trends of the security you are trading.

Volume and Price

Volume breathes differently than does price. Volume as a tool works well on daily charts but consistently damages intraday signals. It offers both early warnings and dead ends, often at the same time. Volume reflects crowd psychology that often makes little sense in the short term but turns highly predictable at key intersections of trend and time. A successful trader needs to have an intelligent interpretation of the herd mentality that drives price change, develop an understanding of volume’s impact on the chart, learn when to use it and how to ignore it when required.

Opportunity arises from recognition of key volume events and a correct interpretation of the crowd behaviour. You need to invoke both left and right brain functions to measure the complex struggle between greed and fear. However, keep in mind that profits depend on price change alone. The price itself offers the best indicator for price changes through out the pattern cycles. As price rises, it predicts that further gains will follow. As it falls, odds increase that it will fall even further.

Precisely, this is what we call the market sentiments. Most or so to say maximum times it happens that if some large volume is sold out than all the investors of that particular script or let’s say stock start to decrease their volume by selling the hold positions and it works the other way round the same way i.e. if a large volume is purchased than investors start to hold positions thinking that it might rise in near future.

Here one thing to keep in mind that news play a vital role, most of the times investors specially the ones who have entered the market recently start following the pattern based on media news without deep study about the script and fall in trap, whereas, successful traders have their plan handy at all times before entering a trade.
Remember, as I conclude my every post saying your ultimate goal is to come out as a Winner!
 

Understanding the Market Structure

Market Structure


Investors keen to outperform the market – that is, investors looking for returns higher than the market average – take to active trading, employing various methods and strategies.

Active trading, including day trading, is better understood by distinguishing it from buy-and-hold investing. In buy-and-hold investing, investors disregard day-to-day market fluctuations essentially for two reasons: one, they believe that effects of short-term movements are really minor and, two, because they believe that short-term movements are almost impossible to predict with any degree of precision.
Active traders, on the other hand, are a different breed. Active traders are driven by the urge to look for profit potential in the market’s temporary trends, which means trying to sense a trend as it begins, and to predict the direction in which it would head in the near future.

However, a larger number of trades does not necessarily translate into greater profits. Outperforming the market, which is what active trading is all about, is not to be mistaken for doing many trades; rather, the focus is on maximizing opportunities by employing a conscious strategy.

What are Technical Indicators

Technical indicators are the squiggly lines often found above, below and on top of the price information on a technical chart. Indicators that use the same scale as prices are typically plotted on top of the price bars and are therefore referred to as “Overlays”

A technical indicator is a series of data points that are derived by applying a formula to the price data of a security. Price data includes any combination of the open high, low or close price over a period of time. Some indicators use only the closing prices, while others also incorporate volume and open interest into their formula. The price data is entered into the formula and a data point is produced.

For example, the average of three closing prices is one data point [5,200 + 5,300 + 5,400)/3 = 5,300]. However, one data point does not offer much information and does not make an indicator. A series of data points over a period of time is required to create valid reference points to enable analysis. By creating a time series of data points, a comparison can be made between the present and past levels. For analysis purposes, technical indicators are usually shown in a graphical form above or below a security’s price chart. Once shown in graphical form, an indicator can then be compared with the corresponding price chart of the security. Sometimes indicators are plotted overlaid on the price plot for a more direct comparison.

Technical Indicator Offers

A technical indicator offers a different perspective from which to analyse the price action. Some, such as moving averages, are derived from simple formulas and the mechanics are relatively easy to understand. Others, such as stochastic, have complex formulas and require more study to fully understand.
Technical indicators on the other hand, prove disappointing. I have personally tried many different indicators in the resent past and each one, in turn, has proved more disappointing than the other. May be it’s my individual perception and results may differ person to person. Perhaps for those who trade much longer time frames – weeks, months or years – some of the indicators may help, but for short-term traders there is not much help from most of these technical indicators. And virtually all indicators are correct after the day is over.
 

Trading Rule # 11 & 12

Trading Rule # 11:  Control Against Minute-by-Minute Movements and Take the Market Seriously

Watching the ticker can be fun. It can even be mesmerizing. Many people, though, enter a trade and then anxiously watch the tape with their eyes glued to the screen, almost as if their whole life is depended on this one trade. Or, they go channel surfing, moving from one business TV channel to the next, their mind obsessed with the outcome of that one particular trade.

This kind of behaviour does no one any good. Rather, what it does is raise your blood pressure and add to your stress levels. Do your blood pressure a favour, enter the trade if all of your trading rules are met, put a stop loss, and go take a nap, or go to a movie, or play with your kid, or help your wife with the cooking.
It’s not that hard to make money either in a roaring bull market or a raging bear market. Don’t take yourself to be a genius when everything is going great for you. Equally, don’t think of yourself to be dumb when nothing is going right. The market whips us all now and then. The whipping usually comes just when we think we have got it all figured out.

If we see an analogy with the possible moves in chess. Just after the first move, there are 400 moves open for both players. Each player can move any of his 8 pawns 1 or 2 squares and the knights each have two squares they can go on to- and, hence 20 x 20 possibilities. After two moves apiece, there are 72,084 possible moves available, after 3 moves apiece, there are 9+ million moves possible, and after the four moves apiece, there are 318,979,564,000, or about 319 billion possibilities.

Well those are the numbers of possibilities in a game of chess which is played between only 2 players. In contrast, the trading game has hundreds of thousands of players and, therefore, practically infinite number of possible moves available!

So, you must learn to put yourself in control when dealing with the market. Remember, the market, and only the market, is always right, and it’s we who could be wrong.

Trading Rule # 12:  Always stick to your Rules

If you follow the rules you have made, then you have a better chance of succeeding. This applies to any aspect of life. Keep things simple and follow the rules. Ignore the rules and you will have no money.
The definition of successful trader is one who has his or her trading plan written down, who also applies risk and money management rules, and the one who then lives by those rules.

One final take on rules: take some time off to work out a set of trading rules that you believe work for you. Take a printout of the rules in large font and paste one copy on the top of your trading terminal and another in an even larger type font at a prominent spot in your trading room.
The above idea mind sound as a reminder. However, this is another rule which governs the law of attraction. If you will read my other blog www.deep-mindcontrol.blogspot.com then you will clearly understand how important this rule can be for you.

You see by following this rule you are giving auto suggestions to yourself about what you want to attract in to your life. Everything that comes to you start with an image in your mind and then it’s transformed in to any physical form.
This is my personal experience of applying Laws of Attraction in to my trading.