Trend, Direction
and Timing
| It's easy to chase your tail before making a new trade. In
fact, most of us don't know what to look for before we commit
our capital. Simply stated, each opportunity should speak for
itself. The best way to decide whether a given trade does that
is to first answer a few basic questions:
- What is the trend or range intensity?
- What is the direction of the next price move?
- When will this move occur? |
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Concentrate on the three Cs to find the answers you need to make
the trade. Recognize trend-range intensity through time-frame
convergence. Predict price direction through the will of the
crowd. And align market timing through range contraction.
Markets alternate between up-down trends and sideways
ranges.
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| This is
true in all time frames. Price movement swings through
synergy and conflict as trends collide or converge. The
strongest trends emerge when multiple time frames stack
up into directional movement. The most persistent ranges
appear when multilayered conflict stalls price change.
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Use moving average ribbons (MARs) to study trend intensity.
These handy tools illustrate complex relationships through
simple interactions. Start by finding where current price sits
in the ribbons. Since price always moves toward or away from
underlying averages, each new bar reveals characteristics of
momentum, trend and time. Tie MARs together in a logical way.
For example, use 20-, 50- and 200-day averages to view distinct
short, intermediate and long-term trends.
The interplay between averages exposes market phases and trend
acceleration. Look for a bear market when MARs flip over and the
200-day MA sits on top. Look for the bull to return when it
crosses back and each MA lines up, from shortest to longest.
Expect choppy action when averages criss-cross out of sequence.
Price, for example, can bounce like a pinball when it gets
caught between inverted averages.
Volume defines the crowd. Studying market volume has two
primary functions. First, it gauges the strength of ownership
and the passion of the owners. Second, it filters the crowd's
divergent impulses and predicts their herd behavior. Capture
this vital information with a simple volume histogram
(preferably color-coded) and an accumulation indicator such as
on-balance volume (OBV). Volume is deceptively simple. The lack
of a clear relationship between price and volume undermines
accurate prediction. Volume leads the crowd as often as it lags,
but always makes perfect sense in hindsight. Examine price
action closely before timing trades to a volume pattern. And
move quickly to other opportunities when the crowd gives mixed
signals.
Range-bound markets lower volatility and dissipate crowd
excitement. Eventually congestion reaches a balance point where
a new trend can begin. This cooling-off phase sounds simple, but
it's very hard to trade profitably. Declining volatility fosters
crowd disinterest, profit taking and indecision. The chart draws
a series of narrowing range bars (the distance from bar high to
low). Then a new trend explodes just when everyone turns their
backs, but most miss the trade because it gathers no crowd until
it passes.
Find the narrowest range bar of the last seven bars (NR7) to
locate this sudden congestion breakout. Its predictive power
lies in the location where it appears. NR7s work best right in
the middle of congestion, or when price pushes repeatedly
against a major barrier. When the signal works, it works fast
and triggers a major price expansion without a pullback.
How do you trade an NR7? Place an entry stop just outside both
price extremes at the same time, and then cancel one order after
the other executes. Then place a stop loss at the location of
the cancelled order. This takes advantage of the small pattern,
regardless of the way it eventually breaks out.
You can answer the three questions with a single price chart and
a few good indicators. This way you'll know what to do next with
very little effort. Get on board quickly when everything
converges and points to an impending move. Multiple signals
reveal crowd forces that converge into intense breakouts or
breakdowns. These focused time-price zones line up with the
right answers at the right time.
