| In a previous article I mentioned that my analysis | | | | at its proximity to the support and resistance barriers |
| involves monitoring price action, in order to gain an | | | | within the framework, and also gain clues from |
| insight into the short term sentiment of the market. | | | | changes in momentum or volatility. |
| Determining who is in control at that time - the bulls | | | | * Is the current price swing, faster or slower than |
| or the bears. And assessing how they're likely to | | | | preceding swings within that trend? Is the current |
| respond to changes in the market. | | | | price swing speeding up, or slowing down? |
| I thought today I'd prepare a quick article to give an | | | | * Is the volatility changing? Is the average range of |
| overview of how I analyze price. Those of you who | | | | the price bars increasing or decreasing? |
| know me know that I'm a great fan of candlestick | | | | * These sorts of questions regarding changes of |
| charting. However, price analysis is much more than | | | | volatility and momentum can give you clues into the |
| just watching for your favorite candlestick patterns. | | | | changing strength of the trend, and the likelihood of |
| Too many people just teach the candlestick patterns, | | | | a reversal at, or continuation through, an area of |
| which are fine, but in my opinion there's some | | | | support or resistance. |
| essential analysis missing that an astute trade needs | | | | * If you want to get experienced at this, it takes |
| to consider BEFORE they look at price action and | | | | time. Review price charts over and over, identifying |
| respond to every candlestick or bar chart pattern. | | | | how changes of momentum and volatility precede |
| Let's have a look at what I mean. | | | | either a continuation or reversal of that trend. |
| Price analysis for me is essentially a top down | | | | Having gained an appreciation of the strength of the |
| approach, working from the macro level of Market | | | | trend, and its location within the support and |
| Structure (so we analyze the big picture first), then | | | | resistance framework, ONLY THEN, finally, do I |
| down to the current Trend within that structure, and | | | | concern myself with the current price action to |
| only then do we look at the current price pattern, | | | | determine the bullish or bearish sentiment (or more |
| whether through candlestick analysis or whatever | | | | particularly a potential change of sentiment) through |
| other method works for you. | | | | candlestick analysis. |
| So I basically start off with a wide view of the | | | | What does this little bit of extra work give me? |
| market, and drill down to the detail in the current | | | | Here's an example: |
| price bar or pattern. | | | | Instead of entering short on a shooting star reversal |
| I prefer to do this over two timeframes. | | | | pattern, just because it matches the shooting star |
| The market structure is defined primarily on a higher | | | | diagram in my book on candlestick patterns, I will first |
| timeframe. For me, as a daytrader, that's the one | | | | conduct further price analysis regarding the trend and |
| hour charts. Of course, if you trade differently to me | | | | how it moves within the support and resistance |
| then that can be any other time period you wish. | | | | framework. For example, the price may have just |
| Just make it higher than the timeframe you trade on | | | | meandered slowly up to a major resistance level. The |
| - I recommend by at least a factor of four. | | | | current price swing may clearly show less momentum |
| Then on the shorter timeframe (what I call the | | | | than both the previous upswing and downswing. And |
| trading timeframe) I refine the market structure a | | | | the price bar range may be narrowing. This gives a |
| little further, analyze the movement and strength of | | | | reduced likelihood of the commitment required from |
| the trend, and then assess the bullish or bearish | | | | the bulls to break through the area of increased |
| sentiment based on the current price patterns. | | | | supply. The shooting star pattern provides evidence |
| For me, the trading timeframe's anywhere from 1 | | | | of a clear rejection of prices at that resistance level. |
| minute to 5 minute charts, depending on the market | | | | This provides me with a lower risk or higher |
| and its volatility, and how well the price is flowing. | | | | probability trade in the short direction. |
| So, what do I mean by market structure, trend | | | | Another example: |
| analysis and price analysis? | | | | Instead of entering long on a harami cross reversal |
| Firstly Market Structure: | | | | pattern, just because it matches the harami cross in |
| * The higher timeframe chart is opened and any | | | | my book on candlestick patterns, I'll conduct further |
| areas of major support or resistance are identified | | | | analysis to see where this pattern occurs within the |
| and clearly marked on the chart. | | | | bigger picture of market structure. For example, the |
| * Support & Resistance for me are areas of | | | | trend may show a strong and accelerating move |
| past price congestion, swing highs or lows, or gaps. | | | | downward, on greatly increased volume, extending |
| That doesn't include any 'guessing' at future support | | | | price rapidly to great distances below its average, |
| or resistance, via the use of pivots points or | | | | right into an area of major support. This is an area |
| Fibonacci levels. I'm not a fan of these analysis | | | | where I expect increased demand is likely to be |
| techniques. Of course, if they work for you, good on | | | | sufficient to absorb and overcome the force of the |
| you, keep using them. | | | | bears who have spent all their energy on the |
| * My expectation when I trade is that there is a | | | | climactic move downwards. This is an area where I |
| higher probability of price stalling or reversing at these | | | | expect price to find support. The harami cross shows |
| areas of major support or resistance. | | | | a clear halting of the rapid move down, and allows |
| * I then narrow my focus to the shorter trading | | | | me an opportunity to enter a low risk trade close to |
| timeframe and add to the market structure | | | | an area of major price support. |
| framework, by identifying areas of minor support or | | | | Seriously, the end result might be the same, but at |
| resistance. (Typically we look on the current trend | | | | least I've entered based on a reasonable assessment |
| first, but you may at times need to look back | | | | of the price action in order to maximize the potential |
| beyond the current trend, to previous market action, | | | | for a lower risk or higher probability trade. Over a |
| to find applicable areas of minor support or | | | | lifetime of trading I expect this approach will produce |
| resistance) | | | | more favorable results than just entering because |
| * Once again, these come from areas of congestion, | | | | the pattern matched one I'd memorized from a book. |
| swing highs or lows, or gaps. That is, areas which are | | | | Ok, a bit of a summary, and I know this is a bit of |
| proven to stall price movement or reverse price | | | | repetition for those familiar with my work, but don't |
| direction. My expectation with minor support or | | | | just blindly take your entry triggers. Think about |
| resistance is for a higher probability of minor support | | | | where they occur within the bigger picture structure |
| holding in an uptrend, and minor resistance holding in a | | | | of the market. |
| downtrend. | | | | The market structure defines where you trade. The |
| * That's it for Market Structure - simply identifying a | | | | trigger, whether a candlestick pattern or some other |
| support and resistance framework within which price | | | | form of entry trigger, tells you when to get in, ONLY |
| moves. Simple! | | | | when you've first met the requirements of the |
| Having defined our market structure, or a framework | | | | market structure rule. |
| within which price will move, we now focus our | | | | Think about where the current price movement is |
| attention on the current trend. This occurs, as does | | | | within a framework of support and resistance. Think |
| all further analysis, on the trading timeframe. | | | | about the changing strength of the current trend, or |
| * I conduct analysis on the trend to identify its | | | | price swing, as it approaches this area of support or |
| strength. Is the trend moving strongly, in which case | | | | resistance. Watch for signs of strength or weakness |
| we can anticipate it being more likely to break | | | | in the trend, through the clues evident in changes of |
| through the next support or resistance levels, or is it | | | | momentum and volatility. |
| weakening, in which case we have a greater | | | | And don't forget - ALWAYS USE STOPS, because |
| probability of the support or resistance levels forming | | | | there are no guarantees. This is a game of |
| a barrier to further price movement? | | | | probabilities. |
| * We determine the strength of the trend by looking | | | | |