Understanding Good Trading Set-Ups Using Technical Analysis Characteristics

Technical Analysis Characteristics

When searching and evaluating symbols for trading the expectation is not finding a good trade setup. My head is cleared of other day-to-day thoughts and issues that require attention. I focus reviewing price charts looking for obvious reason that a trade would fail and lack of affirming attributes a trade would succeed.

A good trade setup is the only acceptable trade setup. Average trade setups yield average trading result and poor trade setups guarantee poor trading result. Average and poor is loss of money.

Good trade entry setups are always obvious on the price chart. Each attribute considered is obvious. No question or uncertainty remains whether a trade will follow through and profit. The trades are high probability to produce profit.

No trading is 100% success. A loss is inevitable. With effective use of reasonable trading and stop management the loss ratio for every ten trades should be one loss and one scratch. Higher loss rate per ten trades is incompetence. Beyond two losing trades every ten trades provides little or no profit. Beyond three losing trades is net loss in your trading account.

Minimum Obvious Affirming Attributes (SDCL) for Momentum Trading

1) Significant price trend upward or downward,
2) DPO or similar oscillator forms a divergence from price,
3) Clear formation of an important price pattern, and
4) Layering of the 50, 120 and 200 or similar moving average lines.

Trend Significance of Slow 50, 120 and 200 Moving Average Lines

Upward Price Trend: The 50, 120 and 200 (or 60, 120, 240) moving average lines have layered one atop the other during the initial long upward price movement. The largest MA line is on the bottom with each next shorter MA line atop the other. As price had continued its trend upward the vertical distance between each MA line increased. The moving average lines become farther apart.

Downward Price Trend: If price had been falling during a long downward price movement the largest moving average line is on top. Each shorter MA line is layered beneath each other and below the 200 MA. As price had continued to trend downward the vertical distance between each MA line increased. The moving average lines become farther apart.

If a longer MA line is near current price that MA line can behave as price resistance or price support. If price falls from above and the MA line is sloping upward that MA line is support. If price is rising and the MA line is sloping downward that line is resistance. On any chart they are considered fuzzy, not absolute discrete price demarcation.

Significance of the Fast 14 and 20 Moving Average Lines

These two moving average lines are used together. They are an indication of shorter trading sentiment and as price movement within a trend. If price has moved upward or downward quickly they are typically far below or above current price. Their distance above or below current price provides information of how far and how quickly price extended in a direction. The rate price ascends or descends during its recent price movement can be better visualized by both the vertical and horizontal distance between recent and current price to the 14 and 20 MAs and by separation between the 14 MA and 20 MA.

Momentum Price Reversal Trading

Technical analysis for reversal trading is discovering a price area where an upward or downward trend has ended and begins to move an opposite direction. Momentum is how quickly price should travel and how far price should travel.

For momentum trading reversing price requires:

1) Sufficient change of buying and selling sentiment,
2) Recent price history that appears logical, structured and organized,
3) Price movement that has over-extended it current trend direction,
4) Reasonable force to move price quickly opposite the recent trend, and
5) That Price has sufficient distance to travel.

Price behavior on a trading chart informs us that buy and sell behavior has changed. Where a price trend completes and begins to reverse direction is associated with emotional uncertainty. It is described by comparing a recent measured unit price across multiple chart bars exhibiting near consistent range and direction to current price range and price structure. If price behavior forms a recognizable pattern it is evaluated.

A perceptible change of range, larger or smaller, suggests that behavior is changing especially if that behavior follows a price movement that had been consistent for many chart bars. It does not mean that individual bars are larger or smaller. Chart bar size could remain consistent while price structure of high price pivot to low price pivot increase or decrease size. Instead of chart bars size changing there are noticeably more or less chart bars forming new price structure.

Emotional uncertainty can escalate to pain and fear, with larger aggregate uncertainty observed as a noticeable increase of price volatility. Neither pain and fear or increased price volatility must be obvious. Many price reversals with good recognizable trade set-ups never exhibit sudden erratic volume or price behavior.

Ignoring small and insignificant price patterns eliminates small and insignificant price movements. Experience demonstrates that significant price reversal patterns forming slowly across twenty, thirty or more chart bars lead to better price movements, many exceeding 15%. As a strategy it provides maneuverability should the trade not perform and trade exit with least casualty.

Dead Cat Bounce Price Reversal

Suppose you dropped a cat from a height. The cat can go splat, that cat didn't land well. Ah, cats have nine lives and are known to land on their feet. Immediately following the fall the cat is terrified, startled, then quickly runs with amazing speed from its landing spot.

A Dead Cat Bounce is a long trade opportunity; the principle is similar for short trading.

Price after a long fall downward or rise upward is followed by a price bounce that is 15% or greater in the opposite direction. The bounce is followed by price moving the same direction of the original longer price trend. This price move equals or somewhat over-extends the previous pivot.

The DPO or similar oscillator forms an obvious divergence telling us that price force is increasing opposite the direction of the (original) longer fall or rise of price. It suggests energy for price to reverse and move quickly.

There is obvious layering of the longer term moving average lines.

Purpose of Renko

The purpose of discrete Renko price bars is eliminating smaller irrelevant price clutter to improve structured price analysis and behavior pattern recognition. Price clutter on a Renko chart suggests intolerable disorganized behaviors that yield unfavorable trading. Messy price bars, messy trading. Avoid obvious clustered or jagged price.

There must be minimum price bunching at or near pivot points, especially pivots from recent longer price movements and near current price. Formations of tiny pivots or other alternating up-to-down down-to-up chart bars near pivot price areas are unacceptable.

When price is disorganized then trading is inconsistent:

1) Disorganized price is clustered,
2) Clustered is undecided behavior,
3) Undecided behavior is unpredictable,
4) Unpredictable is inconsistent, and
5) Inconsistent is a loss of money.

Read more about analysis methods to improve trading:

Renko Charts [http://www.forex-trading-wins.com/renko-charts.html]

Trading the Trend [http://www.forex-trading-wins.com/trendlines.html]

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