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Trading With Precision 5: Longer Time Frame Analysis, Executive Summary

Trading with Precision Vol 5,  Executive Summary:

How Longer Time Frame Analysis Improves Intraday Performance and Provides Insight into the Market 

Don’t let noise from media sources skew or misrepresent what the actual price action and momentum indicators are telling us.   

  • Market dynamics or the determination of price equilibrium is determined by the constant/continual influence of buyers and sellers.  Multiple factors determine the respective strength of these same buyer and sellers.   This dynamic is always subjectively reported by the financial press who have their own agenda to execute.   We need to be aware of this media bias if/when we use news sources to evaluate the market.

Look at broad action price (monthly and weekly chart formations) to identify the overall direction and cyclical nature of price action.

We get the highest probability of success if we incorporate the broader term cycles and the corresponding support/resistance areas into our trading 

  • The MACD is especially useful in identifying pivotal swings in momentum 

Negative divergence at upper levels of resistance or at new highs tells us that we don’t have the same level of buying strength we did at lower levels of support.

  • The more divergence you see on a chart, the greater the existence of cross currents and we need to incorporate this into our trading mechanics and risk management. 
    • This can be done by utilizing
      • Smaller positions
      • Tighter stops
      • Taking profits sooner  
      • Taking partial profits at initial targets on existing positions

In an overall bullish market, a pullback into an established major support levels (which can be seen on the monthly or weekly chart) presents a high probability entry point.  Please note, high probability does not mean guaranteed.  

  • Also, bullish entries at new highs or break outs can be successful, but they do not have the strength or high probability of a pullback into major support.
    • In a strong bull move, the pullback may be shallow, but by definition it will be into support if the price will continue higher at that point.  
  • It’s up to the individual trader to determine the feasibility of continuation of upward price action and the corresponding risk associated with entries at new highs.

Using the Time and Sales function can be useful when entering a trade or for position management because it provides a supply and demand metric that can be used in conjunction with price action analysis.   Traders need to be aware that a large sell order could be a large buyer taking profit or a large short position being initiated.  Vice versa for a large buy order. 

After an instrument has a large and powerful bull move into new highs, a potential short trade may present itself.   This can be recognized with price action that; 

  1. Makes a new high, thus establishes a new Resistance level.
  2. Pulls back to a lower Support level 
  3. Moves higher to the previously establish new Resistance level (#1 above) and fails to breach (move above) that level 
  4. Pulls back to the previously established lower Support level (#2), but loses that support level i.e., the support level doesn’t hold.
  • It’s important to note here that the price action may not behave as cleanly as described above.   It may take multiple failed attempts to breach the Resistance level and multiple tests of the support level before buying strength weakens and the support level is lost. 
  • Also, when entering a short trade in this scenario, the initial trade is counter trend and should be managed as such until price has continued lower and additional Support levels have failed.  As price continues to fall, the subsequent failed retests of Resistance will provide additional entry points to go short.

Traders need to determine the strength of the overall motion and enter at levels that

  1. Provide high probability of price movement in the desired direction 
  2. Provide an acceptable level of risk to initiate the trade

As traders develop and execute their individual trading strategy, they should keep in mind that there is value in simplicity.

Momentum Indicators (MI) provide extremely valuable information for the trader.  If we are using a smaller time frame’s MIs (ex: 5 min chart), we may want to compare it to a larger time frame’s MI (ex: 30 min chart). If the two chart MIs are contradicting each other, these conflicting signals need to be resolved by the trader in order to effectively utilize the respective MIs.

Anne-Marie utilizes a 3 Point Mechanic:

  1. Determine the overall trend – identified by monthly and weekly charts
  2. Identify Support and Resistance Levels relative to the larger charts (monthly or weekly). A critical distinction is that we refer to these as levels or zones, they are not a specific price points.
    1. Determination of the Support/Resistance levels will also identify the trading range 
    1. As we see price moving to the edges of the range, we can prepare for the bounce off of these edges (top and bottom) and exploit the price movement.  
  3. Set up the trade within the cycle

Key Takeaways:

  1. Traders need to understand the overall trend in the market.  Big picture, what direction is the market moving in.
  2. Traders need to identify the Support and Resistance levels in the larger time frames (monthly and weekly charts).
  3. Traders need to be able to understand which direction the intraday traders are moving the price.
  4. Once traders have determined the above, traders can utilize that information along with momentum indicators, to identify when there is significant bullish or bearish energy in the market.  In other words, identify the times when the overwhelming majority of the active traders in the market agree on the desired price direction. 
  5. The cumulative benefit of above steps 1-4 is that it allows traders to enter positions when the directional movement has significant strength and consequently has a high probability of price movement in the desired direction.

Many thanks to Anne-Marie for another brilliant presentation, and for allowing me to post this summary.

Respectfully submitted, 

Luke Ott