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Swing traders use this mechanism to generate original execution when other price action verifies opportunityMOVING AVERAGE RIBBONS Build the charting landscape with moving averages (MAs). These classic momentum tools define both trend and natural pullback levels. Use them in all charts through all time frames. MAs respond to specialized settings that reflect the prevailing crowd within any holding period. So take great care to choose appropriate values. Averages must align with the current swing trading strategy or they will generate poorly timed executions. Moving averages provide highly visual information as they interact directly with price. Indicators that fit into a separate lower pane force the eye to filter out large quantities of noise to manage information. Unfortunately, the filtering process also discards important data. Moving averages emit continuous signal without noise because they plot within the price pane. They print real-time patterns that interact with other S/R features to reveal profitable convergence levels. Identify convergence-divergence between price and MAs. Because price always moves toward or away from an underlying average, each new bar or candle uncovers characteristics of momentum, trend, and time. This same process works just as well in relationships between two or more MAs. For example, the classic MACD (Moving Average Convergence-Divergence) indicator applies this technique to measure trending markets. Use exponential moving averages (EMAs) for longer time frames but shift down to simple moving averages (SMAs) for shorter ones. EMAs speed and smooth the action as they give more weight to recent price change. SMAs view each data point equally. While intraday markets trigger bursts of meaningless data, SMAs allow the swing trader to spy on other participants. Most keep their settings at these simple levels because they don’t recognize the advantage of EMAs. Good intraday signals rely more on understanding how the competition thinks than they do on the technicals of the moment. Swing traders access a powerful information tool when they add multiple MAs into 3D charts and build a complete multi-time frame trend system. Tie these MA ribbons (MARs) together through a mathematical relationship that mimics time. One classic combination for a daily chart utilizes 20, 50, and 200 periods. Notice how each segment approximates three to four times the preceding one. These ratios tend to narrow in the shorter intraday averages, but the purpose remains the same. They provide an effective framework to investigate and trade three distinct periods of trend: short, intermediate, and long-term. MA ribbons emit continuous trend feedback. For example, they signal a bear market when they flip over on the daily and the 200-day MA stands on top. The bull reawakens when the shorter averages cross back above the longer ones and each lines up in order again. Expect choppy price action during phases when the averages criss-cross out of sequence. Price can bounce around like a pinball several times before breaking free when it gets caught between inverting averages. Use standard settings of 20-50-200 for the daily time frame or speed them up to 18-50-150 for an aggressive view. Popular daily averages provide an easy framework for quick digestion of a large number of stock charts. Watch them to measure the opposing crowd. Focus on the common belief that short-term trends pull back to the 20-day MA while intermediate and long-term impulses find support at the 50- and 200-day MAs. Intraday chart views must be faster because participants tend to react very quickly and trend changes can take place in minutes rather than days. Five, 8 and 13 period settings for 1-minute, 5minute, and 60-minute charts tune to the swing of the short-term market. These Fibonacci numbers correspond to dynamic, routine, and weak trend action within individual equities, indices, and derivatives, and they interact powerfully with short-term central tendency tools such as Bollinger Bands. MARs generate layers of convergence-divergence feedback. Instead of price interaction with averages, the averages now interact with each other. Classic crossover strategies evolve into complex patterns with many unique formations. Ribbons reveal subtle relationships among price, time, and trend. Major averages tend to print S/R behavior with each other. Swing traders use this mechanism to generate original execution when other price action verifies opportunity. This behavior also assists precise timing because MAs lag price movement. They reduce whipsaws and false breakouts as they turn slowly to meet new conditions. Complex math indicators will often point right to entry where major moving averages converge. MA ribbons ease the swing trader’s work through their visual simplicity and their unique spectrum analysis. Trending markets echo characteristic price behavior over and over again. Measure this fractal fingerprint in the depth that an issue corrects after each impulse of a trend. MARs allow quick examination to locate classic retracement levels to use for entry on the next pullback. These can be very pleasant times for swing traders. Watch closely how price penetrates the ribbon. The depth it reaches before emerging often reflects a level that the trend will repeat over and over again. When price undergoes a sudden shift in direction, ribbons twist and mark clear signposts for awakening volatility. Each of the averages requires a different time period to absorb price change and roll over. This emits a broad range of rainbow patterns that have obvious predictive power. MARs slowly invert to accommodate changing conditions as price shock induces a new trend. Manage positions using these visual interrelationships. Execute short-term swing trades when crisscross MARs predict pivoting price movement. Once inversion completes, shift to momentum entry that takes advantage of the new convergent environment. Spreading MARs signal accelerating momentum when layered through adjacent time periods. The practice of technical analysis often lacks simplicity. Many swing traders believe that they cannot succeed without complicated sets of math input to predict price change. On the cóntrary, many earn their living through simple elements of price and volume, packaged with moving averages. These primary indicators provide the essential link among time, price, and trend, and these natural building blocks easily tie together into powerful visual trading systems. CANDLESTICKS Candlestick history goes back much further than standard price bars. Japanese traders used them in the 18th century to forecast rice prices. According to legend, one local speculator executed over 100 consecutive winning positions by applying this simple tool. The military names for many candlestick formations arise from that era’s feudal system. The pattern names that compare trading sessions to battles and blood remain valid 300 years later. Candlestick charts condense far more information than standard bar plots. They separate price range extremes within a chosen period from the central opening and closing values. The candlestick real body represents the core price action, measured from open to close. Upper and lower shadows mark the range outside this boundary. Candlesticks illustrate intrabar conflict between bulls and bears. They reveal price action in the time frame below the one measured by the chart. Color-coding of intrabar price movement adds another dimension to candle study. When the open prints above the close, the real body will usually appear hollow and designate upward change. Alternatively, the body will fill with black, red, or any other color when the open lies below the close. The interplay of hollow and filled candles reveals very short-term swing conditions as well as surges in volatility. It also uncovers hidden gaps that fill by the bar’s close. While most Western charting ignores these important failures, swing traders can examine many hidden levels with candlesticks and locate significant S/R. Candles print numerous predictive patterns with only one to four bars of data, making them an outstanding tool for short-term trading. Candle prediction depends on the location of the pattern within the charting landscape. Two identical formations at different S/R boundaries will generate unique outcomes. Consider abandoning plain vanilla price bars and trading with candles exclusively. Use candlesticks for all charts in all time frames, but exercise caution on very short-term views. Extremes of intraday candles (shadow zones) generate inaccurate information created by bad ticks. Mentally filter price extremes to avoid executing positions based on faulty data. Act only on candles that print with length and volume both well above the average of the previous bars and those precisely located at major S/R pivots. Avoid all signals based on patterns in low-priced or thin issues. Candlesticks illustrate reversal patterns better than any other technical tool. Many changes in trend originate within the time frame below the primary view of the swing trader. Common formations such as shooting stars, hammers, dojis, and haramis provide early warning to prepare strategies against the crowd. But all signals must work within the context that the candles print. Locate S/R convergence through cross-verification before relying on any interesting pattern. Japanese candlesticks work very well in conjunction with classic Western technical analysis. Watch for their appearance along moving average barriers in trending markets. Look for high-volume reversal candles at tests of tops and bottoms, major zones of S/R, and standard Fibonacci retracements. Stop loss raids cripple trendlines drawn from standard price bars, but candle charts survive these short-term violations of known S/R. While the bar chartist concludes that support has broken and moves on to the next opportunity, the candle chartist knows that the same level still remains intact. Candle construction permits trendlines both at the shadow extreme and the real body’s edge. This allows a powerful contrary view in an environment where everyone knows the basics of technical analysis. Manipulation at major S/R generates frequent price violations and increased risk. Candles provide a perfect tool to adapt in this noisy environment. Doji and hammer reversal patterns reach across many S/R barriers, only to close back within support. Both their location and appearance signal that the boundary’s support remains well intact. These important levels generate interesting contrary strategies and improve timing. (See Chapter 10). Forget most standard candle pattern definitions found in modern financial books. Concentrate on the few major formations that consistently point to crowd conflict and resolution. Every setup acts differently, depending on location, volume, and trend. See the truth whether it confirms or disputes popular opinion. Undocumented patterns with strong predictive power appear every day. Learn to read the message of the candles even if they don’t carry a warrior identity. Most hidden archetypes of crowd excitement, panic, and reversal arise in the unconscious mind and can be understood through trader intuition as well as analysis. |
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