- VOLATILITY :Volatility is predicting the rate of price change. If the prices of the market fluctuate rapidly in a short time span, it is termed to have high volatility and vice versa. With the degree of volatility a trader must be able to gauge if the market is volatile enough to cross the SR and execute their trade accordingly. Eg:If you invested in a touch option in a highly volatile market, the high volatility can make prices turn around and move in the opposite direction. Still, your chances of winning a touch options in a volatile market are far better than in a quiet market ( vice versa for no touch options).
- DIRECTION OF THE PRICE MOVEMENT: Only when you understand the direction of the price, can you make a trading decision. Most traders use candle stick charts to understand the price movement as line charts are not ideal in quickly revealing all the invaluable information traders deduct. There are many types of price formations, however these 4 are the most important of the lot-
- 1) TRENDS: ” The trend is your friend”, and is the most used price formation. Price charts look like they have zig-zag movements, these patterns formed are called trend. Analyzing trends is key to estimating the future price direction. Over a large number of candlesticks a trader can predict if the prices are likely to rise or fall.
- 2)SIMPLE & COMPLEX CANDLE FORMATIONS: Every single candlestick can tell you about what is happening in the market.To understand what the market is doing right now – if the current movement is weakening or gaining momentum, if the market direction is likely to turn around any time soon, and whether you can trust the current movement or not – you should use candlestick formations. Analysis of 1 candlestick is better known as simple candlestick formation- the various formations include – big candle, dragonfly doji, gravestone doji, hammer, inverted hammer, inverted black hammer,long lower shadow, long upper shadow,marubozu and long legged doji. To understand each of these formations please click HERE. On the other hand the analysis of 2-5 candlesticks is known as complex candlestick formation. There are various complex candlestick formations; namely- Bearish Harami, Bullish Harami, Bearish 3 method formation, Bullish 3 method formation, dark cloud cover, engulfing bearish line, engulfing bullish line, evening star, morning star, falling window, 3 black cows, 3 white soldiers, and piercing line. To understand each of these formations please click HERE. Only when Simple & Complex Candlestick formations are paired with a solid trend analysis will you be able to estimate the markets correctly and make an ITM.
- 3)Continuation & Reversal patternsContinuation pattern involves the analysis of 20, 50, or more candlesticks. Continuation patterns include such price formations as the flag, pennant & triangle. To understand each of these formations please click HERE. They all indicate that the current trend is going through a consolidation period to generate new momentum, after which he is likely to continue in its original direction.Reversal patterns are equally large price formations as continuation patterns that indicate the exact opposite: The current trend has come to an end. In the near future a trend in the opposite direction is very likely to form and take the place of the current trend. Examples for reversal patterns are the double top & head on shoulder formation.
- 4)Gaps: These are great investment opportunities. Gaps occur when prices jump from one level to another, leaving a gap between two prices. Gaps can indicate four events:a) Big news hit the market and energized an otherwise slow trading day. This kind of gaps often start new trends in the direction of the gap. Recognizing them can provide you with a great investment opportunity.
- b) Big news hit the market and energized an already existing movement. Usually, this movement will move faster and stronger for quite some time after the gap.c) A trend is exhausted. In that case, the gap can indicate an impending reversal.d) Coincidence. Sometimes, especially during trading periods with low volume, gaps occur randomly. Since these gaps are not supported by any change in market sentiment, the large price jump is not validated. Therefore, exhaustion are very likely to close, which presents a trader with a great opportunity to predict a price movement in size and duration.
- TIMING :Because the market moves more erratic on short time frames, it is more difficult to trade strategies that require long-term events. Most notably, trend followers will find it difficult to find suitable long-lasting trends on short-term time frames.For traders of such strategies, it might make sense to switch to trading a more short-term focused event. Often, this only requires a minor tweak to their strategies. Traders that used to follow trends as a whole can switch to trading each swing individually, and they will have found a more short-term trading alternative that is based on the same basic phenomenon. Most strategies allow for a similar tweak that adapts them to shorter time frames.Generally, shorter time frames work better with strategies that trade short, simple events. Simple candlestick formations will work better than continuation patterns, and volatility indicators will work better than long moving averages. Changing your trading strategy from one of these examples to the other should be simple. Continuation patterns are a part of candlestick analysis, and by trading simple candlestick formations, you will stick with the same trading style while only changing the event you are trading. Similarly, the switch from moving averages to momentum indicators helps you to stick with trading technical indicators and only switches the indicator you trade.
Such tweaks require minimum effort on your part, but they can make a significant difference in your earnings.