| Posted in THE GATEWAY TO SHORT-TERM TRADING | Posted on
The U.S. stock exchanges trade over 9,000 issues each day. Add to that many thousands of
emerging exchanges and companies worldwide. On any given day, every bull and bear condition,
from euphoria to panic, exists somewhere on the planet. Buried within this universe of volatility and
price movement, perfect trade setups wait to be discovered. But how can the speculator consistently
tap this deep well of profit without being crushed by information overload or burnout?
For many decades, technical traders learned chart interpretation through the concepts of Dow
Theory. Or they studied Edwards and Magee and faithfully memorized the characteristics of
familiar price patterns seen daily on their favorite stocks or futures. These speculators were a
minority within the investment community, and their size allowed them to execute effective
strategies that capitalized on these little-known patterns when they appeared.
Net connectivity revolutionizes public access to price charts. They no longer require an expensive
subscription, and most market participants can view them quickly in real-time. Now everyone reads
the charts and believes that he or she understands the inner secrets of technical analysis. As noted
earlier in this chapter, common knowledge of any market condition closes the system inefficiency
that allows easy profit from it. Triangles, flags, and double tops now belong to the masses and are
often undependable to trade through old methods.
Fortunately, the popularity of chart reading opens a new and powerful inefficiency for swing traders
to manipulate. They can use the crowd’s limited pattern knowledge for their own profit. The new
disciples of technical analysis tend to focus on those few patterns that have worked well over the
past century. Skilled traders can place themselves on the other side of popular interpretation and
fade those setups with pattern failure tactics. More importantly, they can master the unified
structure that underlies all pattern development and awaken the skills required to successfully trade
dependable setups that have no name or adoring crowd.
Pattern Cycles recognize that markets travel through repeated bull and bear conditions in all time
frames. Trends uncoil in a predictable manner, while constricted ranges print common shapes.
Measurable characteristics distinguish each opportunity phase from uptrend to downtrend and back
again. Most participants see these changes as the typical top, bottom, and congestion patterns. But a
far richer trading world exists.
The twin engines of greed and fear fuel the creation of market opportunity. Through their power,
the crowd reacts in a predictable manner at every stage of price development. Prices fall and fear
releases discounted equities into patient value hands. Prices rise and mindless greed bids up hot
shares into the pockets of momentum players. On and on it goes through all markets and time
frames.
Rising prices attract greed. Paper profits distort self-image and foster inappropriate use of margin.
The addictive thrill of a rally draws in many participants looking for a quick buck. More jump on
board just to take a joyride in the market’s amusement park. But greed-driven rallies will continue
only as long as the greater fool mechanism holds. Eventually, growing excitement closes the mind
to negative news as the crowd recognizes only positive reinforcement. Momentum fades and the
uptrend finally ends.
Falling prices awaken fear. The rational mind sets artificial limits as profits evaporate or losses
deepen. Corrections repeatedly pierce these thin boundaries and force animal instinct to replace
reason. Negative emotions build quickly as pockets empty. Personality flaws invade the psyche of
the wounded long while sudden short-covering rallies raise false hopes and increase pain. The
subsequent decline finally becomes unbearable and the tortured shareholder sells, just as the market
reverses.
The emotional crowd generates constant price imbalances that swing traders can exploit. But
successful execution requires precision in both time and direction. Fortunately, this chaotic world of
price change masks the orderly Pattern Cycle structure that generates accurate prediction and
profitable opportunities through all market conditions. This inner order frees the mind, provides
continuous feedback, and empowers spontaneous execution of rewarding trades.
Swing traders capitalize on the emotions of others after they control their own. Pattern Cycles
caution them to stand apart from the crowd at all times. In the simplest terms it represents the
attractive prey from which their livelihood is made. And just as a wild cat stalks the herd’s edge
looking for a vulnerable meal, the swing trader must recognize opportunity by watching the daily
grind of price swings, volume spikes, and market noise.
Prices trend only fifteen to twenty percent of the time through all equities, derivatives, and indices.
This is true in all charts, from 1-minute bars through monthly displays. Markets spend the balance
of time absorbing instability created by trend-induced momentum. Swing traders see this process in
the wavelike motion of price bars as they oscillate between support and resistance.
Each burst of crowd excitement alternates with extended periods of relative inactivity. Reduced
volume and countertrend movement mark this loss of energy. As ranges contract, so does volatility.
Like a coiled spring, markets approach neutral points from which momentum reawakens to trigger
directional price movement. This interface between the end of an inactive period and the start of a
new surge marks a high-reward empty zone (EZ) for those that can find it.
Prior to beginning each new breath, the body experiences a moment of silence as the last exhalation
completes. The markets regenerate momentum in a similar manner. The EZ signals that price has
returned to stability. Because only instability can change that condition, volatility then sparks a new
action cycle of directional movement. Price bars expand sharply out of the EZ into trending waves.
Swing traders use pattern recognition to identify these profitable turning points. Price bar range
(distance from the high to low) tends to narrow as markets approach stability. Skilled eyes search
for a narrowing series of these bars in sideways congestion after a stock pulls back from a strong
trend. Once located, they place execution orders on both sides of the EZ and enter their position in
whatever direction the market breaks out.
Paradoxically, most math-based indicators fail to identify these important trading interfaces.
Modern tools such as moving averages and rate of change measurements tend to flatline or revert
toward neutral just as price action reaches the EZ trigger point. This failure reinforces one of the
great wisdoms of technical analysis: use math-based indicators to verify the price pattern, but not
the other way around.
Volatility provides the raw material for momentum to generate. This elusive concept opens the door
to trading opportunity, so take the time to understand how this works. Technical Analysis of Stocks
and Commodities magazine describes volatility as ‘‘a measure of a stock’s tendency to move up and
down in price, based on its daily price history over the latest 12 months.” While this definition fixes
only upon a single time frame, it illustrates how relative price swings reveal unique characteristics
of market movement.
Rate of change (ROC) indicators measure trending price over time. Volatility studies this same
information but first removes direction from the equation. It stretches waves of price movement into
a straight line and then calculates the length. Volatile markets move greater distances over time than
less volatile ones. But this internal engine has little value to swing traders unless it can contribute to
profits. Fortunately, volatility has an important characteristic that enables accurate prediction. It
tends to move in regular and identifiable cycles.
As prices ebb and flow, volatility oscillates between active and inactive states. Swing traders can
apply original techniques to measure this phenomenon in both the equities and futures markets. For
example, 10-and 100-period Historical Volatility studies the relationship between cyclical price
swings and their current movement. And Tony Crabel’s classic study of range expansion, Day
Trading with Short Term Price Patterns and Opening Range Breakout, predicts volatility through
patterns of wide and narrow price bars.
emerging exchanges and companies worldwide. On any given day, every bull and bear condition,
from euphoria to panic, exists somewhere on the planet. Buried within this universe of volatility and
price movement, perfect trade setups wait to be discovered. But how can the speculator consistently
tap this deep well of profit without being crushed by information overload or burnout?
For many decades, technical traders learned chart interpretation through the concepts of Dow
Theory. Or they studied Edwards and Magee and faithfully memorized the characteristics of
familiar price patterns seen daily on their favorite stocks or futures. These speculators were a
minority within the investment community, and their size allowed them to execute effective
strategies that capitalized on these little-known patterns when they appeared.
Net connectivity revolutionizes public access to price charts. They no longer require an expensive
subscription, and most market participants can view them quickly in real-time. Now everyone reads
the charts and believes that he or she understands the inner secrets of technical analysis. As noted
earlier in this chapter, common knowledge of any market condition closes the system inefficiency
that allows easy profit from it. Triangles, flags, and double tops now belong to the masses and are
often undependable to trade through old methods.
Fortunately, the popularity of chart reading opens a new and powerful inefficiency for swing traders
to manipulate. They can use the crowd’s limited pattern knowledge for their own profit. The new
disciples of technical analysis tend to focus on those few patterns that have worked well over the
past century. Skilled traders can place themselves on the other side of popular interpretation and
fade those setups with pattern failure tactics. More importantly, they can master the unified
structure that underlies all pattern development and awaken the skills required to successfully trade
dependable setups that have no name or adoring crowd.
Pattern Cycles recognize that markets travel through repeated bull and bear conditions in all time
frames. Trends uncoil in a predictable manner, while constricted ranges print common shapes.
Measurable characteristics distinguish each opportunity phase from uptrend to downtrend and back
again. Most participants see these changes as the typical top, bottom, and congestion patterns. But a
far richer trading world exists.
The twin engines of greed and fear fuel the creation of market opportunity. Through their power,
the crowd reacts in a predictable manner at every stage of price development. Prices fall and fear
releases discounted equities into patient value hands. Prices rise and mindless greed bids up hot
shares into the pockets of momentum players. On and on it goes through all markets and time
frames.
Rising prices attract greed. Paper profits distort self-image and foster inappropriate use of margin.
The addictive thrill of a rally draws in many participants looking for a quick buck. More jump on
board just to take a joyride in the market’s amusement park. But greed-driven rallies will continue
only as long as the greater fool mechanism holds. Eventually, growing excitement closes the mind
to negative news as the crowd recognizes only positive reinforcement. Momentum fades and the
uptrend finally ends.
Falling prices awaken fear. The rational mind sets artificial limits as profits evaporate or losses
deepen. Corrections repeatedly pierce these thin boundaries and force animal instinct to replace
reason. Negative emotions build quickly as pockets empty. Personality flaws invade the psyche of
the wounded long while sudden short-covering rallies raise false hopes and increase pain. The
subsequent decline finally becomes unbearable and the tortured shareholder sells, just as the market
reverses.
The emotional crowd generates constant price imbalances that swing traders can exploit. But
successful execution requires precision in both time and direction. Fortunately, this chaotic world of
price change masks the orderly Pattern Cycle structure that generates accurate prediction and
profitable opportunities through all market conditions. This inner order frees the mind, provides
continuous feedback, and empowers spontaneous execution of rewarding trades.
Swing traders capitalize on the emotions of others after they control their own. Pattern Cycles
caution them to stand apart from the crowd at all times. In the simplest terms it represents the
attractive prey from which their livelihood is made. And just as a wild cat stalks the herd’s edge
looking for a vulnerable meal, the swing trader must recognize opportunity by watching the daily
grind of price swings, volume spikes, and market noise.
Prices trend only fifteen to twenty percent of the time through all equities, derivatives, and indices.
This is true in all charts, from 1-minute bars through monthly displays. Markets spend the balance
of time absorbing instability created by trend-induced momentum. Swing traders see this process in
the wavelike motion of price bars as they oscillate between support and resistance.
Each burst of crowd excitement alternates with extended periods of relative inactivity. Reduced
volume and countertrend movement mark this loss of energy. As ranges contract, so does volatility.
Like a coiled spring, markets approach neutral points from which momentum reawakens to trigger
directional price movement. This interface between the end of an inactive period and the start of a
new surge marks a high-reward empty zone (EZ) for those that can find it.
Prior to beginning each new breath, the body experiences a moment of silence as the last exhalation
completes. The markets regenerate momentum in a similar manner. The EZ signals that price has
returned to stability. Because only instability can change that condition, volatility then sparks a new
action cycle of directional movement. Price bars expand sharply out of the EZ into trending waves.
Swing traders use pattern recognition to identify these profitable turning points. Price bar range
(distance from the high to low) tends to narrow as markets approach stability. Skilled eyes search
for a narrowing series of these bars in sideways congestion after a stock pulls back from a strong
trend. Once located, they place execution orders on both sides of the EZ and enter their position in
whatever direction the market breaks out.
Paradoxically, most math-based indicators fail to identify these important trading interfaces.
Modern tools such as moving averages and rate of change measurements tend to flatline or revert
toward neutral just as price action reaches the EZ trigger point. This failure reinforces one of the
great wisdoms of technical analysis: use math-based indicators to verify the price pattern, but not
the other way around.
Volatility provides the raw material for momentum to generate. This elusive concept opens the door
to trading opportunity, so take the time to understand how this works. Technical Analysis of Stocks
and Commodities magazine describes volatility as ‘‘a measure of a stock’s tendency to move up and
down in price, based on its daily price history over the latest 12 months.” While this definition fixes
only upon a single time frame, it illustrates how relative price swings reveal unique characteristics
of market movement.
Rate of change (ROC) indicators measure trending price over time. Volatility studies this same
information but first removes direction from the equation. It stretches waves of price movement into
a straight line and then calculates the length. Volatile markets move greater distances over time than
less volatile ones. But this internal engine has little value to swing traders unless it can contribute to
profits. Fortunately, volatility has an important characteristic that enables accurate prediction. It
tends to move in regular and identifiable cycles.
As prices ebb and flow, volatility oscillates between active and inactive states. Swing traders can
apply original techniques to measure this phenomenon in both the equities and futures markets. For
example, 10-and 100-period Historical Volatility studies the relationship between cyclical price
swings and their current movement. And Tony Crabel’s classic study of range expansion, Day
Trading with Short Term Price Patterns and Opening Range Breakout, predicts volatility through
patterns of wide and narrow price bars.
