Saturday, 16 November 2013

How to analyse... End of the week: what have we got ?

Someone asked me this week: what do you look at in a chart ? How do you define a 'clear chart' with a 'nice chart pattern'. While I am not really going to write a whole manual here, let me go into some more detail on this. The way I trade can probably best be described as technical analysis using Price Action. Allthough this is a generic term and can mean lots of different things for different people my personal interpretation of this is: the reading and finding of meaningfull candlesticks patterns in a contextrelated setting just using 'naked charts'. This means no indicators play a role in my analysis whatsoever. I only got two simple moving averages on in my charts (the 9 and the 27) to 'guide' my 'eyes' and 'focus'.

My personal setting is specifically swing trades (= a trade that lasts for several days / weeks) related searching of reversal patterns as I like to get in early and then try to milk that trade to it's fullest. The latter thing is not an easy feat though since I got to be attentive all the time to seperate the noise from real meaningfull reversals. That's why I have a disaster stop on in case I really miss something. I try to be in as much of the time possible. Since it's swing trading it's really quite relaxed. I just shouldn't get too relaxed about it. :-) However the way I trade is not for everyone, I am quite aware of this.

Ok, enough beating about the bush: what do I look for ? I look for double confirmation patterns to show up on my 2H (the H stands for hour) charts. This is exactly what happened at the overlap of the US session and the Asian session on Monday / Tuesday (depending on where you live). Somehow I wasn't too awake when I woke up the next day and still too short biased. It happens. We got a double inside bar there; exceptionally that is enough as a signal for me as I regard that as a double confirmation signal. It gave a long at around 1268 USD. That's allready nice in itself as a signal, but I like it to get things confirmed on the 8H chart for my swing trade. This latter thing is sometimes called the 'roll over' by some people. This is the 'triple confirmation' I like to see before I initiate a trade. This is exaclty what happened, we got a breakout countertrend on the inside bar that formed at around 1273 USD. Presto: that's all I need for a good trade setup. Somehow I wasn't too awake when I woke up the next day and still too short biased and managed to overlook that one too. Something which at that point shouldn't have happened.

Why do I want to see a trade on the 8H chart ? Well this more or less coincides with how the trading sessions are divided into the 24 hours a day. The first one being the Asian session, the second one being the European session, the third one being the American session. Like everything in technical analysis: it doesn't have to be perfect. But if it quacks like a duck, walks like a duck and eats like a duck: it is a duck.

At this point in time you might be asking 2H charts, 8H charts ... where do I get to see these kinda charts ? My standard platform doesn't exactly show them and I don't feel like getting me some kinda subscription to some kinda chart package ... Well, although I don't trade with them, I can advise you the demo charting package of Alpari Metatrader 5 version. Unlike many charting packages theirs have their week nicely aligned with how the most important futures market in gold trades (the COMEX, subdivion of the CME (Chicago)). This gets you five nice daily candles in a week. Not six, like quite a lot of charts out there.

In perfect circumstances (=where I expect real big moves) I get double confirmations in my 8H chart (so a kinda quadruple confirmation). This is what exactly happened on thursday: the 8H inside bar that broke out got confirmed horizontally (meaning around the same level) by a key reversal. I finally didn't manage to overlook and miss this one too lol and I got into my long at 1281.40.

Meanwhile what had happened to the original long signal on the 2H chart. It had turned into an inside bar on the daily chart. (remember me getting stopped out of my short biased trade ?). This made some red alert lights pop up: I shouldn't have been stopped out at that point in time. Since my mind still was thinking short there I still hadn't looked at the bigger context. I should have known better by then ... the 8H setup made me think: multi-week long. Now notice how that daily signal is situated into the bigger context: it was around old support horizontally. The 15th of October we had a fiercefull engulfer up that started a bull-run towards 1361 USD. So the daily is now also telling me multi-week bull market. Allthough I am not really a 'targets kinda guy' I'd be really disappointed if we somehow wouldn't take out the high of 1432 at this point.

So let's now look at the weekly chart. At the beginning of this week I told you the market would have a hard time putting in a bullish weekly candle. In fact it somehow did and it didn't. It put in a doji (pinbar type). That's not really bullish as such, but becomes so if the market takes out the high of 1294.20. I expect that to happen over the course of next week. That would turn it into a 'morning star'. But at this point in time I see more then enough bullishness allready. Since it would be situated next to a weekly engulfer up it make would make it an all the more stronger signal. But in fact when you even look at the broader context it's a triple/quadruple weekly signal. Horizontally to the left we allready had an inside bar with an engulfer following in the month of July.

So far does my factual analysis go. Now let's try to do something for fun. Let's try to get out a crystal ball and look at charts the way Madame Soleil does ... For the record: this is not the way technical analysis should be done and often where things go totally wrong ... !

Let's take a peak at the monthly chart, although we are not the end of the month yet and only about halfway. Some things show up allready: in July we had an inside bar that broke up the the upside. That's a nice signal, but as you know by now I want a confirmation horizontally from it. What did we get in October: we got a long stretched out doji. In itself not a meaningfull signal like I explained above. So we have to wait for the end of the month. Reading my analysis above you are allready getting a good feeling what the monthly signal is going to look like in the end. I think it's going to be a bullish candle. That would make for the conclusion of a morning star, situated next to a first monthly engulfer earlier on. And presto: we have a tentative multi-month bottom.

After this last paragraph by Madame Soleil: let's not forget to play this game day by day. That's how it should be done: always keep your eyes open to disprove what you currently got into your head as the most likely road ahead and try to find evidence contrary to that current scenario. 'Flexibility' and 'being disciplined' are key-words in trading even though at first glance the first one might sound totally opposite to the second one. While in reality they are the necessary ying and yang a true trader needs. That's exactly why people often get so confused by the markets.

I learned almost everything I know just by looking/staring at charts for eternities over the years. Although I was lend a helping hand here and there by other traders. Even now I sometimes overlook things at times ... but I try to learn from my mistakes and correct them as soon as possible. I have gotten better at that last part over the years. ;-)