One of the challenging aspects to active trading is the information overload that many traders face, by using overly complicated technical indicators, says professional trader, Ken Calhoun of TradeMastery.com and DaytradingUniversity.com.
In this three-part series of articles we’ll focus on how to use simpler price action moves (along with basic technical indicators like volume), to identify potential trading opportunities in an easy-to-follow, straightforward manner. Many top professional traders also rely primarily on price action to help identify entries and exits.
Price Action Patterns To Look For When Entering a Trade
One of the first major patterns to identify is multi-day major high-low ranges in the stocks being traded. In Figure 1, [Prologic, Inc. (PLD)], it’s evident that the trading range is just over 1.0 point (from 32.8 to 32.9). This major range is the first piece of information to use when developing a trading plan for each new entry.
For example, if a trader now enters a trade at 34.5, we use this 1-point range to develop a price target (34.5 + 1 point = 35.5). Looking for the depth of major cup patterns as seen in this chart is also helpful. In this example, the left side of the cup occurs on August 21 up at 33.8, with the right side of the cup completing on August 28, at 33.8. When looking for a new trade, the astute active trader now has a “price action move”, defined by the price elasticity as seen in this chart.
Identifying the 3- to 5- day high-low “box range” is a key price action pattern to look for when developing decisions for swing trades. Using these ranges can help with decisions related to when to wait, when to enter, and where to exit a trade once it’s taken.
Price Action Moves for Intraday Trades
Identifying the “length of single price action moves” before retracements, is one of the most important price action moves to scan for when identifying intraday trading opportunities. Looking at Figure 2 [Solarwinds, Inc. (SWI)], it’s evident that it moves in price action increments of 1 point before price action slows down or reverses.
NEXT PAGE: Price Pattern Pivots Work