How to Train Your Eyes to See Charts Like a Pro (Part 3)

08/18/2010 12:01 am EST

Focus: STRATEGIES

Timothy Morge

President, MarketGeometry.com

(Continued from Part 2)

I see one other clue. It isn't much, but it may be of interest, depending on how a trade was framed out. Price is testing the area where it should run out of directional energy, right at the multi-pivot line.

You can see the upper multi-pivot line has held, and even though it had one nice poke through, price has failed at the upper multi-pivot line. Now price is at the lower multi-pivot line and again, it had one poke through, but that move lower failed, so this multi-pivot line has done a good job showing where price should run out of directional energy.

Can we use this small clue? Do you have any ideas? Can you frame a trade looking at this chart?

Let's zoom in for a closer look.

chart

Click to Enlarge

When I look much closer and focus on details as small as how each bar unfolded and even how each bar opened and closed and its high and low, I see a few more clues.

I see an open gap above the current price action, and I know larger traders love to push prices to fill open gaps given any reasonable opportunity.

In the last three bars, I see a set of double tops and double bottoms. This is a sign of price clumping. When it happens in an area where price is expected to run out of directional energy, I pay close attention.

Can you frame a trade now in your mind? Plan it out.

Which way do you think price is headed? Where would you enter? Where would your initial stop loss order be placed?

Furthermore, what is your profit target? Are you going to use a single profit target or multiple profit targets?

What is the risk/reward ratio on your potential trade as you've just planned it?

Let me add one more set of lines before I show you how I would frame out a trade in this area.

chart

Click to Enlarge

I zoomed back out and added a traditional Median Line, using the prior major low as pivot A, the single poke above the upper multi-pivot line as pivot B, and the current area of clumping as the potential pivot C.

As soon as I draw in the blue Median Line and its parallels, I pull my chair back from my desk three or four feet, close my eyes for a few moments, and then open them to see what catches my eyes.

Try it. What catches your eyes? Do the lines I've added help your focus?

More tomorrow in Part 4…

By Tim Morge of MarketGeometry.com

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