I expect the S&P 500 index to trade between the recent high and low for a while, several weeks o...
Using Volume to Confirm Patterns
03/23/2011 12:00 pm EST
Pattern recognition is a time-tested, reliable method, and veteran trader Harry Boxer discusses how he uses multiple time frames and volume to identify and confirm patterns on the charts.
One of the things traders look at in the charts is pattern recognition, and how you find good trades using that? Our guest today is Harry Boxer to talk about that. Harry, first of all, what is pattern recognition?
Well you know, in the last 40 years I’ve been doing technical analysis, you keep seeing patterns repeating: Triangles, pendants, channels, trend lines, and head-and-shoulders, whatever the patterns that you see in textbooks. There’s a reason why they’re in the textbooks because they repeat often, in all time frames. From one-minute charts intraday, which we daytrade with in our site, and then there’s also the daily charts, weekly charts, whatever. I find that most useful for short-term trading are one- and 15-minute charts, and for daily chart, for swing trading, daily charts and various different time frames, but that’s what I find useful.
A lot of traders find it easy to see the pattern after it’s happened of course, and they can see it and when they’re learning how to recognize it, it’s easy. But actually knowing that it’s forming while it’s forming, on the right side of the chart, is more difficult. How do you get to that point?
Well it’s funny because when I’m drawing lines immediately my eyes focus on a pattern, I go right to it and draw the line so that I actually define the pattern. One of the things that’s important in any consolidation pattern, is that towards the end of that pattern, a low-volume ebb—that’s a phrase I coined—the ebb and flow, when it comes to a low volume and it’s a balance between buyers and sellers, there’s a quiet period for a day or two that usually is a precursor to a move. Oft times I’ll watch for a sudden volume surge to come in and break that pattern, which usually sets off at least a short-term move.
You’re looking at the candles above and volume below to get an idea of what’s happening. Is there a way to kind of speed up that process, to learn it and to recognize it, so that when you do start to draw lines, you see it happening yourself?
To be honest with you, I think that it takes a lot of years of experience and, it’s very repetitious. The more you do something, the more you analyze, the more hours you spend analyzing and looking at charts, the quicker and the more readily you’ll be able to observe those patterns and recognize them.
Are there certain patterns that fulfill themselves more often than others; that have a better success rate?
I think so. In a bull trend or a bear trend, you want to see a thrust in volume with a price thrust, then you want to see a kind of a consolidation pattern where that thrust is being digested, so to speak, and then the low volume at the end of that pattern, and then the new thrust begins that will set off the next days. Because stocks tend to move in steps. When a stock is following a perfect channel, you’ll find that it hits the top of the channel, bottom of the channel, top of the channel, bottom of the channel, and it’s amazing how they’re parallel and usually near a 45-degree angle.
And do you want to see this happening on longer time frames and the shorter time frame at the same time?
Yes, yes I do. There’s always patterns within patterns. I’ll always draw the long-term channel, then within that channel, usually you’ll see shorter-term channels. When you go into a 15-minute time frame or a shorter term than a weekly or daily, you’ll see that there’s a lot of times intraday trends, there’s four or five day trends; those are swing trades.
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