When you look at a Chart You Should Ask These Questions
Beginners often look for entry signals. Professionals look for whether the conditions are right for trading. These questions will help you establish whether you should be IN our OUT of the market. Simple but objective technical analysis helps.
These questions will help you formulate a plan and strategy. Once you establish the conditions of the market, you will be able to answer the question that everyone thinks is very important.
Where can I enter the market?
What type of entry can you use? Once you know you should be in this market then you have a variety of ways to get in. It’s up to you which entry method you use. Here are some of the options available to us all:
- A Pullback Entry?
- A double Bottom/Top on a pullback?
- A Trend Bar?
- Candle formations?
- A fractal breakout?
- A Range Breakout?
- An Entry Signal Indicator?
- A mean reversion type of entry?
- Trend continuation entry?
- Etc etc.
Once again, we must NOT put greater emphasis on “how to get in” before we know whether we should or should not get in.
The first question is to establish the market phase.
It would help the trader to understand the concept of the Market Cycle. It’s not that harda to understand. Market either trends or stays in a range.
The next question you ask or action you take is a natural next step based on the previous step. It’s a flow chart.
Question 1: Is the market trending on this time frame or is it in a trading range?
Question 2: If it’s trending, what is the current stage of the trend?
Question 3: If it’s range bound market then we have to check if
- It’s in a wide trading range or
- It is a tight trading range
If there is a wide or normal trading range, then there are ways to trade it. But if its in a tight trading range, then we should stay away from trading inside this range.
Where are the levels that you can use to make entries? Can you find Double Tops and Double Bottoms? Do you see a confirmation candle near the highs or Lows? Can you drop to a lower time frame and trade off this information? (it might be trending in a lower time frame)?
A Trading Range can have two types: A Trading Range is either Wide or Tight. You can classify it as Very Wide, Wide, Normal and Tight if you like. But let’s keep it simple for the purpose of this article and my trading plan.
There are trends inside wide and very wide trading ranges. Those you can trade either with reversal entries or pullback entries near its start or mid points.
Narrow or tight trading ranges do not have enough space for traders to make money. The risk/cost is often higher or the same as the reward. No point wasting time on this.
When a Trend is Created, it can have these 3 phases
- Breakout Phase: consecutive same colour candles, no pullback, can have a pause seed or an opposite colour candle but must not break the opposite high/low
- A Trend Channel: Market does not always breakout into a momentum breakout phase, sometimes it can simply breakout and immediately pullback, and the sequence continues which creates what is called the trend channel. A trend channel has two forms
- A Tight Trend Channel: very small retraces
- A Normal Trend Channel: decent pullbacks for good entries.
- A Wide Trend Channel: both sides have good range, hard to stay in but both sides can make money
- A Channel Wedge: A trend can also start to create a wedge type of channel. Often after a breakout phase, the market starts a wedge channel. When the symmetry is broken (price breaks near the tight end of the wedge) it often turns into a trading range.