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Trendlines reflect hidden market order as well as self-fulfilling prophecyBUILDING CUSTOM INDICATORS Most technical indicators tune to preadjusted settings by the author, charting software or website. Use these canned inputs to track crowd behavior, but set them aside when growing skills demand original strategies. Trends and opportunities exist throughout all time frames. Proper choice of both indicators and their related settings requires considerable attention. Common parameters can misalign with particular tactics and trigger execution decisions that depend on false information. Vary time frame to track cyclical price behavior and build a 3D trend model. Place one custom set above and below a central study that correlates with the chosen holding period. This may require plotting different indicator types for each length chart. For example, to track faster signals on intraday holds between 1 and 3 hours, try a 6-17-9 MACD histogram on a 60-minute chart, 5-3-3 Stochastics on the 5-minute, and watch the broad daily action with 8-day Bollinger Bands. Many indicators apply smoothing averages to their raw calculations. These slow down choppy output and filter individual data to emit fewer false signals. Swing traders apply these moving averages in different ways to remove inherent bias from the classic formula. Exponential MAs offer the most common variation. This measure applies greater weight to more recent input and filters the double count tendency of simple MAs. Experiment with alternative MA calculations when indicators require a smoother appearance. The varied output may improve a particular tactic or method. Use this custom technique to speed up, slow down, or filter out certain levels of data. When a classic analysis method gains popularity with the masses, price adjusts to undermine its most common outcome. An indicator may stop working entirely when the trading majority bases decisions on that price examination. This popularity forces constant reevaluation of indicator effectiveness and choice of parameters. Common knowledge focuses upon specific time periods and smoothing averages. Swing traders adjust by phasing their parameters ahead of or behind those of the crowd. This capitalizes on the herd instinct and uses its behavior to build trading profits. Canned indicators never answer all of the important questions for each promising setup. Because this limitation adversely affects performance, develop customized views of market activity that reflect and support unique strategies. Start with pieces of popular tools already in existence. More importantly, learn to articulate exactly what new information will support evolving tactics. Identify the question first and then compose an original way to answer it. Test many variations of a new math application before moving on to the next step. Once in place, find optimum smoothing averages through trial and error. Then run this new indicator through a systems testing program such as TradeStation. These heavy number-crunching software programs take complex data sets and evaluate them through numerous markets to measure how well they signal primary buy and sell zones. PATTERN TOOLS Apply price pattern tools before beginning any other chart analysis. They provide the core knowledge required to execute original and profitable trading strategies. TRENDLINES Trendlines reflect hidden market order as well as self-fulfilling prophecy. Because many market participants watch straight-line extensions of two prior highs or lows, odds increase that any extended line will support or resist price when struck. Trendlines grow stronger after each successful test. Some may persist for years, while others may break in minutes. An individual trendline will print on the arithmetic or log scale chart, but not both at the same time. Always toggle between chart types to uncover these important S/R barriers. Trendlines have many applications beyond their well-known uses. The indicator plots average momentum for the trend that forms the line. The rate of price change up or down the line always remains constant. Therefore, these straight lines reflect momentum convergence-divergence when compared with other price inputs. For example, momentum increases when price expands away from a trendline and decreases when it rolls toward the line. Also monitor the distance between trendlines and major moving averages. This oscillation provides significant timing feedback when used in conjunction with Pattern Cycles. Trendlines often print in a psychotic manner. This odd phenomenon occurs through many scenarios. For example, important lines or channels may vanish for no apparent reason and then reappear unexpectedly months or years after their departure, still exerting major influence. Or an apparently normal trendline may suddenly act as a price swivel, rather than support or resistance. Price strikes it once, and the line holds but then breaks on a second test. Price thrusts through, pulls back, and tests successfully from the other side, but then fails once more and jumps back to the original side. The line becomes a central pivot axis that drives swing traders crazy. Legitimate trendline breaks display common price mechanics. Bars expand sharply away from the violation point on greater-than-average volume. Pullbacks occur, but not until price prints a good distance away from the break point. Volume then declines on a slow reversal back toward the former barrier. When price breaks a trendline on low participation and doesn’t expand quickly, an immediate jump back across S/R often occurs. This behavior triggers an excellent pattern failure signal in the opposite direction. Watch for price to draw a miniature reversal pattern right across the trendline. Use these small double tops and bottoms to signal a low-risk fade entry. The relationship between trendlines and the charting landscape shifts relative to the time frame of each element. The swing trader must properly tune time to explore different aspects of momentum. Make certain the time inputs match holding period for the intended execution. For example, the plot of a 6-month trendline has little meaning for intraday trading unless price touches it that day. But the return of a 5-minute candlestick to a 3-hour trendline may pinpoint a profitable entry zone. The first break in a major trendline does not signify a reversal. It flags the end of a move and beginning of sideways congestion. Take the time to understand the difference between that phenomenon and an actual trend change. Congestion represents an important feature of the underlying trend. It often leads to a new price thrust in the same direction as the previous one. Sometimes congestion evolves into a legitimate reversal, but other conditions must support the change first. Price action rings a profitable buy signal when it remounts a broken trendline. This occurs after a pullback that follows the breakdown. Momentum reverses in the direction of the trendline, and significant participation spikes price back through the line. Support from this new floor should be strong and eventually push the growing rally into another breakout move. Look for price waves to print a series of rising trendlines that arc upward above the original remount level. Charting landscapes may print conflicting trendlines within the same time frame. This adds considerable noise to any trade analysis. Each intersecting force must resolve price direction through crowd participation. When two or more trendlines clash, consider a quick position exit until conditions resolve. Don’t confuse this event with trendlines that print within different time frames. These represent important profit opportunities. This setup predicts that price within the smaller wave will come under the influence of the larger trendline and reverse course. PSYCHOTIC TRENDLINES Always seek innovative methods to evaluate new setups. Many odd chart shapes have characteristics that generate original ways to look at the markets. For example, standard trading wisdom uncovers a trendline whenever three or more relative highs or lows line up. This exercise sketches a straight line under rising trends and over falling ones. But many participants fail to realize that a trendline drawn through both highs and lows contains predictive properties as well. Psychotic trendlines (PTs) encompass all straight-line phenomena not covered by classic charting landscape rules. They recognize that some market participants will act on the extension of any two price pivots. PTs don’t have the power of normal trendlines but can exert tremendous influence on price development. For example, watch their great impact when vanishing trendlines suddenly reappear after months or years. Evaluate PTs in relation to other chart elements and use them for simple cross-verification. Also determine whether they define classic S/R or swing axis events. A straight line drawn across any two relative highs or lows should produce a random extension with no predictive power. But in Methods of a Wall Street Master, Vic Sperandeo illustrates how his two-point method will locate breakouts when combined with specific trading rules. Apply PTs in a similar manner. But any strategy must also address several variations since these lines represent price pivots as often as S/R levels. First locate a PT on a chart of interest. Then see whether price gaps through it repeatedly or whether bars swivel back and forth across its boundaries. This signals a pivot bias for that line. Next categorize whether the slope trend is up or down and whether it acts more as support or resistance. Then trade primarily in the direction of the slope if the PT shows classic S/R. For example, if the trend descends and displays price resistance, sell that market at the line. Apply simple trading rules with pivot PTs regardless of trend slope. Expect that price will hold the first two times that it strikes the line but fail the third time. This tracks the same strategy that swing traders use for the second test of a horizontal high or low. If the PT also exhibits multiple gaps through past pivots, odds increase for a gap to ultimately break the line. But don’t take the trade unless cross-verification also pinpoints a breakout or reversal at this level. |
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