Wednesday, December 12, 2012

Price Action

MetaStock SPRS Series - Week 98 - TechniTrader® Stock Discussion for MetaStock Users - Price Action - December 10, 2012
By: Martha Stokes C.M.T.

Traders tend to think merely in terms of up or down or momentum. What they often fail to consider is who is driving price and why. If a trader understands who is driving price and why they are moving price, then they will be better prepared to anticipate what price will do next. In trading successfully, it is not what happened today in the stock chart that matters as much as what will happen tomorrow, especially for short term traders.

There are 4 positions that are within a stock at any one time:
  1. Traders and Investors buying stock to go long either to swing or intraday trade, or to hold for weeks, months or even years as an investment.
  2. Traders and Investors who are selling the stock to close out their position, either for profit taking or to use the proceeds to buy other stocks.
  3. Traders Selling Short are short term trades based on the anticipation the stock will move down and they will net profits on that move.
  4. Traders Buying to Cover are short term trades to close out a sell short position, either for profit taking or because the trade is going against them.
Each group has its own agenda, time frame, goal or target price, entry order, stop loss, and reason for their purchase or sale of that stock.

Which group or groups dominate determine the energy, velocity, and duration of the short term price action and volume action.

Below is a great example of how the 4 different groups buying and selling alters the price action, volume and energy, angle of ascent and descent, trendline pattern, and entry signal and exit signals. The changes over time as to how price moved in this chart example is directly corresponding to which of the 4 groups above were at any period of time, in control of price or dominating the price action during that period.

Chart 1

As a retail trader, the more you understand about what price and volume action corresponds to which group or groups in control of price, the better you will be able to determine and anticipate what price will do next in the short term. In today’s market the institutions dominate and where, how, when, and why they are buying or selling dramatically alters price movement.

Whenever you are buying a stock or selling short, it is imperative that you also consider who is in control of price at that moment, even if the stock is in a consolidation or platform pattern, because who is in control will govern what direction the stock will take next, how long the move will last, and the potential profits whether you are trading up or down.

Many traders just want to find a stock that is going to move when they are still at the beginner level. But as you advance and gain more experience, you realize that understanding the movement is even more important than finding a stock to trade. Once in a trade, this understanding will help you make wise decisions rather than impulse decisions. The more you understand why price is moving and who is moving price, the better trader you will become.

Trade wisely,

Martha Stokes, C.M.T.
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
MetaStock Partner

©2012 Decisions Unlimited, Inc.

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