Trading what you see, 2

cont'd discussion aboutTrade What You See: How To Profit from Pattern Recognition (Wiley Trading)

Usually, the odds are in favor of a trading day being a range bound day in which prices vacillate between two price points. But sometimes the trading day is a trending day in which prices go unidirectional with short countermoves throughout the day. Therefore, knowing when the odds favor the day being range bound or trending is relevant to decisions such as whether to take profits quickly (during range bound days) or to use a trailing stop to see how far price will go in the same direction.

The authors of the subject book say that if you see one of these three conditions, then you should trade on the assumption that you will likely have a trending day.

1. If yesterday was a narrow range day, such as the narrowest price range of the last 7 days, then today is likely to be a trending day.

2. If yesterday is a day in which the open is about the same price as the close, then today is likely to be a trending day.

3. If today opened with a gap followed by wide range bars in the first 15 to 30 minutes of trading, then the rest of the day is likely to be a trending day.

The authors say that during a trending day, prices move unidirectionally, interrupted by moves in the opposite direction by amounts equal to not more than 0.50 of the movement in the direction of the trend (and that usually such countertrend moves are only 0.382 of the preceding movement in the direction of the trend).

...cont'd tomorrow...

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