As a technical trader, I rely on technical and sentiment indicators to give me the edge I am looking for; they guide me towards a buy or sell decision. But I learned long ago I must analyze trading price action in relation to the other indicators before I can trade with confidence.
You can latch on to an indicator, but if the price does not confirm what the indicator is telling you, buyer (or seller) beware.
Timeframes matter when it comes to trading price action
You can look at price action on the SPX 500 across different timeframes and come up with an entirely different view.
For instance, a 15 minute chart might show a very bullish short term momentum move underway, while the daily chart does not. If you’re trading over a one to three-day period, the 15 minute chart is a worthwhile signal to follow. But if you’re trading for days or even a couple of weeks, the daily chart is a more valuable tool. (FYI, that is my preferred time frame.)
Your job is to recognize the difference that timeframes make, and act accordingly.
How to analyze price action
When other indicators align with trading price action, I have greater confidence in making a trade. Here is a break down of the process I use to determine if the trade is a good one (or not):
- Identify if there’s a strong daily trend on the price chart. Is there a breakout on price?
- Check out the volume. Is it strong or weak as the price makes a move?
- Look for followthrough on price. Are any distinctive chart patterns evident?
- Analyze the MACD. Has it made a crossover move?
- Look at relative strength. How is the stock performing versus the rest of the market?
- Consider money flow. Is there a positive flow as the stock moves higher?
- Analyze option activity. Is big money flowing towards option strikes?
- Assess the stock’s position. Is it overbought or oversold?
Analyzing price action by asking and answering these questions, can help you make a sound trading decision. Perhaps you use other filters to help you come to a conclusion about a trade; there’s no right or wrong way to approach it. Based on my trading timeframes and experience, these work for me.
If you want to know what else works for me, grab a copy of my eBook, Yes You Do Have Options, which features 13 rules I live by.
