Sunday, September 18, 2011
Example of charting and understanding trend
Here I've attached a nifty daily chart with the Median line drawn with Upper median line parallel and Lower median Line parallel.
How do we interpret and form an opinion of the trend and where the prices are heading?
We start the median line from an important pivot point and draw the line through 50 % of the next major retracement / swing.Parallel Lines are drawn equidistant from the Median Line through the extreme pivots of the retracement swing.The Median line set can be drawn as soon as the price crosses 38.2% R of the retracement swing.
Now , the Lines are ascending and we call this an Ascending Pitchfork and the trend is moving up as long as the price is contained within these parallel channels.
The Price will not move up in a straight line and will alternate between rallies, retracements and consolidation periods .
The basic concept for the trade Decisions are
1.Lower Median Line parallel is a support Line.Testing and retesting of this line gives a good entry Point for Buy.
2.When Price climbs up and meets Median line,
2a.It will meet with Resistance and retrace the upswing recently completed.
The retracement can reach the Lower Median line parallel again or after a minor swing down can breakout of the previousminor swing pivot.So the breakout can be another Buy Entry point.
2b.The price consolidates for a longer period within a range.The breakout of this range Gives a good BUY Entry point.
2c.The price zooms through the median Line.It indicates a strong trend and price has a probability of reaching the Upper median line parallel.So adding to positions can be done.
3.Upper Median Line Parallel is the resistance for the upmove.When Price meets the UMLH , one can book profits on Long positions.
3a.On meeting the UMLH, a red candle indicates the trend reversal.One should wait for a retest of the high, formation of a lower high, or breakdown of a minor swing retracement and go short.The first target will again be the price bar meeting the Median Line.
The Price need not meet the UMLH.The formations of swings at the upper channel and the breakdown into the Lower channel will give the indication the trend is reversing.
So the next step is to look out for formations where we can short the stock / index.
At the beginning of any trend , we cannot assess the strength straightaway, so we need to enter trades with always the stoploss in mind.Price patterns, Breakouts ,volumes give hints about the trend direction.
In Median Line System, we look out for patterns Like 123 pattern, Breakouts of Minor Swings highs,minor swing lows to enter a trade with a minimum stoploss.
In the attached example chart, there is a minor retracement at 50 % level of Retracement and breakout of the swing high gave a good Buy entry point with the swing low as the Stoploss.
When it reaches the Median Line, there will be a resistance and this point is the place to book part profits.The price patterns at the Median Line which have to be watched out for
At the median Line the trade decision will have to be taken based on the above.
Again coming back to the example chart, the price retraced from the Median line and reversed again.The breakout of the Swing High at the Median Line gave a second entry for Buy position.
The price goes through a consolidation mode and after touching the Lower Median Line parallel climbs up again.Now the breakout of the previous sminor swing high gives another Buy Entry point.The meeting point of Price Bar at the Median Line will be the part profit booking target.
Some simple tips to follow would be :
Ascending Pitchfork: Up Trend , Look out for BUY trades ( trend trades)
Descending PitchFork:Down Trend , Look out for Sell trades