Today’s Q&A is a VERY recent one. It just happened today, but it’s such an important question I thought I just had to add it to the newsletter.
I enjoyed and learned a lot from reading your best article: Price Analysis – A Top Down Approach. An experienced trader mentioned to us that it is a must-read for any aspired scalper who wants to understand what is a good approach.
Something hanging me in the air in the article though is about reading price actions of the swing momentum and volatility in order to know the strength of trend. Would you spare a few more words on this subject?
I’m glad you liked the article. Thanks for the great feedback.
Great question – tough one to answer though in an email.
Once I’ve determined the ‘area’ that will provide a lower risk and higher probability trade, within a framework of support and resistance, the question becomes, “where do I enter?”
The fact is that the closer I can enter to the support or resistance zone, the lower the risk I am taking. Most novice traders feel that waiting for more confirmation of a change of direction provides you with lower risk. I see the reality as opposite to this. The more confirmation I wait for, the further price is from the S/R region, and so the greater the risk. The less confirmation I have, the closer I am to the area of maximum supply/demand imbalance, and therefore the lower the risk.
That’s what makes it so difficult. Trying to enter as close to the S/R top or bottom as I can.
To do this, is simply a function of LOTS of chart watching. Watch how price acts as it moves quickly into S/R. Watch how it moves slowly into S/R. Watch how it acts when seriously overextended into S/R. Watch how it reacts when accelerating into S/R etc. I can give general guidelines, but a lot of it is developing an intuitive feel for whether price is going to punch through the S/R, touch it, or pull up short. Of course, you don’t always get it right. I miss a lot of moves – but that’s fine because the next one will be along shortly. You only need a small number of trades a day – you don’t have to catch every move.
I know I haven’t really answered the question – to be honest it’s impossible to answer it in an email. Watch charts.
It helps as well to think about price movement from the perspective of the battle between the bulls and bears. As you look at price, ask some questions: Price is moving – where’s it going? Where it’s target? If it keeps moving, where is the absolute worst place to go long/short? Where are people in the market placing their stops? Where are they placing their targets? Where are they going to face maximum fear, and have to dump their positions.
That’s all trading is. Find the low risk, high probability areas. Once price is in those areas, is it conforming to your expectations (eg. price has moved up into an area of resistance – is it now stalling)? Now where’s the best entry point within this area. Then enter at that point and manage the trade.
Best of luck,