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The Traders Wheel
10/10/99 by Alan Farley

3x3 Market Analysis

Skilled traders learn to recognize the trend by watching price react to other important levels. Focusing on key relationships, they effectively predict market moves through convergence or divergence over a small number of price bars. Learn to read this powerful axis of price change with three sets of technical indicators that answer three important questions:

What is the trend or range intensity?
What is the direction of the next price move?
When will this price move occur?

All stock movement can be characterized as alternating between trend and range. This observation is true for all time frames. Markets move through a constant cycle of synergy, balance and conflict as trend intensity and direction shift alignment through different period views. The strongest trends arise when multiple time frames stack up into directional positive feedback. The most persistent ranges emerge when discontinuity increases the noise of negative feedback through many periods and stalls price change.

Technical indicators have difficulty viewing both trend and range at the same time. As a result, important formulae tend to align along specialized paths that focus on one or the other. Use trend-following tools such as moving averages, MACD and price ROC to look into the rear view mirror and establish trend strength, momentum and direction. Then reach forward with RSI, Stochastics and other oscillators to inspect swing range cycles that trap markets between measurable extremes.

 

You can investigate a poorly understood quirk of market behavior using a third class of indicators. Standard deviation and reversion to the mean reveal a strong bias for markets to return to neutral states following supply/demand price swings. Traders exploit this market behavior when they can locate extreme price zones.

Price channel construction provides an excellent source for deviation analysis. Popular tools such as Bollinger Bands identify price imbalance where reversals should occur. They also point to narrow congestion where breakouts will develop. Even a simple Parallel Price Channel will locate natural price extremes where the best trading opportunities exist.

View all three sets of indicators on a single price chart for a quick snapshot of the current trend. When all views converge and are verified by the price pattern, the odds for a sharp directional move greatly increase.

 

 
Alan Farley is a full-time trader and author residing in Denver, CO. He publishes The Hard Right Edge premier web site for trader education, technical analysis and trader resources featuring both Morning Trader and Traders Workshop. The site provides traders with comprehensive resources including original tactics and strategies on multi-trend technical analysis and short-term trading .

  Alan also authors on-line training technical analysis in association with independent sites. His most recent publications include the Mastering The Trade on-line workshop, Momentum: Riding The Tiger, and Time of Day. In addition to writing, he is an outstanding speaker and lecturer on short term trading strategies.

 He has been featured in Barrons, Smart Money magazine, Tech Week, MoneyCentral and TheStreet.com.

 

 

 

 
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Last modified: April 02, 2001

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