Nowadays, anyone attempting to get into technical trading will get bombarded by a flurry of chart indicators and overlays. As newbies, it is easy to get carried away with these charting tools. You'll see rookie chart analysis get obscured by a dozen indicators turning their charts into abstract paintings. Well, this is far from how the pros do it.
It's important to note that when you look at too much information, you'll bound to get conflicting signals which may often cause faulty trades. When you observe how veteran traders study the chart, they have little to no indicators plotted. They analyze first the main source of information where all these indicators derive their data from, and that is PRICE.
Price is regarded as the leading indicator above everything else. It will move first before any news, disclosures or earnings get to be released. It shows you where volume is flowing. And it moves ahead of any major market breakout or breakdowns. As such, analyzing price will lead you to making the right moves as they start to happen.
I always believe that prices move first and fundamentals come second. - Paul Tudor Jones
In this post, we will give a brief guide in unraveling the importance of analyzing price and the wealth of information it provides to traders.
1. Sentiment
Price discounts everything. Whether it is out of speculation or due to fundamental value, price will reflect in real time the sentiment of the investing public. Even before a big news comes out, price will start to move in response to it.
Buy the Rumor, Sell the News
The sentiment of the market movers are the ones that matter the most. Since most of us do not know what they will buy or sell next, it is through the analysis of price action and volume where we can get potential clues.
Major plays happen at such short notice. Most of the time, a stock that breaks out from a steady accumulation will leave the investing public in confusion. "Why is it going up?". Then when the news is released, the smart money will start to sell at strength while the clueless herd start to buy at the top. Thus the famous term "Sell on News" came to be known.
The chart above shows the run up of NOW during the telco play season last 2018. Even before any news were released, you can see that price already started to move months prior. Breakout in prices and huge buying volume were indicative of big institutions moving with inside information. When official news came out, the price have already declined by -65% from its peak.
This other example is very telling of a "Buy the Rumor, Sell the News" scenario. Early 2019, the price of PHA rallied by 370% within a week. Rumors of a potential tie up with SAMA Global caught fire in trading forums and everyone wanted to get in. However, you can see in the chart that the price declined steadily after that 1 week rally. News was finally released on August 2019 that the deal was no longer pushing through.
These two examples are concrete evidence that prices will always move days, weeks, or months ahead of the actual news. When it is trending in the news, it is already too late. Thus, analyzing price action is mandatory if you want to participate in major plays as they start to happen.
2. Trend
Price will show you if the trend has momentum or is about to reverse. Even before a potential crisis, price will already show early signs of weakness. Key supports breaking down and a spike in selling volume are tell tale signs of what is to come. If you are able to interpret price effectively, you will be able to get out of major market meltdowns before it happens.
The Trend is Your Friend Until it Bends
The 2020 market crash of PSEI is a good example of how price provided initial signs of a major trend reversal in the market. 2019 was a sideways trend for the overall index. But by January 2020, price started to show weakness as it approached major market support levels. By February to the first week of March, 2 major multi year supports of the index broke down. After a week, WHO declared COVID a global pandemic which accelerated the ongoing panic selling.
If you were monitoring price action, you would have liquidated your positions completely on the initial breakdown. This would have saved you from the crash and would have allowed you to place at market recovery for a quick profit.
3. Historical Patterns
Since supply and demand is fueled by human behavior, price movement will tend to repeat similar patterns. Thus, we see the market transition to major cycles over time. During a crisis, price drops. It recovers as the economic climate eases. Earnings rise, fueling demand. Market soars until it is met with another crisis. These circumstances happen every time and it is price that will dictate as to what cycle the market is in now.
The chart above is a basic illustration of what a market cycle looks like. Over the course of history, price continues to transition in between these 4 major cycles. As a trader, knowing what cycle the market is in is very crucial as each one dictates a different trade approach in terms of risk and strategy.
Price Action is the Boon of the Common Trader
Remember that there is a multitude of people who are participating in the market. Most of them have access to insider information with big fat pockets to back it up. A common trader will have little to no access to these. But clues are always embedded in price movement and volume. The market movers can hide their information but they can never hide their trade activity. This is when analysis of price becomes crucial. It is the footprint of major market activity and it will always point you to the right direction.
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