Human beings are generally creatures of habit. As Albert Einstein once said, “Man like every other animal is by nature indolent. If nothing spurs him on, then he will hardly think, and will behave from habit like an automaton.“
This aspect of human nature is useful to us as traders. As market participants become comfortable in a trend, they fall into daily routines. This creates patterns of action throughout the trading day. If we can identify those patterns, they become important tools for increasing the predictability of our trades.
To identify patterns and recurring action in the market, I simply track the daily action of my stocks. I want to focus more closely on the previous five days, because only the more current patterns will be useful. In reviewing the information, patterns become apparent.
This is the type of information I look at:
1. The Trend
a. Daily chart trend
b. Five-day trend
c. Five-day average range
2. The Previous Day’s Momentum
a. Previous day’s low
b. Previous day’s high
c. Previous day’s closing price
d. Closing Momentum (where the stock closed in relation to its intraday range)
3. The Intraday Action
a. Open price
b. Size of the open gap (gap between the open price and previous day’s closing price)
c. Opening move. (Did we see a climb or fall at the open?)
d. Size of first move
e. Time of first top or bottom
f. What time of day was the intraday Low and High hit?
g. Did it follow one of the Common Open Patterns?
h. What was the afternoon action like?
Note about Tracking:
I usually track this information loosely on a pad of paper, jotting down notes throughout the day. Yes, I could do a more thorough job of it if I created an elaborate spreadsheet and spent a few hours each evening pouring over charts. I find, however, that the more complicated and cumbersome you make things, the less likely you are to keep up with it. So please don’t go overboard. Jotting down the most pertinent information, and doing a quick review of the five-day chart during your morning preparation is most often enough to get the job done.
As always, if you have any questions, feel free to contact me Shawn Klug