How to read a Chart - Part IV: Perspectives on PoI
Points of Interest
Introduction
One of the most common mistakes in trading ist the trading somewhat somewhere in the nowhere, which in general results in a bad trade location, wide stops, being stopped out very often or being right while being wrong.
Thus, in trading it is paramount to wait patiently for your setup to appear, and not every setup is of the same quality. Even though high quality setups are not appearing on a 1-minute-, 5-minute- or 60-minute-basis, waiting will actually not only save you money, but also result in higher profits, higher trading confidence and less stressful decision-making. Even if you’ve already heard of the basic principles, they are just right.
A. Highs and lows
As I’ve pointed out in my previous article “How to Read a Chart Pt. III”, the highs and lows on a daily chart are building the overall structure. Don’t get me wrong: the weekly has some nice perspectives too, but you should watch it if you are an investor going in for 10+ years. The highs and lows on a weekly chart still do have importance on lower time frames, but you shouldn’t make a decision on trading entries for a plus 5 years investment opportunity on a 1-minute- or even a 1-second chart. Why are highs and lows important? They are used as reference for past and thus future resistance. Does this always apply? No for sure, that's why structure is important. So before we’re diving deeper into this subject, let's have a quick comparison of weekly and daily highs and lows.
I’ve marked the high and low of the weekly chart in thick red, just to show that everything you might see on a weekly basis you're also able to see on a daily basis. In orange is the range of the past week and in blue the range of the current week.
So in general: if we’re trading above the previous week’s range, we are in general long biased, if we’re trading below the previous week’s range, we are short biased. Does this always apply? No! But when does this apply? When the big fishes, the “whales” are showing interest in selling or buying at those specific points. Something we can derive from the chart above is the following: the previous week’s low got rejected, but the value is shifting down; this means, that if we’re trading above the current week’s high there are two scenarios: either we’re going up fast, breaking the previous weeks high or we are being rejected and shifting down again - at least to the bottom of the range. If we're going below the low, it might go quick, fast and harsh.
B. High and low of the previous day
Applying this principle from chapter A to intra-day trading, it goes alike: in general, if we are trading above the previous day’s high, at large we are long and if we are trading below the low of the previous day, we are short. Let’s unfold this beauty of perspectivity:
In the picture above I’ve used a random high/low indicator - displaying the highs and lows of the previous day's session - as there are hundreds and hundreds to be found on @TradingView and the reason why is quite obviuos and well justified. I’ve also added “setups” to show you what to expect if you would have traded blindly every single break above the high or below the low. Even if you would have no specific view on the market, no bias or any idea of the markets direction you still would have made 4X (40 times your risk !) at win ratio of 56% - which most people would say is "not good".
C. Ranges
So what are the zones between a day's high and low? It's nothing else than the day's range. You may find ranges on bigger and smaller scales, on a 1 minute to 1 year time frame. What are these ranges? They are zones of congestion, zones of consolidation and zones of value, but mainly they are battlefields.
Let's have a look on a chart:
I've just plotted some of these zones to point out one thing: if you're trading within the zone, you're lost and you will most likely lose money even if you're right about the direction.
You need an edge in trading, and the easiest thing is to trade from one edge to the other edge until a breakout has been confirmed.
D. Big Bars / Big Fat Candles
Don't mistake me: this is not about day drinking, romantic candle light dinner or something like this; it is about big fat candles on a chart and what happened there and what is likely to happen. Some should note that a range on a lower time frame is nothing else than inside bars on a higher time frame. Usually a big fat candle appears if stops have been triggered and thus the sentiment has shifted. So, somewhere within this big fat candle there is support or resistance and it depends on volume and sentiment if we're about to move further in this direction or not, but mostly it is indicating momentum. If you want to trade pullbacks, you need to figure out where the breakout has happened; usually it has happened before the top or bottom of the corresponding range. Additionally, if a big fat candle got retraced to 100 percent, something is fishy, whilst a strong breakout should indicate only a partial retracement if the traders are committed to push prices further in their direction.
E. Value areas and Points of No Interest
As I'm using the free version of @TradingView , I would've attached an image from my order flow software, because there is no decent free volume profile indicator displaying value areas (if I'm wrong, post a link in the comments), but it seems that the image upload didn't work, but anyway. The point I'm trying to make ist this: value areas are showing zones where price is seen as fair and thus the most volume has been traded. If you're using a market profile (tpo or monkey bars), it is showing where price has been traded most of the time. Outside of this range, price is considered unfair, and this is - exactly as ranges overall - where your edge is.
Zooming out and seeing the bigger picture is extremely helpful to not get caught in war zones of higher time frames and big players.
On this chart above I'm using the 200 period volume profile of @LuxAlgo ,visually a beautiful piece of art. Furthermore, it is displaying somewhat similar to a value area and - even more interesting - the valleys in the profile, also called low volume nodes. To use these valleys as reference, you should not make the mistake and look where price has not been traded at all, but where supply and demand have diminished; this is blatantly simple: if there haven't been buyers or sellers at all, price will move on; so you need at least a certain threshold of trading activity.
In grey I've plotted the borders of the range. As you can see, as soon as the price has reached these areas, a reaction has happened. On the upside, it was a head fake, false breakout, emerging head and shoulders pattern or simply: no more buying interest. When price broke down you could have easily entered at the rejection or at the pullback.
Another zone of no interest is the light purple area, which has been established by big bars breaking through it and where one side has been swept. When price broke through and traded above, you could've used the pullback to go long (in the middle of the range though) or when it broke below to go short or to finally close your losing long position.
Quick cheat number 1 on applying support and resistance:
Switch to a line chart, check for the prominent highs and lows, switch back to candle or whatever your preference is and adjust (or don't ;) ).
3 different types of charts, all displaying the same. It is not perfect, it is not a pin point "you will always win and never lose" system, but markets consist of humans which aren't perfect either; and as long as machines are made by men, they aren't neither. And this is the reality of trading: nothing is a one-shot, a bullseye; nothing is perfect.
At last, there is more to trading than placing a limit order into a chart and get rich quick.
Quick cheat number 2 (that no one will tell you because it is too simple to sell it):
Look to the left! Markets have memories, because - and I'm repeating - markets consist of humans, and the only reference points others may use are not any calculations, extensions or fantastic AI structures: at the end it is all derived from history. How did price react at the last reference point? What happened next?
Let's quickly example this:
Think of it yourself: do you want to re-evaluate every tick hunting for signals on a vast amount of indicators or are you just keeping it simple (stupid)?
Key Takeaways
Don’t trade somewhere in nowhere!
Future price action depends on past action!
Switch your perspective if a change has become evident!
Trade less, earn more!
___
Note:
As I’m writing a book about reading a chart,
I am going to post a couple of short articles on this topic and others related to it, e.g. trend, volume , Dow theory, auction theory and behaviorism.
If you are spotting some errors or if you like to add something, feel free to comment or pm.
Cheers,
Constantine -
p.s.: This article is not intended as any kind of trading advice. If anything concerning this topic remains unclear, drop a message or a comment.
I've also linked a previous analysis of a trade where you can see a walk-through of the principles as described above
Introduction
One of the most common mistakes in trading ist the trading somewhat somewhere in the nowhere, which in general results in a bad trade location, wide stops, being stopped out very often or being right while being wrong.
Thus, in trading it is paramount to wait patiently for your setup to appear, and not every setup is of the same quality. Even though high quality setups are not appearing on a 1-minute-, 5-minute- or 60-minute-basis, waiting will actually not only save you money, but also result in higher profits, higher trading confidence and less stressful decision-making. Even if you’ve already heard of the basic principles, they are just right.
A. Highs and lows
As I’ve pointed out in my previous article “How to Read a Chart Pt. III”, the highs and lows on a daily chart are building the overall structure. Don’t get me wrong: the weekly has some nice perspectives too, but you should watch it if you are an investor going in for 10+ years. The highs and lows on a weekly chart still do have importance on lower time frames, but you shouldn’t make a decision on trading entries for a plus 5 years investment opportunity on a 1-minute- or even a 1-second chart. Why are highs and lows important? They are used as reference for past and thus future resistance. Does this always apply? No for sure, that's why structure is important. So before we’re diving deeper into this subject, let's have a quick comparison of weekly and daily highs and lows.
I’ve marked the high and low of the weekly chart in thick red, just to show that everything you might see on a weekly basis you're also able to see on a daily basis. In orange is the range of the past week and in blue the range of the current week.
So in general: if we’re trading above the previous week’s range, we are in general long biased, if we’re trading below the previous week’s range, we are short biased. Does this always apply? No! But when does this apply? When the big fishes, the “whales” are showing interest in selling or buying at those specific points. Something we can derive from the chart above is the following: the previous week’s low got rejected, but the value is shifting down; this means, that if we’re trading above the current week’s high there are two scenarios: either we’re going up fast, breaking the previous weeks high or we are being rejected and shifting down again - at least to the bottom of the range. If we're going below the low, it might go quick, fast and harsh.
B. High and low of the previous day
Applying this principle from chapter A to intra-day trading, it goes alike: in general, if we are trading above the previous day’s high, at large we are long and if we are trading below the low of the previous day, we are short. Let’s unfold this beauty of perspectivity:
In the picture above I’ve used a random high/low indicator - displaying the highs and lows of the previous day's session - as there are hundreds and hundreds to be found on @TradingView and the reason why is quite obviuos and well justified. I’ve also added “setups” to show you what to expect if you would have traded blindly every single break above the high or below the low. Even if you would have no specific view on the market, no bias or any idea of the markets direction you still would have made 4X (40 times your risk !) at win ratio of 56% - which most people would say is "not good".
C. Ranges
So what are the zones between a day's high and low? It's nothing else than the day's range. You may find ranges on bigger and smaller scales, on a 1 minute to 1 year time frame. What are these ranges? They are zones of congestion, zones of consolidation and zones of value, but mainly they are battlefields.
Let's have a look on a chart:
I've just plotted some of these zones to point out one thing: if you're trading within the zone, you're lost and you will most likely lose money even if you're right about the direction.
You need an edge in trading, and the easiest thing is to trade from one edge to the other edge until a breakout has been confirmed.
D. Big Bars / Big Fat Candles
Don't mistake me: this is not about day drinking, romantic candle light dinner or something like this; it is about big fat candles on a chart and what happened there and what is likely to happen. Some should note that a range on a lower time frame is nothing else than inside bars on a higher time frame. Usually a big fat candle appears if stops have been triggered and thus the sentiment has shifted. So, somewhere within this big fat candle there is support or resistance and it depends on volume and sentiment if we're about to move further in this direction or not, but mostly it is indicating momentum. If you want to trade pullbacks, you need to figure out where the breakout has happened; usually it has happened before the top or bottom of the corresponding range. Additionally, if a big fat candle got retraced to 100 percent, something is fishy, whilst a strong breakout should indicate only a partial retracement if the traders are committed to push prices further in their direction.
E. Value areas and Points of No Interest
As I'm using the free version of @TradingView , I would've attached an image from my order flow software, because there is no decent free volume profile indicator displaying value areas (if I'm wrong, post a link in the comments), but it seems that the image upload didn't work, but anyway. The point I'm trying to make ist this: value areas are showing zones where price is seen as fair and thus the most volume has been traded. If you're using a market profile (tpo or monkey bars), it is showing where price has been traded most of the time. Outside of this range, price is considered unfair, and this is - exactly as ranges overall - where your edge is.
Zooming out and seeing the bigger picture is extremely helpful to not get caught in war zones of higher time frames and big players.
On this chart above I'm using the 200 period volume profile of @LuxAlgo ,visually a beautiful piece of art. Furthermore, it is displaying somewhat similar to a value area and - even more interesting - the valleys in the profile, also called low volume nodes. To use these valleys as reference, you should not make the mistake and look where price has not been traded at all, but where supply and demand have diminished; this is blatantly simple: if there haven't been buyers or sellers at all, price will move on; so you need at least a certain threshold of trading activity.
In grey I've plotted the borders of the range. As you can see, as soon as the price has reached these areas, a reaction has happened. On the upside, it was a head fake, false breakout, emerging head and shoulders pattern or simply: no more buying interest. When price broke down you could have easily entered at the rejection or at the pullback.
Another zone of no interest is the light purple area, which has been established by big bars breaking through it and where one side has been swept. When price broke through and traded above, you could've used the pullback to go long (in the middle of the range though) or when it broke below to go short or to finally close your losing long position.
Quick cheat number 1 on applying support and resistance:
Switch to a line chart, check for the prominent highs and lows, switch back to candle or whatever your preference is and adjust (or don't ;) ).
3 different types of charts, all displaying the same. It is not perfect, it is not a pin point "you will always win and never lose" system, but markets consist of humans which aren't perfect either; and as long as machines are made by men, they aren't neither. And this is the reality of trading: nothing is a one-shot, a bullseye; nothing is perfect.
At last, there is more to trading than placing a limit order into a chart and get rich quick.
Quick cheat number 2 (that no one will tell you because it is too simple to sell it):
Look to the left! Markets have memories, because - and I'm repeating - markets consist of humans, and the only reference points others may use are not any calculations, extensions or fantastic AI structures: at the end it is all derived from history. How did price react at the last reference point? What happened next?
Let's quickly example this:
Think of it yourself: do you want to re-evaluate every tick hunting for signals on a vast amount of indicators or are you just keeping it simple (stupid)?
Key Takeaways
Don’t trade somewhere in nowhere!
Future price action depends on past action!
Switch your perspective if a change has become evident!
Trade less, earn more!
___
Note:
As I’m writing a book about reading a chart,
I am going to post a couple of short articles on this topic and others related to it, e.g. trend, volume , Dow theory, auction theory and behaviorism.
If you are spotting some errors or if you like to add something, feel free to comment or pm.
Cheers,
Constantine -
p.s.: This article is not intended as any kind of trading advice. If anything concerning this topic remains unclear, drop a message or a comment.
I've also linked a previous analysis of a trade where you can see a walk-through of the principles as described above
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