In the first three articles of this series, we looked at price action patterns using daily trading ranges (part1), volatility signals (part 2) and breakout runs (part 3). In this article we’ll be focusing on how to tell the difference between charts that have strong price action moves, compared to others (and how to trade them).
Being able to rapidly scan through a handful of charts and separate out the strongest price action gainers from the rest is a key skill that’s worth developing, for both intraday and swing trading price action entries..
Price Action Pattern #1: Swing Trading High Volume Price Action Moves
It’s often useful to look at high volume breakouts as the “jump start” to potential new trade opportunities. New traders look at something that’s run up and mistakenly regret not having gotten in on the move, thinking that by the time it’s run up, it’s too late to enter a new trade. The key is to wait for new high volume to come into the price-action run on sequential moves, which often occur shortly after the initial breakout is seen.
In Figure 1 [Health Net Inc. (HNT)], the initial high-volume breakout move ran as high as 25.60 before pulling back. It’s helpful to look at that as a price action “trigger event”, meaning now it’s gotten attention from the active traders in this, and can be looked at for either long continuation entries, or shorting if it loses immediate support levels.
(Click to Enlarge)
One key to successful active trading is being able to zero in the charts that are “in play” (meaning there’s a significant recent breakout or breakdown, that causes them to escape prior trading ranges with strong price action), and have recently experienced a new trigger event, such as this recent breakout on high volume in Figure 1.
Price Action Pattern #2: Trading Strong Price Action Trends with No Major Pullbacks
Another favorite price action pattern is seen with the strongest-trending charts, in which price action remains above all 3 major simple moving average lines (50, 100 and 200 Mas) on a one-year chart. In Figure 2 [Walt Disney Co. (DIS)], this price action led to continuous new highs throughout most of 2012, until a loss of the 100 MA line recently.
The reason these types of one-year breakout high charts are so valued by active traders is that there are no major pullbacks in the chart pattern to deal with. This makes scaling into a winning trade that much easier, since you can add to winning positions easily during the uptrend. These charts are easily found by looking for 52-week highs from sites that feature those, and filter to make sure the instrument trades at least 1 million shares a day, and is in the $20-$70 per share price range, for optimum volume and volatility.
The main point is that it’s best to locate and trade these price action charts compared to others that often have major pullbacks and drops in them, on a one-year chart. The odds of navigating the price action breakouts are better when trading a chart that has no major pullbacks, since that indicates hesitancy on the part of buyers in the stock (or) being traded.
Price Action Pattern #3: Day Trading Following Sharp-Slope Breakouts
Using one-minute charts for intraday trading entries can provide both opening-range breakout as well as later-day trading setups. One key price action signal is to look for price action moves with a sharp (nearly vertical) slope of the line, especially when seen on high volume.
In Figure 3 [Barclays Bank PLC iPath S&P 500 VIX Short-Term Futures ETN (VXX), this chart consolidated for most of the morning, following a minor gap up, finally breaking out later in the day with a sharp-slope price action move. Note that the slope of the price action line during the breakout is especially steep, nearly vertical.
This is a good pattern to visually scan for when day trading since it indicates buyers are clearly in charge of price action. Trades can be entered on new highs, and scaled into following this price action move, for subsequent entries as well. The key here is to see at least 30 cents of sharp breakout price action without a pullback, to help filter for the strongest possible entries on price action continuation moves.
Ken Calhoun is a trading professional who has traded millions of dollars of equities since the 1990s, and is the producer of multiple award-winning trading courses and video-based training systems for active traders. He is a UCLA alumnus and is the founder of TradeMastery.com and DaytradingUniversity.com, popular online educational sites that reach tens of thousands of active traders worldwide. ###