How The Market Gets From Point A to B Matters
A trader must examine the texture of the chart, as a whole. If it is making lower highs and lower lows, the market is in a downtrend. But how is the market making the highs and lows? Is it grinding higher in small increments over many days, only to give it up in sudden, massive sell-offs? Does it drift lower only to be blown skyward by intermittent stimuli? Is the pattern regular and predictable, bouncing back and forth between channel lines, or does it surf the top then crash to the bottom before re-establishing somewhere in the middle? These are critical distinctions if the trader intends to utilize the intermediate trend to get positioned (generally a good idea) or to trade against the macro trend (possible, but risky). If the trader intends to ride the macro trend, understanding the “normal” intra-pattern characteristics is crucial for risk to reward assessment and execution strategy. A seemingly obvious trend may, on closer examination, not be tradable at all. Assessing the tradability of a market move will be covered in much more detail in Chapters 7 and 12.
From Chapter 4 - Technical Analysis, Page 143.
Excerpt from Trader Construction Kit Copyright © 2016 Joel Rubano. All rights reserved. No part may be reproduced in any form or by any electronic or mechanical means, including information storage and retrieval systems, without permission in writing from the publisher, except by reviewers, who may quote brief passages in a review.