The Aura of Volatility

Most of us are familiar with the concept of electromagnetic fields.

You cannot see them, but they exist and exert influence on objects

that surround them. The electromagnetic fields that surround magnets

have defined boundaries and shape. To see them, place a

strong bar magnet under a piece of paper. On top of the paper, sprinkle

iron filings. Like magic, these iron filings will stand upright and

take shape around the positive and negative poles of the magnet.

If you look at an individual price bar for a given day you see the

high, low, close, and open for that day. Most people just see these

bits of information and go no further. But as with the magnet, there

is an invisible force that surrounds each daily price bar. The invisible

force is intraday volatility. Volatility shapes the bar's high-low

range, dictates the trend, and influences the other price bars. Each

bar has to some degree an influence on the future price movement

the next day. Because of this, you need to ascertain the intraday

price movement of the previous day. In some cases you might want

to observe the intraday movement of the previous five days. This

will give you a feel for what traders are doing. For example, you may

find intraday support and resistance levels that carry over into the

next day. This trading behavior could give you clues that reveal

whether a market maker or an institutional trader was taking positions

or was a net seller of the stock at specific price levels.

When you see an individual price bar or a group, look beyond

the high, low, open, and close. Remember that each bar will have a

given intraday volatility. This will help you in entering and exiting

the trade. It is also important when placing a protective stop. There

are several specific things to keep in mind in regard to intraday

volatility:

1. Bisect the high-low range of an individual price bar by making

a dotted line across the middle of the high-low price

range.

2. Is the close above or below the middle of the high-low price

range?

3. Did it close toward the low or the high of the range?

4. Where is the open in relation to the close on each given

day?

Figure 4.1 shows high-low range analysis. This information is

important because it can give you an idea of potential trend movement.

Examine five days of data and note the relationship of the

close above and below the midline. Is it closer to the high or the

low? It is also important to note whether you are nearing a support

or resistance area—not intraday support or resistance, but resistance

based on daily price bars.

The close on this specific day was above the midline of the

high-low price range and toward the high of the day. The day closed

on a bullish bias. Note that the opening price was near the low of the

day. When you see this kind of representation, you can feel confident

that the trend for the day was bullish. The price range from high to low will indicate the bullishness of one day compared to another

day. I would suggest that you add the price range of the high and low

for each of five days and then divide the total by the number of days.

By doing this you will have an idea of the average price range for a

week. (See Figures 4.2 and 4.3.) The intraday volatility shows the

price movement based on a given day, which represents the aura of

volatility that surrounds all daily price movement.

Figure 4.2 shows the range volatility for a period of five days.

Note the open and close relationships. The majority of the price

action for this five-day period was bearish. In this example, you also

had a series of lower highs and lower lows. Of course, this does not

have to be the case. If the stock was not trending as dramatically, as

shown in Figure 4.2, you might not notice a bearish setup. This is

why your focus should be on the open and close relationships of

each daily price bar.

You will want to ascertain the average price volatility for the

week and then record this information for possible future reference

if you plan to trade this stock on an ongoing basis. In Figure 4.2 the

daily high-low price range for each of the five days was as follows:

Day 1 $2.50

Day 2 2.25

Day 3 1.25

Day 4 2.00

Day 5 1.00

Total $9.00

After you record this information, you simply divide the total by the

five days. This tells you that the average dollar price volatility for the

week is $1.80. Finding this average can be helpful to you as a day

trader and a microtrend trader. Over time, you will come to know

the aura of volatility that surrounds a specific stock and the average

price range of this volatility.

Figure 4.3 illustrates the intraday trading range for a given

day of the week. In this example, you see how day traders can go

long or short during the day. Even though the trend was down

for the day, there were three different occasions where a trader

could have gone long during an intraday downtrend. These

points are identified by the numbers 1, 2, and 3 in Figure 4.3. The

highest probability for this given day would have been to go

short after the open and remain short as long as possible. Instead

of trying to scalp a fraction of a point, you are staying with

trend as long as possible. When the trend reverses, you exit the

trade. Electronic trading technology gives you the ability to enter

and exit trades within seconds. Electronic trading technology will

be addressed in Chapter 6. For now, just understand that this

technology far exceeds that of online trading, which is conducted

over the Internet.

The aura of volatility that surrounds all price movement

must always be taken into consideration, especially when you are

considering an intraday entry or exit and when placing a stop. If

you are a microtrend trader, you will want to identify the high-low

range—especially the lows. An excellent technique for placement

of stops is to plot a moving average of the lows. You usually do

not get stopped out by the high or the close of the day. It is the

lows of the day that typically trigger a stop. Placing a stop on or

slightly below a moving average of the lows when a stock is

trending will typically keep you from being stopped out prematurely.

Stop placement and other trading tactics will be covered

in Chapter 5. Now that you understand the importance of identifying

intraday volatility, let us examine what will become a very

important part of your success: intraday bullish and bearish

chart patterns.

High-Probability, Profitability Intraday Chart Patterns

One of the biggest mistakes I see traders make is overloading themselves

with information. One of the keys to short-term trading—

especially day trading—is to keep your analysis simple and clean.

The analysis that leads to your individual stock selection will take

time, but it is absolutely necessary. Once you have selected the

stocks you are going to trade in real time, simplicity becomes the

key. Your buy or sell decision must be quick and concise. One of

these factors is your interpretation of real-time bar chart patterns.

All of the chart patterns are based on five-minute bar charts, with a

fifteen-minute chart used to confirm the trend.

The following series of real-time intraday chart patterns and

explanations will guide you in your search for entry and exit points.

With all patterns, remember to ask yourself, What time is it? Remember

that the first two hours and last two and one-half hours of the

trading day have the most volatility, though usually trending in one

direction or another. This trending momentum, once identified, can

be used in your favor. Remember, the center of the day is the

grinder. I suggest you avoid it at all costs. Enter the grinder only if

you are in a trade and that trade is still trending.

Most of us are familiar with the concept of electromagnetic fields.

You cannot see them, but they exist and exert influence on objects

that surround them. The electromagnetic fields that surround magnets

have defined boundaries and shape. To see them, place a

strong bar magnet under a piece of paper. On top of the paper, sprinkle

iron filings. Like magic, these iron filings will stand upright and

take shape around the positive and negative poles of the magnet.

If you look at an individual price bar for a given day you see the

high, low, close, and open for that day. Most people just see these

bits of information and go no further. But as with the magnet, there

is an invisible force that surrounds each daily price bar. The invisible

force is intraday volatility. Volatility shapes the bar's high-low

range, dictates the trend, and influences the other price bars. Each

bar has to some degree an influence on the future price movement

the next day. Because of this, you need to ascertain the intraday

price movement of the previous day. In some cases you might want

to observe the intraday movement of the previous five days. This

will give you a feel for what traders are doing. For example, you may

find intraday support and resistance levels that carry over into the

next day. This trading behavior could give you clues that reveal

whether a market maker or an institutional trader was taking positions

or was a net seller of the stock at specific price levels.

When you see an individual price bar or a group, look beyond

the high, low, open, and close. Remember that each bar will have a

given intraday volatility. This will help you in entering and exiting

the trade. It is also important when placing a protective stop. There

are several specific things to keep in mind in regard to intraday

volatility:

1. Bisect the high-low range of an individual price bar by making

a dotted line across the middle of the high-low price

range.

2. Is the close above or below the middle of the high-low price

range?

3. Did it close toward the low or the high of the range?

4. Where is the open in relation to the close on each given

day?

Figure 4.1 shows high-low range analysis. This information is

important because it can give you an idea of potential trend movement.

Examine five days of data and note the relationship of the

close above and below the midline. Is it closer to the high or the

low? It is also important to note whether you are nearing a support

or resistance area—not intraday support or resistance, but resistance

based on daily price bars.

The close on this specific day was above the midline of the

high-low price range and toward the high of the day. The day closed

on a bullish bias. Note that the opening price was near the low of the

day. When you see this kind of representation, you can feel confident

that the trend for the day was bullish. The price range from high to low will indicate the bullishness of one day compared to another

day. I would suggest that you add the price range of the high and low

for each of five days and then divide the total by the number of days.

By doing this you will have an idea of the average price range for a

week. (See Figures 4.2 and 4.3.) The intraday volatility shows the

price movement based on a given day, which represents the aura of

volatility that surrounds all daily price movement.

Figure 4.2 shows the range volatility for a period of five days.

Note the open and close relationships. The majority of the price

action for this five-day period was bearish. In this example, you also

had a series of lower highs and lower lows. Of course, this does not

have to be the case. If the stock was not trending as dramatically, as

shown in Figure 4.2, you might not notice a bearish setup. This is

why your focus should be on the open and close relationships of

each daily price bar.

You will want to ascertain the average price volatility for the

week and then record this information for possible future reference

if you plan to trade this stock on an ongoing basis. In Figure 4.2 the

daily high-low price range for each of the five days was as follows:

Day 1 $2.50

Day 2 2.25

Day 3 1.25

Day 4 2.00

Day 5 1.00

Total $9.00

After you record this information, you simply divide the total by the

five days. This tells you that the average dollar price volatility for the

week is $1.80. Finding this average can be helpful to you as a day

trader and a microtrend trader. Over time, you will come to know

the aura of volatility that surrounds a specific stock and the average

price range of this volatility.

Figure 4.3 illustrates the intraday trading range for a given

day of the week. In this example, you see how day traders can go

long or short during the day. Even though the trend was down

for the day, there were three different occasions where a trader

could have gone long during an intraday downtrend. These

points are identified by the numbers 1, 2, and 3 in Figure 4.3. The

highest probability for this given day would have been to go

short after the open and remain short as long as possible. Instead

of trying to scalp a fraction of a point, you are staying with

trend as long as possible. When the trend reverses, you exit the

trade. Electronic trading technology gives you the ability to enter

and exit trades within seconds. Electronic trading technology will

be addressed in Chapter 6. For now, just understand that this

technology far exceeds that of online trading, which is conducted

over the Internet.

The aura of volatility that surrounds all price movement

must always be taken into consideration, especially when you are

considering an intraday entry or exit and when placing a stop. If

you are a microtrend trader, you will want to identify the high-low

range—especially the lows. An excellent technique for placement

of stops is to plot a moving average of the lows. You usually do

not get stopped out by the high or the close of the day. It is the

lows of the day that typically trigger a stop. Placing a stop on or

slightly below a moving average of the lows when a stock is

trending will typically keep you from being stopped out prematurely.

Stop placement and other trading tactics will be covered

in Chapter 5. Now that you understand the importance of identifying

intraday volatility, let us examine what will become a very

important part of your success: intraday bullish and bearish

chart patterns.

High-Probability, Profitability Intraday Chart Patterns

One of the biggest mistakes I see traders make is overloading themselves

with information. One of the keys to short-term trading—

especially day trading—is to keep your analysis simple and clean.

The analysis that leads to your individual stock selection will take

time, but it is absolutely necessary. Once you have selected the

stocks you are going to trade in real time, simplicity becomes the

key. Your buy or sell decision must be quick and concise. One of

these factors is your interpretation of real-time bar chart patterns.

All of the chart patterns are based on five-minute bar charts, with a

fifteen-minute chart used to confirm the trend.

The following series of real-time intraday chart patterns and

explanations will guide you in your search for entry and exit points.

With all patterns, remember to ask yourself, What time is it? Remember

that the first two hours and last two and one-half hours of the

trading day have the most volatility, though usually trending in one

direction or another. This trending momentum, once identified, can

be used in your favor. Remember, the center of the day is the

grinder. I suggest you avoid it at all costs. Enter the grinder only if

you are in a trade and that trade is still trending.