Price Action. Please clarify something for me

Discussion in 'Technical Analysis' started by sgsaxton, Mar 28, 2006.

  1. From the "All indicators useless?" Thread dated 04-16-03 05:26 PM
    Quote from SimpleSimon:

    "Trading mostly boils down to support/resistance, expansion/contraction, confirmation/failure. Understand this and you won't need indicators."

    Can anyone please give me and example of these? What's the meaning of expansion/contraction, confirmation/failure?

    Also I've read the term "wash and rinse" used to describe market behavior ( I can't find the thread, so I can't provide context). What on earth does that mean?


  2. kut2k2



    TA is not one-size-fits-all. Ignore the bleeters saying "you don't want indicators" or "only Method X works". Most TA *is* garbage but you're never going to get universal agreement on what parts are garbage and what parts are not. So the best you can do for yourself is to widely sample the field and go for those methods that best fit your trading style and needs.

    Good exploring to you.
  3. hcour

    hcour Guest

    Expansion/Contraction = Volatility. Markets cycle between low and high volatility, consolidation (low) and trend (high). Consolidation prepares for the trend, then the trend exhausts itself to once again consolidate. You can see this in price action and in individual price bars - narrow dojis as volatility contracts and wide spread bars as it expands.

    As a trading-range first forms coming off a trend it will start off w/high volatility, then at some point volatility will diminish, individual price bar spreads and price swings w/in the range will narrow, volume will contract, then price will breakout or breakdown to begin a new trend.

  4. hcour

    hcour Guest

    Confirmation/Failure = Follow-thru or lack thereof. Traders have differing ways of confirming the validity of trends and breakouts. For instance in a breakout from a trading-range you might first look at certain criteria w/in the trading-range, then certain criteria on the breakout of the range, then certain criteria on the initial pullback following the bo to confirm or refute your analysis so far. (Chart analysis should be a cumulative, evolving process, the last bar is part of the whole and the sum of those parts are indeed greater than the individual bar. Having said that, as traders we also recognize that price can indeed turn on a dime, a bar, which is why god gave us stops, money-management, and common sense.) So say price breaks out of strong resistance on wide spreads closing on the highs on strong volume, then the pullback is a shallow retracement of the previous leg on narrow spreads closing on their highs on contracting vol. This would seem to confirm the breakout. But if it immediately drops back well into the range on high vol and wide spreads closing on the lows on a deep or complete retracement, this may be failure; the bo may have just been an upthrust, a fakeout, a squeeze, whatever you want to call it. These are of course, principles, not patterns, and there are infinite variations. But basically, if a trader waits for confirmation, it usually means he's looking to take a position after the trend has proved its previous apparent strength according to his criteria.

    I say "usually" because one may take a position earlier, w/in the trading-range, following, say, a shakeout, or a test of a shakeout. It depends upon one's trading style and risk tolerance and skill at reading the market and confidence. In a shakeout of a trading-range, price drops below the low which has been well-established by the range and then recovers. The break may be shallow, it may be deep, it may be on high or low vol. Obviously shallow on low vol is more positive than deep on high vol. But whichever, price then recovers to rally back into the range, the sooner the better, then continues to rally enough to show strength, demand. So there is no follow-thru on that breakdown of support, that's failure of supply to gain control, at least for now. It may mean price is ready to bo or it may indicate further consolidation, in which case we may not really know what is happening yet w/in the range - accumulation or distribution - until there is some kind of confirmation one way or the other.

    Buying on the shakeout itself is the greatest risk, as there's the least confirmation, but the highest potential reward; buying on the test of the shakeout involves less risk (more confirmation) but less reward; buying on the pullback after the bo, the least risk, the least reward. And so on...

  5. bitrend


    The expansion/contraction must have something to do with the galaxies, the big bang theory, not with the market. :D LOL.

    The support/resistance, fresh example NYX; there's a support at $75 (prevent to decline further, the floor) and resistance at $90 (prevent to push into the sky, the hammer).
  6. Thanks for taking to time to enlighten me.
    Is there a source where one could learn more about this?
    Generally speaking, are moving averages and trendlines considered indicators?
    The reason I ask is there seems to be two schools of thought on how one should trade; with or without indicators.


  7. Harold gave you a marvelous explanation of which I would like to elaborate on.

    Support/Resistance = Price Oscillation Bottoms and Tops (Fixed and real points in the Market that need no calculation to confirm. Price Action needs to re-evaluated at each price oscillation)

    Confirmation/Failure = Confirmation is Price's action of continuing in one direction by making HHs or LLs at sequential Price Oscillations. Failure is Price's action of ceasing in one direction by making HLs or LHs at sequential Price Oscillations.

    Expansion/Contraction = Market volitility at sequential Price Oscillations.

    I will respecfully disagree with Simple Simon on a couple points. First, I feel that Price is THE perfect indicator and second I feel that one & only one indicator is needed to confirm Price creating those oscillations. That indicator is essential to seeing the immediate direction of price and the strength of that direction move. Which indicator? Pick a momentum indicator based on smoothness and it's lack of being range bound.
  8. ======
    Yes ,yes;
    like moving averages, more useful on stocks than intraday derivatives.:cool: Wisdom is profitable to direct
    Master Swing Trader book has charts/moving averages which are excellent illustrations;
    3 top trader books by Jack Schwager & his ''Getting started in TA '' book helps[5 books total start suggestion]
  9. kut2k2


    Most technical analysts use the word "indicator" to mean an involved mathematical formula based on price or volume or both. The fact is that the raw data, price and volume, are themselves also indicators. The usual purpose of the complicated formulae is to smooth out the noise in the raw data, and this ranges from simple averaging techniques to advanced adaptive methods, and the quantity being smoothed isn't always the raw data, but also derivatives like "momentum" (price change).

    But IMO "indicator" also includes candlesticks and their interpretations; trendlines ; support/resistance lines and channels. In short, almost every TA method winds up generating one or more indicators, which are merely different ways of indicating what the price chart (and maybe also the volume chart) is telling you.
    #10     Mar 30, 2006