The Price Bar and The Meaning Of It All

[DbPhoenix 42]

The Price Bar and The Meaning Of It All

Whether you get anything out of bar or candlestick analysis may depend in large part on whether you are better at inductive or deductive reasoning. If I'm exploring something new, for example, I'll look for specific examples of whatever it is I'm investigating (back testing), then formulate preliminary hypotheses which are consistent with what I'm seeing. Then I'll apply those hypotheses to further examples in an attempt to come up with general principles (forward testing). If those general principles hold over time, I'll ignore specific examples almost entirely unless I find one or several that seem to suggest that the general principle may have changed (or may not have been valid in the first place). Which is why I get very little out of the price bar/candlestick analyses provided by "experts" in books.

 

But whether one conducts his analysis via deductive or inductive reasoning, analyzing a given price bar/volume bar pair -- while interesting and even instructive -- is largely a waste of time in the larger scheme of things if one is trying to determine what it is he ought to be doing about whatever conclusions he arrived at. The reason for this is that a given bar is not anywhere near as important as the bars which follow it.

 

There is confusion, for example, regarding the significance or importance of high volume on a down bar. Is it a good thing? Or is it a bad thing? And the answer is that it depends. It depends on where the bar is, how long it is (how much disagreement there is over value*), where the open is on the bar, where the close is, the spread between the open and close (*), the distance between the close and the low (*), the distance between the open and the high(*), where support and resistance lie, what the market's doing, how strong the volume is and at what point the volume became strong...

 

But even if one decides that the bar is a good thing, that decision can be no more than a preliminary hypothesis. The rubber meets the road in the bars that follow. Does volume increase or dry up? Does the price continue to fall or does it rebound? If support is being tested, does it hold? As with the beginner who asks whether a large trade is a buy order or a sell order, it doesn't really make any difference since one side of the trade can't exist without the other (otherwise it's just pending). What matters is the immediate effect on the stock. If it rises, the trade represented buying pressure. If it falls, it represented selling pressure. But it takes a few minutes to find that out.

 

This lack of appreciation for what happens next is common amongst beginners because of the "distribution" boogeyman. They'll say that "ACME was under distribution yesterday" in the same way that Mel Brooks used the name "Frau Blucher". The horses are supposed to whinny and you're supposed to shudder and eyeball the exits.

 

But distribution is a fact of life, like the opening bell, and is largely irrelevant to the decision-making process. Distribution takes place in every stock on every exchange from the very beginning of its breakout from the base. What matters is what happens after. Is there enough demand to absorb that supply and propel the stock higher? Then hang on for dear life. Is there not enough demand to absorb that supply and propel the stock higher? Then get the hell out without hesitation and stand aside until you see where the decline tails off.

Even if you know the "meaning" of strong volume and a long bar (or weak volume and a long bar, or strong volume and a weak bar, or strong volume with a long bar in which the relationship of the open and close to the high and the low are...), you have to arrive at a set of general principles or else you'll never be able to act. And the ability to act decisively and with conviction is essential to maximizing profits.

 

This can get complicated beyond belief, and understanding it can be an insurmountable challenge even if you're unusually bright. Over the years, that understanding will come if one applies himself enough. And there really is no way to understand it without experience. But the experience required to understand all this can be accelerated by sitting down in front of a screen which contains a real-time (or replay thereof) one-minute bar and volume chart (no indicators of any kind) of a stock, a one-tick chart of the stock, and, if you like, daily (or hourly) versions so that you can see important areas of support and resistance. As the bar forms as one is watching it, along with its volume bar, one is very nearly on the floor watching not only the struggle between bulls and bears but also the relative strength of each from second to second. Even a few hours of doing this (lunch hour, coffee break, early morning, assuming the data service is working that day) will lead to a great many Ah-Ha! moments which are difficult if not impossible to reach by looking at static charts in hindsight.

[jsatt11 10]

As usual DbPhoenix describes the complexities of making good trading decisions based on the price and volume present on the current chart. And suggests considerable practice time in front of the chart.

 

Does anyone know of a way, such as a slide-show, to move the chart to the next (right side) period? I am familiar with the slide show feature that moves through a watchlist of securities but not left to right through one security.

[BlueHorseshoe 10]

Does anyone know of a way, such as a slide-show, to move the chart to the next (right side) period? I am familiar with the slide show feature that moves through a watchlist of securities but not left to right through one security.

 

Some charting platforms have a built in "replay" function for this - you can even choose the speed of the replay so that a five minute bar forms, say, every thirty seconds. Sierra charts have this capability, and I'm sure a query in the right section of the forum will get you advice on other platforms that do.

 

In TradeStation (which doesn't have a replay function as far as I am aware), my preferred method is to scroll through the chart a bar at a time using the left and right arrow keys on the keyboard - this means that I can go at my preferred speed and quickly skip through bars that are not of interest to me.

 

Hope that helps,

 

BlueHorseshoe