I practice and preach a “pragmatic approach” to trading. A technical trader gathers data, extracts facts and through back testing and empirical study applies the optimal trading strategy. The facts are extracted from price action. Traders and analysts mainly use open, high, low, close to determine momentum (direction), value, risk and profit targets.

Volume is an important component of analysis as well. Markets were created to facilitate trade. If a market is moving in a direction and volume is near average or increasing that market will likely continue in that direction. During traditional high-volume times liquidity is high. Subsequently, institutional traders tend to be most active when volume is peaking. Peak times for volume are the first hour of trading and the last 30 minutes of the session.

On the other hand, trends often pause or reverse shortly after volume begins to taper off and day ranges dip below average. Opens and closes (small body candlesticks) tend to be near each other when a trend is running out of gas.

Liquidity Leads

Bid and offer spreads are usually narrow when volume is high. Bid-offer spread is the difference between the price that bulls will pay and bears will sell. Generally, the tighter the bid-offer spread the more liquid a market is deemed to be. Liquidity attracts volume and traders; particularly professional traders seek volume. Big ticket orders are often hard to execute without affecting prices when volume is low. Thus, institutional traders are typically most active when volume is high. Collectively they are the force that moves markets. Thus, the logic is that a move higher or lower in the first 60 minutes of the day may reveal whether the institutions are bullish or bearish.

This assumption can also be made late in the day. If the last 30-minute period of the day has a long body green candlestick and small wicks, it means bulls are in control and higher prices are likely at the onset of the next session, thus allowing the trader to realize more profit. On the other hand, a long body red candle with small wicks suggests that sellers have the edge heading into the next day. 

Facts Lead to Theory

A pragmatic approach requires gathering facts using price patterns and probability to produce an educated forecast. Markets go through trend phases and consolidation phases. When a market is trending higher the low for the session is often seen early in the day when volume historically peaks. Closes are often near the upper quadrant of the range during an uptrend. Conversely, downtrends frequently see highs early and lows late. Reading momentum early and late is easy. Gauging when the institutional traders are likely to take a stand is a much tougher task.

Perfect timing for entry and exit is the desire all traders have. To enhance timing, search for markets that have shifted to neutral or are in a consolidation phase. One of my favorite searches is to seek a series of 5 days with below average ranges and volume. This is an indication of impartiality. Severe day range overlap and small candlestick bodies are common prior to breakouts as well. When these factors are apparent, odds for a vertical move increase greatly. Identify the setup, then enter a long position if price exceeds the first hour high because that is an indication the buyers have gained control. An extension down after the first hour indicates sellers have gained the advantage.

Reading momentum is often easy. Recognizing when a trend is about to begin requires a pragmatic approach using data generated from the bull-bear battle.

John Seguin, Market Taker Mentoring