How to Diagnose Trend Potential

Prediction is fallacy, probability is not.

Time may be the most valuable commodity for traders. If we could control it, we would know where a price would be anytime. This is what we seek, but such knowledge is idealistic unless you are a time traveler or “terminator." However, there are patterns that give us a slight chance to get time on our side.  

A candlestick is a technical tool that reveals momentum or direction in real time. This tool is geared to determine future direction using the close in relation to the open of a specified time frame. If a market closes above the open, it is deemed bullish, and a close below the open is considered bearish.

Another reliable gauge of impending direction requires the ability to track time at price. The logic is that time at price produces volume, which subsequently reveals a fair price. Time + Price = Volume

Momentum is the move away from a fair price. So, we must first determine a fair price, and we can use time to do it.

The gold 30-minute bar chart below shows a pattern that frequently occurs before breakouts. A series of at least a few days with severe overlapping prices and below average ranges indicate uncertainty. Such price action also reveals a fair value area. Extraordinary vertical moves are common with this formation.

The large green rectangle displays an average day range. The smaller boxes show fair value areas for each day. These small boxes capture the fairest prices over a 24-hour period. In this example, value areas overlap, and the day ranges are below the norm. The market accelerated lower after this pattern.

The 30-year bond futures chart below organizes daily price action into bell curves. The high and low are typical in most every graph. However, this chart reveals a fair or high-volume price within the range. When high volume or fair prices are similar for three to four consecutive periods, odds increase for a vertical or directional move.

Pattern recognition is key to timing trends. Tracking time at price can prepare us to catch vertical moves hours and sometime days before they happen. We cannot predict trends, but we can increase the probability of catching one early.

John Seguin, Market Taker Mentoring

Trader Education