Recently I met a group of novice traders and they were very interested in learning how to develop a personal trading style or methodology. I told them the first thing they need to do is learn how to read price action. All traders endeavor to catch trends early and hold positions until exhaustion or max profit. Start by using charts to interpret the auction process. Trends have common characteristics.

A healthy trend is one that is facilitating trade as it moves in a direction. Markets were created to facilitate trade between buyers and sellers. So, if volume is increasing as a market moves in a direction, it is likely to continue on that path. A good trend usually has day ranges that are near average or larger. Long candlestick bodies are common during trends. A fast-moving average will remain above slower moving average in a healthy uptrend, and in a downtrend the fast MA will remain below the slower MA. In an uptrend, daily higher highs and higher lows are common, and in a downtrend, lower daily lows and lower highs are frequent.

As a trend nears an end, volume often dissipates while ranges tend to sink below average. Candlesticks tend to have small bodies (similar open and close), which are an indication of neutrality. Prices often severely overlap for three to five days at the end of a trend. Fast- and slow-moving averages are frequently similar for consecutive sessions when a trend has run its course.

Markets often trend then consolidate and trend again. This is what they do. To become a good trader, you must be strong in reading and reacting to price action. Charts are an essential part of learning how to interpret the forces of supply and demand. Fundamentals move markets; charts help us understand the impact of economic data. My last words to these new traders were to be unwavering in learning what professional traders do. They are all skilled at reading charts and knowing what reports may affect sentiment or direction.

John Seguin, Market Taker Mentoring