The Pro Trader's Checklist: Identify Trend Potential

In my last article I discussed how to define fair value. We needed to start there because it is the foundation for building strategy. Traders hunt for opportunities to jump on trends early, so it is imperative to recognize when odds favor a directional trade. Momentum begins as a market moves either up or down away from fair value.

A fair price is that price where buyers and sellers transact most often. Measuring time at price reveals a pivotal level for defining momentum. One of the most logical and reliable signals for reading short-term momentum depends on where a market closes in relation to the fairest price of the day. A close above the high-volume or fair price indicates bulls are in control and that the market will likely probe higher to search for sellers. Conversely, a settle under the fair price suggests that sellers have momentum in their favor and prices are apt to cheapen to entice buyers. This logic applies to long-term patterns as well.

The opposite of a market that is overbought or oversold is one that is wound too tight. Vertical measurements are used to signal when a market has gone too far, too fast. The horizontal measurement can aid in timing the onset of a trend. Trends frequently begin shortly after a high volume or fair price takes shape and the recent ranges are below average. I created macrograph to track time at price. This horizontal dimension is illustrated in the IWM (Russel 2K ETF) chart below. The colors are used to distinguish each week of the month.

In September IWM had a below average range (high minus low). It also spent above average time at price (171.60). The combination often precedes breakouts. The horizontal dimension was above average, and the month closed below that fair price. Thus, we had a bearish signal with odds favoring an above average vertical move.

Catching the onset of a trend is not easy, but you can improve your odds by using time at price in your strategy.

John Seguin, Market Taker Mentoring

Trader Education