There are several valuable technical trading tools that I use on a shorter-term and even an intra-day basis. While I am not a "day trader" and am more of an intermediate-term "position trader," I do have many readers that are day traders or trade shorter timeframes. Thus, I like to provide analysis and clues that do help out those traders who use shorter trading timeframes. And even for the longer-term position traders, shorter-term trading tools can help refine their all-important entry and exit strategies. Below are some of my favorite shorter-term chart signals that I employ.
(You'll note that my favorite shorter-term trading signals are not computer-generated, in keeping with my philosophy that while computers certainly aid traders in many ways, they can never replace the extreme value of the human eyes examining a price chart.)
Collapse in volatility: A collapse in market price volatility occurs when trading ranges (price bars) narrow substantially. See the yellow shaded area on the chart below. This price pattern is evidenced by price chart bars (the bars can be daily, hourly or in minutes) that suddenly get smaller. The smaller price bars should number at least three in a row, and do not necessarily need to get progressively smaller with each bar. This "collapse in volatility" usually sets off a significantly bigger price move--either up or down. As the smaller price bars accrue on the chart, there is no set number of bars that will set off the bigger price move. It could be three bars, or it could be 10 bars or more before the bigger price action is set off.
Outside days (or bars): Outside days (or bars) occur when the last price bar is bigger (a bigger trading range) than the previous bar on the chart. If the close (or last trade of the bar's timeframe) is higher than the previous bar's last trade, then that is considered a bullish "outside day" (or bar) up. A bearish "outside day" (or bar) down occurs when the close (or last trade of the bar's timeframe) is lower than the previous bar's close, or last trade.
Inside days: These occur when the last price bar is "inside" the previous bar--meaning the trading range is smaller and inside the previous bar's trading range. In other words, the last bar's high is lower and the low is higher than the previous bar's trading range. Inside days (or bars) signal that the market is taking a break after a busy period. Inside days can also be an indicator that a collapse in volatility may be setting up and that yet another bigger price move could be on the horizon. After a big price bar and busy trading day, one can expect the next session could be an "inside" rest day.
Key reversals: These are more important chart signals that occur less frequently than most others I discuss in this feature. Key reversals are one important signal of a potential market top or bottom. A key reversal occurs when a new for-the-move high or low occurs, and then during that same day (or trading bar), the price sharply reverses direction to form an "outside day" up or down. Some analysts will call this, alone, a key reversal. But in my trading rules, a key reversal must be confirmed by follow-through strength or weakness the next trading session (or trading bar). Follow-through greatly helps eliminate false signals and makes a market "prove itself" after a bigger move.
Exhaustion tails: These occur when either buying or selling apparently is exhausted after prices make a fresh-for-the-move high or low that creates a bigger price bar on the chart. Then prices reverse course to close at the other extreme of the bar's earlier move. Thus, you get the bigger bar that creates a "tail." These tails are then important guideposts because they then become an important resistance or support level on the chart.
Closing Price: Most traders agree that the most important price of the trading session is not the open, the high or the low--but it is the closing price, or settlement. After an entire session of buyers and sellers doing business, this is the level at which they have agreed (voluntarily or involuntarily) on price. I place more emphasis on a closing price below an important support level or above an important resistance level, or above or below a trend line or chart pattern--as opposed prices just probing above or below those levels during the session only to then pull back.
Daily or weekly high or low closes: If a market closes near the session high or at the weekly high close, that's a sign of market strength and suggests there will be at least some follow-through strength the next trading session (or price bar). On a close near the daily low or a weekly low close, this suggests market weakness and that follow-through selling could occur the next trading session or price bar.
Gaps: These chart formations occur when price bars push well above or below the previous bar to form a gap on the chart. (The last bar's low is higher than the previous bar's high for a gap-higher move. The last bar's high is lower than the previous bar's low to form a gap-lower trade.) Gaps are a rarer occurrence nowadays, with the increasing popularity and use of electronic trading in most futures markets. Gaps can be created on a minute, hourly, daily, weekly or monthly chart. Price gaps indicate a strong market move and many times the gaps will then serve as important support or resistance levels on the chart.
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