Determining the levels of interest seems to be a tough thing to do. Not so tough when the action is moving as the result of the completion of the accumulation or distribution setup, but tough on some during the start during the sideways movement of the process of accumulation and distribution. Many people consider these sideways movements as chop. It isn’t that the market action isn’t trending. The market is always in a trend. It isn’t trending in that particular time frame. It is in these times that people are trying to play a longer term trend and get stopped out long or short. Really, if they examine their losses during these periods, it doesn’t really matter that the market was longer term accumulating or distributing, they still repeat the same mistakes over and over. And that is why we want to put levels into context.
The sideways action is always due to a significant level. Understanding the move in context is critical for you to determine your probabilities. Sideways movement can be the start of an accumulation or distribution, but also happens en route to targets of accumulation/distribution. They usually manifest themselves as the mid point of the double bottom, the mid point of the double top and finally the top range of a head and shoulders or bottom of the range of an inverse head and shoulders. What always seems to be lost in each case is the reason you are at that price level. The reason that the sideways movement is occurring. This problem is why people don’t understand why the accumulation process produced a new low. Why the distribution process produced a new high. Why are you accumulating or distributing in first place? The immediate response is because we are about to pop up or drop the price respectively. But never, we are accumulating because the target of the distribution that lead to accumulation is coming to completion. We are distributing because the target of the accumulation is nearing and so the price action is setting up for the correction. They always forget what the original process is that brought them there. And then finally the other reason why they get lost, is they don’t understand where they are in the leg. The first 2 reasons relates also to the latter.
The other part of putting things into context relates to the price action. Some people forget or don’t even realize where they are in the chart pattern.
Primary Distribution Chart Patterns
- Double Top
- Head and Shoulders
Primary Accumulation Chart Patterns
- Double Bottom, Head
- Inverse Head and Shoulders
If you still have to ask me how to recognize accumulation or distribution, I’ll hit you with a bat. And if you start with, that chart pattern doesn’t look like whatever, again, i’ll come out with a bat. If up to now, you are still looking at text book perfect chart patterns, it is time for you to take up another trade.
Price action produces these chart patterns. It is the manifestation of how volume is being offset. The representation of Accumulation and Distribution. When you are on the final shoulder of a head and shoulders, will you call out for the moon? You might think that is funny, but people do. Why does this happen? They don’t understand the price action. They don’t know how markets move. They have deer looking at headlights syndrome. Bottom line, they just don’t know. Armed with all the technicals, they still have not put it all together but still brave enough to put in a trade. These are the people who say they know technical analysis or grasps concepts of technical analysis but when it comes to applied, their focus is too narrow and have no clue about progression.
This is part one of this primer. I’ve struggled writing about this concept because to me it is rather basic. It is the culmination of all the technicals already discussed. But in order to effectively discuss this issue, it will seem rather complex and drawn out because I am going to take painful steps to explain each concepts. And I say painful, because I actually have to slow down my own thinking to describe it. In practice, the visual cues are all I need to process the price action to act on them. And that is where you want to gravitate to. You look, you understand and you act. Sometimes in order to move faster, you must slow down. Just like the market, in order to pop/sell hard, you must sell/pop up first respectively. Take some time to think about what was presented above and how it relates to your trading.
Perception
Here is a chart. This chart does not show the price or the time frame. Can you tell me if this is an intraday chart? Or is it a longer term chart like a weekly.
In this chart, can you identify areas of support and resistance? Can you identify levels of strength? Can you see the legs? If you have trained your eye and mind to understand what support and resistance is and how you can see levels, then what I’m asking you, is easy as pie. If not, then you need more studying.
Can you form a bias as to what this chart is? Is it 5min chart? Is it a daily chart? Bias is what screws up people and their technicals. They form so many bias when it comes to time frames too. They think one is too fast or too slow. No possible way to trade the ticks. Is this a tick chart of some sort?
Before I reveal what this chart really is, can you tell me if you understand how price action produced the sell and pops in this chart? Can you identify the legs and how they came to be? If you are truly sharp and honest about your technical skills, you probably can. If you can’t more studying is required. The visual cues is what you need to develop to make intelligent decisions about your trade. You will not make painful analysis. You will make quick and smart trades. No matter what time frame you are looking at.
Would it surprise you to know that the chart you were looking at is a weekly chart? Your perception of time frame determines your bias. But some people add an extra level of complexity. They think that one time frame is more difficult to trade than another. This chart could have easily been a 512tk chart.