[The S&P 500 is starting to sell-off from the key zone Murray has been talking about for over a month. The next step in analysing the trend is to understand the concept of key bars. Click on the video to learn what they are and how they could help you to become a consistently profitable trader.]
Entering the world of technical analysis can be quite daunting at first. There are so many different theories out there and a lot of it sounds like hocus pocus at first sight. Many in the investment community dismiss technical analysis out of hand and couldn’t be convinced of its efficacy even if you got 100 trades right in a row.
Technical analysis is a risk management tool. You need a map of the territory that you are wading into. Without a map you will be tossed around by the volatility of the market. With a map you have solid mathematical points to make calculations of risk and reward.
The point of technical analysis
The point of technical analysis is not to predict the future. Technical analysis shows you where the market is in balance and out of balance. It shows you how short-term traders are positioned, and it gives you a good sense of where the current short-term stop-losses are set.
The goal of my model of technical analysis is to find entry points that will see a quick mean reversion of some sort so I can take part profit and become free carried.
From there the market can do whatever it wants, and I will either make money or break-even. In other words, I have the same payoff as a free call or put option. Of course, prices might have a huge overnight gap in which case money can still be lost, but they are a rare occurrence.
In today’s presentation I thought I would do a quick review of my model of trend analysis using buy and sell pivots and key bars. It is relevant to our case study in analysing the E-mini S&P 500 futures and I finish the presentation by giving you an up-to-the-minute analysis of the current sell-off.
Understanding the current state of the market is incredibly important. To understand that I need to look across different time scales and decide the state of the market in each time scale. Once I have that information I can start planning trades based on how aligned the time scales are.
I use the pivots to pick out trends and the key bars are used to give me a range to make calculations off. All of this is explained to you in a simple way in the video presentation.
Putting together the pieces of the jigsaw can seem overwhelming when you don’t have much experience. I do think that most technical analysis is rubbish or at the very least describes how markets used to behave rather than how they behave now. My model of technical analysis is easy to understand after you invest a little time into understanding it, and once you have a valid model that task of creating a trading edge becomes much simpler.
Editor, Alpha Wave Trader
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