Hello Inandlong....it's been a while...
I use what I call "price action" to trade. Here's how I would describe it.
First, I use charts. The chart is price and volume. That's it. No moving averages, no stochastics, no MACD, no RSI....just a chart.
I guess I looked at my first chart probably 35 years ago. Back in those days none of us had heard of things like stochastics. If you were going to seriously be a technician, you read the Edwards and Magee book...even back then. And I would recommend it even today.
I think it's important to understand chart patterns. Edwards and Magee is the bible for that. Now notice I said "understand chart patterns". I didn't say they were the holy grail. And I didn't say how to use them exactly. I just said it's important to understand. Because once you understand the chart patterns, you begin to understand "price action".
Now personally, if understanding chart patterns were all there was to it, then you could buy the book, memorize a few patterns, and you're off and running. But frankly, I think that's just a beginning of price action.
For instance, I never look at a chart "out of context". Here's what I mean: there's a news background to all charts...a context. It's one thing to look at last weeks chart on the ES for instance without knowing the background. It's another thing to understand that war in the Mideast may be imminent, terrorist actions may take place in the US, and that people are duct taping plastic sheeting to their house and buying gas masks!
Further, along with this particular context, the gold chart shows a sharp downward move off the highs.
Given the negative context, when the market starts to resist decline, start to climb past previous highs, starts to give you some important clues....in other words, the price action is starting to speak to you.
More context: as we move down you watch some of the key stocks holding...like INTC for instance, unable to go down. You ask yourself "why". What will happen to INTC if the market bounces?
You piece all of this together. You watch it weave itself into a pattern until it starts to make sense. The chart is important. But it needs context, background.
News announcements are important. Good news may cause a gap up. If the news was unexpected, the gap may "breakaway". If it was expected, discounted, then the market may be focusing on something down the road, and use the higher prices to sell. It's important to understand what is good news, and what is bad news, so that you can understand if the market is "shrugging" something off. Because that's how the market "tells" you which direction it's going.
Chart patterns become important because they tell you what "should" happen, and therefore you KNOW what to do when and if it doesn't happen. For instance, the break of a neckline on a head and shoulders pattern "should" take the market higher. But if it then fails a few days latter back under the neckline...that tells you a) everyone is trapped and b) a sharp move in the opposite direction is at hand. An example of this occurred in the NDX on Nov. 21. Take a look. A breakout, which then failed back under the neckline a few days latter, and then led to a good move in the opposite direction. In other words, understand the patters, and what they mean. It helps you to know what to do when you see the pattern, and when the pattern does something unexpected.
In the old days we hand drew our charts, then watched the tape all day long. Today, the computer does my charts....I don't watch the "tape" exactly, but I do watch a number of key stocks and indices, tick, trin, vix looking for clues, something that is deviating from the pattern.
I don't want moving averages or stochastics, or any other squiggly line interfering with the price action. While these may be helpful to some, I have a problem with them. Here's why: stochastics for example might tell you when the market is oversold according to it's formula. The problem is that ALL of the really good moves up take place with stochastics overbought. I would hate to miss a great move because I thought the market was overbought. Just as bad, when a market quickly moves to a peak and reverses, you might still be waiting for your indicator to say something instead of acting.
What I'm suggesting is that it's all in the price action. What I'm encouraging you to do is to "play the market", not to "play the indicator". When the guy who's watching stochastics decides the market is overbought, he makes his trade, it shows in the price action.
Same thing with moving averages. Some people don't realize that Edwards and Magee do not tell you to go long or short just because a trendline breaks. Nope, what it means according to them is that a trend that was up, is no longer up, when the trendline breaks. BUT, importantly, it may not be down at that time. Same thing with moving averages. Yet people put these on their charts, and then start to believe in them. They're just a squiggly line folks, and a delayed one at that.
Hope this helps some.
OldTrader
(at the moment I can only do it for intraday but should be able to generalise on upper scale when I will have time to collect and analyse datas).