Markets Can be Marked Up (or Down)

You cannot help notice how major moves from one price level to another usually happen quickly. This rapid movement from one price level to another is not by chance – it is designed for you to lose money. You can be suddenly locked-into a poor trading position, or locked out of a potentially good trade by one or two days (or bars) of rapid price movement: The Index or stock usually then rests and starts to go sideways.If you have been locked-into a poor trade, you may regain hope, and so will not cover a potentially dangerous position. The next sudden move against you does exactly the same thing, so the process continues.

Conversely, if you are not in the market and have been hesitating or waiting to trade, sudden upmoves
will catch you unawares; you are then reluctant to buy into a market where, yesterday, you could
have bought cheaper. Eventually a price is reached where you cannot stand the increases in prices any
more and you buy, usually at the top!

Market-makers, specialists and other professional traders, are not controlling the market, but simply taking full advantage of market conditions to improve their trading positions. However, they can and will, if market conditions are right, mark the market up or down, if only temporarily, to catch stops and generally put many traders on the wrong side of the market. The volume will usually tell you if this is going on, as it will be low in any mark-up that is not genuine. Yes, they are marking the market either up or down, but if the volume is low, it is telling you that there is reduced trading. If there is no trading going on in one direction, the path of least resistance is generally in the opposite direction!

Volume Surges in Related Markets

If you are an experienced market-maker or floor trader, you can read the market as it flows along fairly well. As soon as you see either strength or weakness appearing in the cash markets you are immediately thinking of trading in the option markets to improve your trading position.
As this activity is recorded as total option volume, we have something to work with. We will know that with a sudden high option volume day, professional money is certainly active. If they are active, then they will have a good reason.

Using Different timeframes By analysing a daily chart, we may say to ourselves, "Well, there is nothing very much I can read into today's action“. The indications may not be very clear. However, looking at the same day on an intraday chart will give you the missing information you require. For instance, by looking at the intraday price action from yesterday, you will have a much clearer view of whether the next day’s trading will be bullish or bearish.

In the same way, a weekly chart may provide you with insights not immediately apparent in the daily chart. This is very clear when you start to look at individual stocks, which generally make far more sense viewed on a weekly chart. Intraday traders mostly stick to hourly or shorter time frames, rarely looking at the larger picture, whilst position traders would consider hourly charts of little value to them. Both attitudes are counter-productive. Intraday charts are useful to position traders, as they often highlight indications of strength or weakness, marking the day as a bullish or bearish day, which then gives a very strong indication of how to trade the following day. In turn, intraday traders can benefit significantly from the wider picture offered by daily or

The Relationship Between the Cash and the Futures Price

Futures will fluctuate above or below the cash price, but the cash price sets the limits of any move in the futures market, because large dealing houses with low dealing costs will have an established arbitrage channel and their actions will bring the future back in line with the cash. This process keeps the price movements between the cash and futures markets largely similar.

Sudden movements away from the cash price are usually caused by the activities of the specialists or
market-makers. These professionals are trading their own accounts and can see both sides of the market (i.e. the buy and sell orders). If syndicates are in the process of selling or buying large blocks of shares, they know these large transactions will have an immediate effect on the market, so they will also trade the futures and option contracts in order to offset or lower risk. This is why the future often seems to move before the cash.

Technicians watch for price clues that can alert them about a shift in market psychology and trend. Reversal patterns are these technical clues. ‘Western reversal indicators include double tops and bottoms. reversal days. head and shoulders. and island tops and bottoms. 

Yet the term “reversal pattern” is somewhat c a misnomer. Hearing that term may lead you to think at an old trend ending abruptly and then reversing to a new trend. This rarely happens. Trend reversals usually occur slowly, in stages as the underlying psychology shifts gears.
A trend reversal signal implies that the prior trend is likely to change. but not necessarily reverse. 

This is very important to understand. Cornp are an uptrend to a car travelling forward at 30 m.p.h. The carts red brake lights go on and the cal’ stops. The brake light was the reversal indicator showing that the prior trend (that is. the car moving forward) was about to end. But now that the car is stationary will the driver then decide to put the car in reverse’? Will he remained stopped? Will lie decide to go forward again? Without more cities we do not know. 

Exhibits 4.1 through 4.3 are some examples c what can happen after a top reversal signal appears. The prior uptrend, for instance. could con-veil into a period 1 sideways price action. Then a new and opposite trend lower could start. (See Exhibit 4. 1.) Exhibit 4.2 shows how an old uptrend can resume. Exhibit 4.3 illustrates how an uptrend can abruptly reverse into a downtrend.

It is prudent to think of reversal patterns as trend change patterns. I was tempted to use the term “trend change patterns” instead of “reversal patterns” in this book. However, to keep consistent with other technical analysis literature. I decided to use the term reversal patterns. Remember that when I say “reversal pattern” it means only that the prior trend should change but not necessarily reverse. 

Recognising the emergence of reversal patterns can be a valuable skill. Successful trading entails having both the trend and probability on your side. The reversal indicators are the market’s way of providing a road sign. such as “Caution—Trend in Process of Change.” In other words. the market’s psychology is in transformation. You should adjust your trading style to reflect the new market environment. There are many ways to trade in and out of positions with reversal indicators. We shall discuss them throughout the book. 

An important principle is to place a new position (based on a revers al signal) only that signal is in the direction of the major trend. Let us say. for example. that in a bull market, a top reversal pattern appears. This bearish signal would not warrant a short sale. This is because the major trend is still lip. It would. however. signal a liquidation of longs. U’ there was a prevailing downtrend, this same top reversal formation could be used to place short sales. 

I have gone into detail about the subject of reversal patterns because most of the candlestick indicators are reversals. Now, let us turn our attention to the first group of these candlestick reversal indicators, the hammer and hanging-man lines.