- Basic Market Movements
It doesn't take a rocket scientist to know that when you actually understand how something works, it's easier to do that activity. If you are driving a car and it breaks down, how are you supposed to know that the radiator needs water or that you just need to flip a switch to keep driving?
The markets are very similar, if you understand how they work and why they move the way they do, you will have much better success at becoming a day trader. Understand that the movement in the stock market is ruled by the decisions that people make. Have you noticed that when there is bad news the market moves faster to the downside than when the market is going up?
As day traders, we thrive in a world of uncertainty. When there is fear, people make rash decisions, the markets are more volatile and there are more opportunities to become very successful in the markets. You finally will be able to buy that pony your daughter always wanted. Your Ferrari is not important.
Identifying Direction
The market moves in two different stages; trends and consolidations. Based on a lot of different variables, the market is going to either move up, down or sideways. Whenever we have a market that is moving up or down we call that trending. The market can be trending to the upside (going higher and higher) or it can be trending downward (lower and lower). Whenever we have the market moving sideways we call that a consolidation.
Trends - movement up or down (Ex: uptrend or downtrend)
Consolidation - sideways movement (Ex: the market is consolidating)
Trends
The market will hardly ever move in a straight line because of the human aspect of trading. The one goal that I have for you is to be able to understand how the market works. Because once we understand why the market does what it does, we are going to be able to adapt to any situation and make money in almost any market.
With that said, considering that the markets are run by people and their emotions, we can understand the reason why the market never moves in a straight line. Since people's money and emotions are involved there are constant feelings of angst, nervousness, and hesitation when getting in position and getting out of positions
Don't forget the all too common stupid decision.
Ever wonder why the market moves faster when it goes down than when it goes up? Fear makes everyone act with quicker emotional decisions based on unreliable information. This is why whenever there is a crisis there is twice as much volume in the market when it flies to the downside. Taking a closer look at a trend. We are always going to have a have a unique stair-step pattern. We call these runs and retracements.
Run - A move in a certain direction (usually in the direction of the trend)
Retracement - A move in the opposite direction of the run (typically smaller and with less strength)
The reason why runs occur is because people think that the market is going to move in that direction. Remember that people put their money in stocks in order to make investments and make money. The faster and stronger that run, the more convinced people are that the market will move in that direction.
Retracements occur because there are people getting out of their positions and other traders assume that this means the market is going to move in the opposite direction. This is the fundamental reason why the market moves the way it does. I know that this is a very basic
information but by understanding that simple concept, we are going to be able to take advantage of more complex movements in the market and make money when other people can't.
Consolidations
Consolidations are simply hesitations in the market. Think of them as a speed bump before a retracement or a run. Essentially, a consolidation is when the market decides whether it is going to continue in the same direction or turn in the opposite direction (remember that a move in the opposite direction is a retracement).
Most of the time a consolidation is simply a hesitation before it moves in the same direction.
When we have these hesitations, it takes away from the strength the market. So, if you have a very strong run and then a consolidation, the more that consolidation occurs the less strength that we have. The more a consolidation that develops the more likely the market won't continue going in the same direction.
Consolidation - A slowdown or hesitation in price in preparation for the next move
What we can do now is put these movements in the markets together to see the runs and retracements in addition to the consolidation (or hesitations). The idea here is just to see the direction in the market and identify whether it's moving up, down, or sideways. In the next chapter.
we will learn how to read the momentum of these moves.
Any time that the market is not moving up or down, then we have a situation where the market moves sideways. Whether the market moves sideways for a second or two, 5 minutes or an hour, moving sideways signifies that the market is not trending. You already learned about a very small sideways movement called consolidations which typically occur inside of a run.
That means there is actually direction whenever you have a consolidation due to the fact that it is part of a run. A consolidation is merely a hesitation in the movement before the market decides what direction to continue in. You will find examples below of larger consolidations where the market actually changes direction. Remember that consolidations absorb the energy and strength of the market, the larger a consolidation and the longer that it occurs, the more likely that the market is to reverse and form a retracement.
Sideways Moving Markets
Once we move into examples of markets that are actually moving sideways, we move into two examples called channels and choppy markets.
Channeling Market - When the price (black bars) move between two areas
Choppy Markets - When the market has no clear direction or strength
Channels are very easy to spot in the market as you will normally see the price (black bars) moving back and forth between two areas, those areas are called support and resistance which we learned about later. We will learn how to read these later on but it is important to be able to identify these when you're looking at market movement.
Channels don't necessarily mean that the momentum in the market is gone. Just like consolidations, the more a channel continues to form, the more energy or strength goes away as part of that sideways movement. You will see in the chart above how the market was trending to the downside then started to consolidate and was followed by a turn in the opposite direction.
This is not always the case when it comes to consolidations, but in the above scenario, the market changed direction.
There can be situations where you have so much momentum in a certain direction that the channel is simply a larger consolidation for the overall movement. Remember that a consolidation is a hesitation in movement, so when you have a significant amount of strength in a certain direction a channel can be a larger consolidation. The market is never going to move in a straight line because of human emotion. These periods are when people are taking profits and others are making uneducated decisions to go in the opposite direction.
In the example below, you will see how the channels work in between the two areas (red being resistance and blue being support). These types of channels are simply consolidations for the overall move to the downside. This can also happen in an uptrend.
In the chart that we have above, you will find that the channels are simply consolidations for the overall move to the downside. Another way to phrase this is that there is a direction in the trend, the trend is moving down, and the channel is just a consolidation for the overall movement. This is when we have channels (price moving between two areas) that are a consolidation (hesitation in the market from and overall move) before the market continues moving in that direction.
All of the examples that I have shown already have been with smaller channels and consolidations. There are also times when the market works in between a very large area. The area or channel can be so large that you have a trend inside the channel. A trend means that we have momentum and direction, so even though we are on a channel we can still take trades.
We can take trades inside of a channel as long as we have movement and direction.
These larger channels are going to be periods when the market is moving sideways for a longer amount of time, have a look below:
Choppy Markets
There are going to be times in the market when we do not have any direction. The market will not show any movement or strength in any particular direction. This is what we call a choppy market.
Choppy market: a market which has no direction (is not continuing to move in a direction)
I want you to specifically compare the chart above with the chart below. I chose this chart above to show you that you can have movement and trends within channels. Notice how in the chart below there is no significant trend, the market is moving up and down with no structure and it is between two areas-- which makes it a channel.
The difference is that even though the market is moving back and forth there is no structure to it. The market is just blatantly moving back and forth without giving us clean runs in retracements.
A choppy market can be in a channel but a channeling market cannot always be a choppy market. Just because you are in a channel doesn't mean that you have no direction. Another way of saying this:
A market with no direction, a choppy market, can move within a range (generally two areas)
A market moving within a range, a channel, may or may not have direction.
Hardeep Dhruv
Sr. Technical Analyst
www.marketkhiladi.in
