This post is a guest contribution from professional trader Anne-Marie Baiynd.
Consider the following familiar scenario:
You’ve been watching a stock for an entry and you’re certain you’ve analyzed it six ways to Sunday. Oh, it’s a winner — you know it. So you enter (certain you’re on your way to a buying a Lamborghini) when without apparent forewarning, the trade begins to reverse against you.
At this juncture usually we have the eyebrow-raising sense of disbelief and the spattering of your favorite expletives depending on your position size. If you’re really nuts, you bang your fist or something like that. (If you get crazier, I’d recommend working on control or taking up another occupation because there is no room for giant emotional swings in the realm of successful trading.)
You are now at a determination point — a moment of re-evaluation. Is the stock going to continue moving in the anticipated direction, or should you cut losses and take your lumps? We quickly refer to our trading strategy to confirm that the initial value conditions that triggered the entry have not been violated. They are, indeed, intact. What now?
Where else can we look for more direction or illumination on the reversal? Enter the Up-Volume/Down-Volume (UVOL-DVOL) chart.
For the sake of clarity, or for someone new trading in the market, the UVOL symbol represents the number of stocks ticking up in the NYSE while the DVOL symbol represents the number of stocks ticking down in the NYSE. In the day trading environment, the UVOL-DVOL chart can provide you with benefits including:
• Assistance with timing your entry more efficiently;
• Assistance with timing your exit more efficiently;
• Alerting you to potential market reversals; and,
• Determining future market direction when price candles are choppy.
Below is a view of the S&P Futures (ES) and the corresponding UVOL-DVOL on Thursday of last week (I’ve embedded some notes on how to view the charts):
• The morning begins with dissonance … a clear indication not to initiate a position if you are risk averse.
• At about 11am or so, the smoke clears as the charts are in confluence (i.e., in sync).
• This adds reliability to the breakout pattern as the day begins to trend.
• Note: on a trending day, the ovals show touches at the moving average as reliable entry points.
• On a clearly trending day, this indicator is most effective.
Though it may take a little time, I urge you to study these charts. If you want to become a good technical trader, it’s important to hone your pattern recognition skills. The stronger this ability is, the better you will become at entry and exit.
If you don’t already have 30 indicators on your charts (joking, of course, you really shouldn’t have more than 3 or 4), then consider adding UVOL-DVOL. Though it will take some time and attention to use the UVOL-DVOL indicator in the way I discussed, it is a relatively accurate measure of market direction. Further, when used properly this indicator provides the potential to increase your profit margins significantly. For me, it’s all about filtering the noise …