Follow the ball!

Salome1999rafalolbinskiI guess we human beings cannot act on thin air, so we make constructs that help us make those decisions; especially, when prices have only a one dimensional movement – they either go up or down.

Let me explain.

First, we chart prices, and it makes perfect sense, charts allow us to have a visual representation of what has been going on. A chart allows us to know if prices have been advancing, declining or channeling.

But, we obviously need to tell where prices will move next, especially when the surrounding information (earnings reports, economic indicators…) seems very often to point in the opposite direction of the recent price movements.

Let’s stop here for a minute. A few considerations are important;

  • The players in the game will try to deceive you in the short run; prices will eventually follow the logical direction, although prices are known to move in the wrong direction for prolonged periods of time (George Soro’s Reflexivity Theory).

Usually after a news release, or at the opening of a trading day – when prices need to adjust significantly; a big player will start his trading by moving prices in a fake direction, where he may uncover that the market (or other players) favor this direction, getting out, and making a little money on his discovery; or, if he comes across resistance to his initial move, he continues his raid with a second move in the opposite and originally intended direction with the self reassurance that resistance will be minute.

  • Not all players have the same time frames, some are looking for daily, hourly, 15 minute results only; but, a “logical” direction will eventually prevail – no one can carry the world on their shoulders for too long, not even the Chinese.
  • Today’s prices are discounting all future events, not only today’s news.
  • Prices are very important in themselves because some essential piece of information may be only known to a privileged few; — so, you must follow the ball at all times, because prices are the final word.

Highlowchart_1Since we must follow
prices – independently of their surrounding news, we must find border line events as telltale signs of the direction prices will take after these borders are breached; hence, the concepts of support and resistance are born. Or, if prices break support, sell; if they breach resistance, buy.

The easiest and most compelling examples are the previous daily high and low, if either one is broken follow prices with your order.

Chartwtic_1Of course, a whole endeavor is dedicated to analyzing prices in themselves called Technical Analysis; which deals with all kinds of indicators, moving averages and oscillators included. 

We’ll be talking about those in the future too. Happy trading!