Do you use charts when trading or to support an investment decision? Most traders and investors who use charts for locating trade setups and entries will look at many different factors. Some of the most common tools that chartists use include; numerous moving averages (Simple or Exponential moving averages), different oscillators and indicators, trend-lines, candlestick patterns, and more. It is safe to say all of these tools can be very effective at times. However, there is no holy grail, and in many cases, the simplest strategy can prove to be the most effective.
Technical analysis based trading is primarily focused on putting the odds in favor of the trader through use of reading charts. As a short term trader or an investor, you must make sound decisions which when implemented properly, will reveal the best chance of making money. In other words, become the house not the gambler. You need to position yourself like Steve Wynn of Wynn Resorts, not the guy sitting on the other side of the blackjack or roulette table. Steve Wynn knows the longer someone gambles at his casino, the more money someone will lose. As a trader, you need to be confident that the more trades you take, the greater the odds are in your favor, not the other way around. You do not want to gamble or take unnecessary risks, that is the opposite of what successful traders do. Trading is all about putting the odds in your favor; this simple technique I am about to discuss will help guide you to the path of being the house and not the gambler.One of the simplest techniques revealed by reading the charts which many traders overlook, is the “institutional accumulation” and “distribution area,” better known as the “scene of the crime.” When analyzing the chart of a stock, you will notice this pattern play out often. Here is what you need to look for to find the scene of the crime:1) Locate a stock or commodity that has broken out of a consolidation pattern for the first time, (a breakout is when the stock has moved either higher or lower from the consolidation point or period, as noted in the chart).
2) After breaking out of the consolidation area, the stock then trades higher (or lower in the case of shorting) then moves back to the break out area where the stock was consolidating. When the stock returns to that area of which it broke out, that will now be a good support level for a bounce. Note the following chart.
3) The key is to make sure that the break out from the consolidation area lasted for at least seven bars in the particular time-frame you may be using. If the breakout was less than seven bars and price reverts back to the consolidation area, the odds of the “scene of the crime” holding as high probability support will decrease significantly. In the JPM example, take note of the +7 bar move above the scene of the crime, and the large bounce that occurred after it returned to that level in the chart here.
Remember, technical trading is all about putting the odds in your favor; entering this trade only when the breakout lasted for at least seven bars will help increase your odds.
The “scene of the crime” technique can be used on all time-frames. However, it is best to utilize this technique for short term or intra day bounces. The same rules of this technique can be applied for finding resistance levels and potential short trade setups as well. When looking for a short entry point based on this technique, follow the same principles, just in reverse. Take careful note of where price consolidated then broke down, the point where the stock broke down will be good short term resistance.
It is always beneficial to have extensive knowledge in technical charting to enhance the odds of any trade. Remember, technical trading is all about putting the odds in your favor when entering a position. Start to learn how to read the charts and profit from the markets.