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Technical Tools For The Active Trader:
Techniques for Capturing Intraday Profits (page 3)

 

The 20 period EMA is treated as we would any other potential support or resistance level. In congested, trading range market conditions, these levels can be violated rather easily. However, when price begins to trend, the 20EMA can be a valuable aid in determining appropriate areas in which to take action either by establishing new positions . . . or baling out of existing ones.

 
Charts created using TradeStation. ©TradeStation Technologies, Inc. All rights reserved.
No investment or trading advice, recommendation or opinions is being given or intended.

 

One of the more frequent uses of this indicator comes into play when we began a particular trading day expecting the trend established in the previous day to continue. A common strategy on such days is to look for an opportunity to enter on the first retracement move which takes price back towards a likely support (if in an uptrend) or resistance (if in a downtrend). The first level of support or resistance encountered is likely to be that of either the 5 minute 20EMA, the 15 minute 20EMA, or the 30 minute 20EMA (chart above right). It is important to keep an eye on these levels when we are expecting trend continuation. Once a trend has been established, it is very often the case that one of these levels (most often the 5 min. 20EMA) will contain the price action quite effectively.



Charts created using TradeStation. ©TradeStation Tech-
nologies, Inc. All rights reserved. No investment or trading
  advice,recommendation or opinions is being given or intended.

The 20 period EMA can also come into play immediately following large news-driven price thrusts (chart at right). Trading conditions can often be so volatile during such periods that I generally discourage any sort of participation until the initial hysteria subsides. Typically, the strong impulse thrust that accompanies such events are the beginning statement in a new trend move. Such price behavior will usually undergo some sort of retracement activity before an advance of significance takes hold. Again, the 20 period EMA is an excellent tool for gauging the degree of retracement and likely return to the trend.

As stated earlier, the "dynamic" characteristics of the 20 period EMA is what makes the indicator such an important tool. It's ability to react in accordance to more immediate changes in the market environment make it a valuable aid in creating structure out of essentially unstructured events.

Use of Prior Day Highs and Lows

Each of the intraday trading techniques discussed so far have relied on reference levels arrived at by means of mathematical calculations. The technique discussed in this section, in contrast, will deal with a set of support and resistance levels which are much more intuitively obvious. In short, we will discuss a technique for using the prior day's price extremes as a means of determining market-based valuation levels.

If market activity is thought of as an auction process, where bidders and sellers are constantly vying for the most advantageous price, daily timeframe highs and lows represent the outer extremes of accepted value for any particular trading day. The highest price achieved during the day represents the maximum that buyers were willing to offer for the commodity, and the lowest price represents the minimum that sellers were willing to accept. For this reason, subsequent price action has a tendency to remain within the boundaries of apparent value as defined during the previous day of trading.



Charts created using TradeStation. ©TradeStation Tech-
nologies, Inc. All rights reserved. No investment or trading
  advice,recommendation or opinions is being given or intended.

 

Under typical market conditions (news-driven price thrusts being one notable exception) a successful breach of a prior day high or low is normally preceded by several failed attempts. Once achieved, such price action often represents an important shift in market psychology with the potential to create a new trend move.

One approach for taking advantage of this market scenario is to use the actual break of the prior day high or the prior day low as the trigger into the trade - going long on a break of the high, and short on the break of the low. Using such a method for market entry is certainly viable, and, in fast market conditions may be the ONLY way of participating. However, it is considered to be a rather aggressive technique, for forays into new areas of market valuation are sometimes rejected in very quick fashion. A more conservative and risk averse approach is to delay entry until some sort of price retracement can occur. Such short-term pullbacks often take place before a new trend move can begin in earnest. Many times, a breach of the prior day high or low will retrace all the way back to the original breakout point. If not, the next most likely level of retracement will be that of the 5 min. 20EMA.

Price analysis relative to prior day highs and lows can also prove helpful when markets get caught in extended, tight-range trading conditions. This kind of market scenario is often followed by extreme range expansion and a pickup in volatility. Sometimes the increase in volatility can be very sudden and dramatic, leading to trading days well-suited for capturing large profits - but only if you've chosen the correct breakout direction.

 

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