Here’s a quick look at two concepts that should be a part of your chartreading: ranges with pressure, and measured moves.
There are two common approaches to chartreading, and I think both can be improved upon. One is to look at “big” patterns spanning many bars (think heads and shoulders, or wedges) and the other is to look at 1-3 bar patterns (think candlestick patterns). The problem with these approaches is that they teach you to see patterns, but they don’t teach you to think about the why.
Take a look at the 15 minute chart of the S&P 500 futures below:
I’ve marked two separate concepts. The first is the rectangular range highlighted by the transparent blue overlay. This is a good example of the type of range that we could expect to break to the upside because it shows buying pressure.
Why buying pressure? This is a good question, because a range shows a temporary area of agreement—an area in which buying and selling pressure have found temporary balance. But the location of the range, near the high of the previous thrust, shows that, overall, the bulls are winning this fight. Selling pressure has been unable to overcome the advance buyers made this morning.
All other things being equal, this type of range will break to the upside. This is a specific example from an intraday chart, but you can easily translate it to any timeframe or any market.
The second concept is the measured move. There’s no magic here, but markets tend to trade with more or less constant volatility unless some big, new piece of information comes into the market. In the absence of that new information and a corresponding “volatility shock”, your best bet for future volatility is that it will look a lot like past volatility.
This means that we can reasonably expect a market to move “like” it has in the past in the future: about as far, about as fast, and with similar character. This is why measured moves work. If we look at the swing that came before the range, a reasonable expectation is that prices will move that far out of the range. (The arrows on the chart show this concept.)
This is a simple chart concept—almost too simple to call a pattern—but it is powerful. Look at your own trades and analysis and see how an awareness of these concepts could make you a better trader tomorrow than you were yesterday!