Listening to markets is very important as it is an activity often based on imperfect information. We can never know with 100 percent certainty what will happen next, so as technical traders we usually base our decisions on our analysis of price and our assessment of the probabilities of what may happen.
To do that successfully, the one skill traders should develop is the ability to listen to what the markets are saying.
We need to know how to accurately read price action. Often new traders will learn a strategy, but fail to apply it comprehensively and focus on only one element. That can result in them ending up in trades they should never have entered in the first place. This often occurs because they haven’t yet developed the skill of reading price action, so they don’t realise that having a view of the big picture is often required when zeroing in on a specific trade setup.
For example, if you consider the chart below:
This chart is technically on a down trend, it has made a lower low and a lower high. But the overall trend is weak and lacks momentum. Price has been pretty much trading sideways between a floor of 1315 and a ceiling of 1320. This is also reflected in the way the moving averages keep crossing over one another. And there is no sign that this is about to change.
As a technical trader what we need to do is identify structure in a chart. Once we have done that, then we can look to project that structure into the future and base our decisions on the probability of that structure continuing. If there is no structure or – as in this example, the structure is weak – then we are exposing ourselves to risk by trading it. But inexperienced traders are unlikely to see this. They will only see a specific trigger if it sets up, whether that be a chart pattern or potential breakout, and will usually disregard the broader context of the chart.
In the following chart, the structure is much clearer.
Here the trend is visually obvious, with a clear series of higher highs and higher lows. In addition, we can see that the moving averages are showing the optimal geometry for an uptrend, with the 10 period MA above the 20 period MA, and the 20 period MA above the 50, indicating that this is a strong trend.
We can also observe the way price behaves, moving up before pulling back to the moving averages, before moving up again. There is a structure here, a structure that gives us a level of predictability that we can base our trading decisions on. If a valid setup occurs on this chart, one that meets our strategy rules, then we can be much more confident of a successful outcome than with a setup occurring on a chart with sub-optimal structure.
The thing to remember when reading price action is that the chart will always give you enough information to make a good trade decision, whether that is pulling the trigger on a great setup or – equally importantly – passing on a setup that isn’t good enough.