Using layers to create, confirm, or invalidate your bias

One of the basic components of a trade setup is the formation of a directional bias. Most traders concern themselves with determining if a stock entry is to the long side or the short side. Less frequently there is a neutral view on a stock (and this is a bias that price will stay in a range).

As part of my prep work each weekend, I review a large number of charts. I take a look at different time-frames, different chart “types” (PnF, Candlestick, etc.), and with a few different indicators & moving averages. After a trader has done this for a period of time, you begin to be quicker at seeing a pattern developing within the chart. But what happens when you overlay a different indicator on the chart? Does it:

  • throw a wrench into your perspective causing a need for more review?
  • confirm your bias?
  • invalidate your bias altogether?
  • form a solid bias?
  • require more review to form a bias?

Let’s look at an example using the Daily chart of $EFX (Equifax):

This Daily chart of $EFX (Equipfax) has a nice Rising Channel or Wedge forming. The shakeout on Thursday (7/26) caused price to dip slightly below the 50 day simple moving average, but it managed to close above on Friday, 7/27. However, price now seems in no man’s land – in the middle of the channel – so what can I do to form a bias on direction? It looks like I need a bit more review.

Let’s take a look at the same chart with the Volume by Price indicator overlay-ed and the channel removed:

Ah, now we see where the #1 Volume at Price (VaP) resides – right at the current price level. In reviewing each VaP bar further, it can be noted that the bar at this level has a greater % of buy volume over sell volume (buy volume is illustrated by grey color).

This is a key level as it is testing the late April high, which is the breakout level from mid-June. My personal approach here would be to:

  • monitor for a hold of this 50 day simple moving average before entering a long position.
  • A break below this moving average and it is a short to the bottom rail of the rising channel.

3 thoughts on “Using layers to create, confirm, or invalidate your bias

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