**This is the second post in a 3 part series on The Jade Bronco Method™. Go back to read Part 1 right here.
Step Two: Price Action
The real rule #1 to trading is that price dictates. There are three (and only three) components of trading. The first is Price. When considered alone, it is meaningless. It’s just one point on the y axis.
The second is Time. Time gives context to price. It helps to identify change. When price occurs over time, it can be plotted to a chart. Price over time reveals a very interesting phenomenon in the realm of speculative trading. Patterns emerge. But more on that later. This provides historical context from which to identify the intentions of the majority shareholders (those with the $ to move the price – accumulation).
The third and final component is volume. Volume shows the conviction (or lack thereof) of the shareholders regarding price over time. The combination of these three variables, when properly understood, is the ability to profit from what it predicts.
Patterns develop that can be identified, measured, and processed in retrospect to give rock-solid probabilities of what will happen the next time that pattern occurs (stock will go up or down to a specific magnitude within a specific number of days). We call this the predictability of price patterns. Price patterns are “people patterns.” When reading a chart it becomes clear as day where a seller, or groups of sellers are getting out. The distribution strength will be overcome by the accumulation strength, or those that accumulate the stock.
Humans act in some very common/predictable ways. ESPECIALLY when it comes to their money being at risk. Humans generally move away from those things that we are afraid will bring us pain, and gravitate to those things that provide gain, or pleasure. Many would-be traders get stuck somewhere in between and this most certainly results in lost opportunity. To prefer pain to gain is the cost and loss of opportunity. But the real pain is just learning and keeping to a strategy, then having a mentor hand hold with you, each trade until your proficient.
If you miss the opportunity now, you always say you will buy it on the pull back. The difference between where the price was and where it is now is where the pain is. That’s where people recognize that the cost of avoiding pain is the loss of opportunity. Their loss. And that’s when you start saying things like “I knew I should have gotten in. I’ll wait for the pull back.” Opportunity lost.
“Education, practice and a commitment and discipline to a winning investment strategy are the key to winning in the market.”
Education, practice and a commitment and discipline to a winning investment strategy are the key to winning in the market. Jade Bronco education and coaching shows each of our contributing students what to look for in order to identify the current opportunity and place profitable trades every time. As a Jade Bronco student you will quickly be able to determine the direction of a stock (bearish or bullish) while identifying specific patterns in the price of the stock over time. Then just as quickly, you will learn to find support and resistance in the trend, along with price patterns that specifically predict the future price action of the stock.
Related: Into The Close Trading Community
There is only one price trigger for the Jade Bronco Method™. It is a breakout (big green candle or big red candle). The breakout can only occur after horizontal support or resistance are formed. The two most common set ups for breakouts are reversals and consolidations of the trend. It is important to remember that there are only three components to charts: Price, Time and Volume. 99% of all technical indicators (candlesticks, moving averages, stochastics, MACD, strength/weakness indicators, volatility, etc.) are constructed with only two of the three components on a chart: price and time. Both of which exist in the past.
These are known as “lagging indicators.” They lag by getting you in after the move (leaving money on the table), and keep you in until well after it turns down (and you sit and watch your profits diminish). In late and out late is no way to trade. Here is a challenge: find a technical indicator that includes, price, time, volume and vector. With a little training, the human eye can detect each of these components and reach a conclusion comprehensively. Then proceed to get quickly in to a trade exactly when the conviction of the crowd is obvious, and know that the momentum of the crowd will carry until it fails.
It is known as the first sign of weakness, which is anticipated, expected and then obvious for the exit. Price over time (going forward we’ll just call it price) is the basis of support and resistance, phenomena of price action, and leads to the perception of pattern opportunities that are acted upon through trade entries and exits. Time is money. We agree. But time is also a component of life. Traders will engage various time frames in order to get what they want.
You have likely heard of scalping. Scalpers trade micro time frames during the day but they exit all of their trades before the market closes. Swing traders play day over day momentum until that ends. It usually lasts 2-5 days. It takes into account all of the previously mentioned trading time styles and makes the best of each. Volume, or the number of shares sold for a given period of time, along with price and time, is the third dimension. Volume is the metric that gives magnitude to movement, and by definition.
By quickly recognizing the price pattern and direction of a stock, support and resistance and the direction and strength of the price, you are able to place those 80% and higher probability of maximum gain trades.
Step Three: Create Your T-Chart
This is a double sided chart that we use daily in the selection of our trades. Bears on the left and Bulls on the right. It will look something like this. Use the chart to write down the ticker symbol for each stock screened, along with its entry point in terms of price. It seems simple at first, but all Jade Bronco traders use a T-chart like this. It lines up with the options chain on your platform bear (Calls) on the left; bulls (Puts) on the right.
It helps you visualize which trades will be your best opportunities and direction to follow for your session that day. It also goes along with keeping a trading journal, something that all good traders keep current on.
Step Four: Earnings
Clear the stocks for earnings. A company’s earnings are its after-tax income, or profits, in a given quarter or fiscal year. Corporations are required to file quarterly reports. Since the report is held quiet until it is reported on a selected date, no one can predict the report’s outcome. Therefore, no one can predict how the price of a stock will change before, through earnings day, and after the company’s earnings report.
A company’s earnings announcement can have unexpected consequences on the price of the stock and can cause them to move outside of an expected pattern. By ensuring that your trade avoids the earnings date, you control the risk of a big random price move against your trade.
To Be Continued…
Join us next week for Part 3 of 7 Steps To Profitable Trading In The Market.