Paul’s comments: I’ve asked Travis to help me with this post because I have points to address that I think he can bring a better perspective to than I can. The point of this post is to help simplify things for most traders. If we give ‘students’ of technical analysis too much information to consider they can end up getting overwhelmed and either end up not being able to pull the trigger on a trade or overtrading trying to catch every signal. On the second chart below I’m using just the 8-hour SMA bands and the monthly pivots (high/low/HB). When the pivots AND the bands coincide then the signals are generally better and more reliable. The third chart below highlights a concept I’ve mentioned a few times in the past regarding using the bands as a timing mechanism. I’m hoping that Travis will contemplate the various implications of these charts including limiting a chart to only showing either daily, weekly or monthly pivots depending on how active the trader wants to be. Fewer lines means fewer triggers means simpler entries and exits. This same style of trading can be done using daily or even weekly candles. I thinks Travis’ personal trading preferences would be interesting to know and how those preferences have evolved over time. Finally, I think readers of this post could benefit from his take on whether they need anything in addition to the simple tools shown here. For instance, does market profile add anything to this analysis? If it’s only an incremental addition is it worth the time and potential distraction for the typical trader? How about RSI or MACD or any other indicators? Is it easier to spot reliable patterns such as bull and bear flags on this chart since there’s fewer lines? Also, is it merely a coincidence that those patterns often occur at the pivots or is it completely expected that they ‘should’ occur there? And while we’re thinking about the pivot levels, does it make sense to utilize option strategies that would benefit from a pause around a specific price level? Butterfly and Calendar spreads come to mind, right? All right, that’s all I have to say. Keep reading below to see what Travis thinks about all of this!
Travis’ comments: Thanks, Paul. There is a lot to unpack here. I’m going to keep my comments brief, but I welcome feedback from readers about areas they might want to discuss in more detail.
If you’re struggling, slow down, size down, and simplify. You must be able to walk before you can run. If your system isn’t working, adding things to it or trading more aggressively won’t help.
In all aspects of your trading, embrace simplicity. Make it your goal to find the most streamlined way to accomplish your goals in the market. Vega Options shows you many possibilities for your trading. You don’t need to use them all. It is up to you to decide which of those possibilities, if any, works for you.
You don’t need indicators. There are only three absolute truths in technical analysis: price, time, and volume. You don’t even need to use all three of those to trade successfully. You certainly don’t need any thing extra.
Those extra tools and indicators aren’t bad. Given the right context, I think most of them can be genuinely useful. (For example, I can see specific beneficial applications for RSI or market profile.) But most traders go wrong because they build their trading strategy around their indicators. In other words, they prioritize their tools over their task. They learned to trade from someone selling an indicator-based system. You can’t pick your tools wisely until you have defined precisely the task you need to accomplish.
The Vega Options approach to reading price action is dead simple. Price and time. The only indicator on the charts is the 8-period SMA bands. The entire method boils down to trading market reactions to key past price levels in the direction of the trend on a particular timeframe.
Here are a few charts from Paul. The mark-ups on the charts are his. The commentary outside the charts is mine. These are hourly charts, but the method is valid on any timeframe. Similarly, the key levels on these charts are weekly and monthly, but levels from any dominant timeframe are valid–daily, weekly, monthly, yearly. And you don’t have to use them all.
In this first chart, Paul has identical hourly charts with key weekly levels on the left and monthly levels on the right. This can be an effective way to use levels from multiple timeframes while keeping your charts clean so it’s easy to focus on the price action. You can see how price interacted with both the weekly and monthly levels. But you might also notice that the reactions to the weekly levels were a bit cleaner. In my experience that’s pretty common–larger timeframes can signal bigger moves, but the price action around the key levels is often less precise.
Below is an expanded version of the chart with the monthly levels. Paul’s annotations show a long entry signal near the monthly low.
For my personal style, I would trade that chart somewhat differently. I would not open a new position on Tuesday’s end-of-day pullback into the bands. I don’t like the overnight risk. But seeing that bullish price action, I would have been watching the chart closely on Wednesday morning. When price opened right above the monthly low and pushed upward immediately, I would have looked to initiate a new position with a stop below Tuesday’s pullback low. Also, even though consolidation at the monthly HB likely means another leg higher, I would have wanted to at least partially hedge my position at that level.
The chart below is an hourly chart of $MSFT with monthly levels shows a similar setup. After a gap above the declining bands we would expect price to fall and make a new low. Instead, price held above the bands and dribbled sideways into the monthly HB. It did this long enough for the hourly bands to turn up and meet price at theend of the day. This is extremely constructive price action. Aggressive traders could buy the pullback into the rising bands and monthly HB at the end of the day. But as with the $SPX trade above, that would entail carrying overnight risk. The trade I prefer is off the open the next day. This time, the market gave a perfect entry by opening strong (signaling strenght) but then pulling back to the lower band of the rising bands. As soon as price bounced there, a trader could have initiated a long trade with a stop below the morning’s low.
Two days’ later, the price action would have told you to hedge or close this trade. Price made higher highs on Wednesday and Thursday, but those highs are closer together. Price isn’t getting any separation from the bands, and it’s testing the lower band way too many times. By Thursday, price spends most of the day retracing into the bands. But unlike the bullish consolidation on Tuesday, the bands are flattening and the range is narrowing. The next move is very likely lower.
So what is the point of these charts? The point is that you can get great trades using dead simple charts with nothing more than a few levels and a moving average. Were the other good trades in these charts that you could have caught with other timeframes/tools/indicators? Probably. And if you can manage all of those extra inputs, then great! But you don’t need them in order to trade successfully. You just need to figure out what kind of trader you are, and choose your timeframes accordingly.
What Kind of Trader are You?
A big part–maybe the biggest part–of refining your trading style is having a clear, honest sense of what kind of trader you are. And your identity as a trader has a lot to do with your identity as a person. Think hard about this:
- Do you have substantial life commitments during the trading day that require time, focus, and energy?
- In your daily life, are you good at making quick, heat-of-the-moment decisions or do you need time and quiet to make good choices?
- Do you like to have “all the information” before making decisions, or do you always look for “the big picture.”
- Thinking back on your trading so far, when have you felt the most comfortable, the most in command of your inputs, the most at ease with your risk? (Note that I did not ask, “When did you make the most money.”)
The answers to those questions should give you insight into your identity as a trader and which sort of charts/setups you should use.