Active Trading Masters Program

Section Two: Order Flow and Price Action

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 Disclaimer
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 Active Trading Masters Program :
Building Blocks to High-Probability Trading

Institutional Order Flow Trend Analysis

& Technical Analysis & Multiple Time-Frames

Part Two:
Edge: Trend Analysis

Chart Patterns &

Market Analysis
Potential Change of Trend

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 Institutional Order Flow:
Technical Analysis
Giving structure to price action so you can
anticipate what is likely to happen next.

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 Goals
• To learn the basic structure of price action so that
price movement will never be random.
• To understand how the basic price structure is created
by market participants.
• To begin forming trading scenarios based on
recognition of the basic price action structure.

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 Charts and Technical Analysis
• Charting monitors price action, that price action creates patterns and
those patterns create trading scenarios.
• Our goal is to study and memorize repeating chart patterns and
volume so that when the pattern presents itself again, we can allocate
capital to a high percentage trade scenario.
• You absolutely must have a structure for price action or ALL
movement will be random and confusing!
• Price action MUST look very specific before you take action and risk
capital!

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 Accumulation
• Accumulation: Where institutions and hedge funds are buying
shares as quietly as possible, as price moves lower in a down
trend.
• This will be buying ending a down trend leading to a
consolidation or a pull back. They are beginning to accumulate a
position.
• Most traders who are objectively watching this stock are selling,
and with good reason it is going down.
• Since the stock is going down it will be easy for the funds to begin
accumulating the position quietly. Sellers are abundant as price
moves lower.

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 Accumulation in action
• When a institution has a large order to fill, they will try to do it as
quietly as possible.
• The reason for wanting to do it quietly is simple, if they tip their
hand on the size of the order they will push the price up on
themselves.
• They will passively buy as many shares as they can until the
selling dries up. If they need more, they will need to pay higher
prices.
a. Can be seen on a chart as a PAUSE in the trend (consolidation or
a pull back with heavier than normal volume after a downtrend.)

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 buying urgency
• The Markup: The large buyer in need of more shares, must start
to pay higher prices to fill the order.
• The PAUSE that was formed by the large buyer has caused many
traders who were selling to stop, the stock is no longer going
down.
• We now have two groups of traders who need to buy stock.
Traders who sold the stock short short (and are now wrong) and
the larger buyer who needs more stock.
• The only logical thing that can happen now is that prices will rise.

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 The Markup=an uptrend
1.Demand eventually overtakes supply and the price action begins to
break out of the PAUSE with larger volume traded in the direction
of the break out.
2.The markup starts with larger green body “energy” candles,
accompanied by significant volume.
3.An urgency to acquire shares has arrived.
• This Markup is what we all know as an uptrend.
• A markup with good order flow will be identified with higher highs
and higher lows with light volume pauses in between.

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 Distribution: end of an uptrend
• When the large buyer has filled the majority of the order, the markup
will typically end with an obvious increase in volume.
• For this to be distribution and the end of the markup, there will be a
heavy volume pause or a heavy volume very fast move.
• The large buyer is selling the end of the order while prices are still in an
uptrend.
1. After the markup, many shares are trading after significant price movement
upward price movement.
2. Can be seen on a chart as a pause (consolidation or pullback) with heavier
than normal volume after an uptrend. Or a huge spike in volatility with heavy
volume after a fast move up.

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 The Markdown: selling urgency, the downtrend

• At this phase institutional buying has slowed and the stock no longer has
the demand to support the high prices.
• Traders sensing that the demand has exhausted itself, will now begin to test
the short side by selling stock.
• Traders that bought stock late into the markup are now long and wrong.
These late entrants must now sell to exit their positions, creating selling
urgency.
• When previous support levels are broken, these two selling forces will add
fuel to the downside.
1. The Markdown starts with “energy” red candles leading to a down trending
stock with light volume pauses between lower lows and lower highs

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 Picture perfect price action

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 Price action phase: HD

Tight consolidations are

usually a continuation

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 Price action phase: BA
Wide consolidations are
usually distribution

Tight consolidations are

usually a continuation

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 Price action phase: JCP
Mark down

accumulation

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 Price action structure
• The markup and markdown are what traders know as a trend,
from here we are going to make a distinction between order flow
and the current trend.
• The trend will consist of momentum and light volume pauses.
• As a trader you will assume the order flow and the trend will
continue until you recognize a pause or parabolic price action with
heavier than normal volume.
• This heavy volume price action will be the first clue to a potential
change of trend.

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 Price action phase: trend or pause
• Your first consideration should be are we trending or pausing, a paus
can be any type of technical consolidation pattern.
• If a trend is present, you will be patiently waiting for a pause in price
action to get involved, SO YOU CAN MANAGE RISK.
• That pause will be a consolidation or a pullback.
• Volume during the pause will give you clues to the move after the
pause.
• Light volume during the pause equals trend continuation.
• Heavy volume during a pause or after a fast move signals a trend
reversal is coming soon.

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 Price Action analysis made simple
• Markup (uptrend) and markdown (downtrend) are made up of
momentum moves and consolidations
• There are three types of consolidations:
1. accumulation
2. distribution
3. continuation pause (light volume).
• Consolidations end with a volume breakout.
• Volume in a flag or consolidation will give clues to the next move.
• Fast, parabolic type price action that typically leads to the end of
momentum is accompanied by a spike in volume (capitulation)

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 Price action, patience and profitable trading

• Profitable traders make the majority of their living taking advantage

of obvious order flow (trend).
• If order flow is not obvious, they don’t commit capital.
• Unprofitable traders trade any movement/price action, they aren’t
patient to wait for obvious price action.
• Unprofitable traders frequently do not wait for a pause in price
action to initiate a trade which results in trades with hard to define
risk or even excessive risk.

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 Current price action of
stocks in the DJIA
Video 7A

One year daily charts scanning the four phases of price action

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 How to Draw Trend Lines
Trend Strategy #1
How to go “Old School” and work the charts by hand

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 How to Identify Trends on the Daily Chart

Core Knowledge: A clear method to establish trends

Skill Development: Developing the mindset to choose one,
believe it and use it
How to draw trend lines in the context of price action
structure
Introduction to moving averages
How to correctly use moving averages
How to apply candlesticks to trend analysis

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 “text book” price action for drawing trend lines

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 How to properly draw trend lines
• For an up trend start at the lowest low of the period you are analyzing for a
trend
• Begin drawing the up trend line and do not cross through relevant price
action
• Continue up until the highest low
• For a down trend trend start at the highest high of the period you are
analyzing for a trend
• Begin drawing the down trend line and do not cross through relevant price
action
• Continue down until the lowest low
• ** as price action accelerates draw new trend lines

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 SPY
June 2014

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 SPY
hourly
June 2014

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 Obstacles and challenges to overcome
using trend lines
• A core belief when applying trend lines is that the trend is intact, as long as
price does not form a change of trend pattern. (to be discussed)
• “Working the charts” gets you in tune with price action but takes longer
than simply reading a moving average.
• Developing patience during a change in trend is a key skill to learn.
• You are waiting for the market to “tip its hand” with energy candlesticks
after a consolidation
• A skill that can only be developed with “screen time” is making a decision
as to which price action is relevant for you. (goals & resources)
• This means getting VERY CLEAR on which trend you are trading

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 SPY Trend Close & Cross Versus Entry C&C
One candle close and cross is not enough for a change of trend
but can be used for an entry

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 Trends vs. Timing Entries
• Price action in higher times frames is accumulation, distribution, mark up
or mark down.
• This price action takes longer to create therefore longer to change.
• Therefore the criteria for change of trend are different than for a change of
momentum or an entry signal.
• Be slow to determine a trend has changed in the context of determining
which side of the market to trade from.
• Be quick to take a profit or loss when making a decision on a shift in
momentum if an exit or entry signal is triggered.
• ** As you gain experience you will learn how to manage trades better but
until then be disciplined in this structure…

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 Moving Averages
Trend Strategy #2
Using Technology to Determine Trends

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 V Order Flow
7/2012-8/2014

V Order Flow
7/2013-8/2014

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 V trend lines
7/2013-8/2014

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 V 20 SMA on daily for current trend
Moving averages are an
alternative to trend lines

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 V Weekly Order Flow and 20SMA
Institutional order flow can be
determined using a 20SMA on the
weekly or monthly charts

Can be a simpler method to quickly

determine mark up or mark down

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 moving averages
• Used by technical traders to monitor trends.
• You should use the same moving averages on all charts
• A moving average is an average of successive closes over a specified time
period
• It is constantly updated by dropping the oldest number and adding the
most recent number to get a new average.
• Hence the term “moving average”
• So a 20SMA (20 period simple moving average) is the average of the last
20 closes- on that time frame
• Acronym to know: SMA=simple moving average. EMA=exponential
moving average
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20 period Simple Moving Average
Each close has equal meaning in the average
Example:

A 20 period moving
average adds up the
close for the last 20
Candles and gets an
average.

For each new candle

the dots are connect
between the average
price to form the
moving average line

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 20 period Exponential Moving Average
Recent price action has more meaning
Shorter duration EMA are used for timing purposes as opposed to trend identification
For example as we will discuss: combining a 5EMA and a 20SMA for entries and exits

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 Notice how many false entries
5ema January –May. Why?
cross of

20sma for

an entry or
exit signal

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 Choppy
entries
because of
poor IOF

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 Trend direction and trend strength
• When price is trading above a rising 20sma, we have an uptrend.
• When the slope of the rising 20sma is exaggerated, we have a strong
uptrend.
• When price is trading below a declining 20sma, we have a
downtrend.
• When the slope of the declining 20sma is exaggerated, we have a
strong downtrend.
• This method of quickly spotting where price is relative to the 20sma
is easier to use than finding “text book” patterns.
• You can use the ADX indicator to determine trend strength but I have
found it to be unreliable.

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using moving averages properly
• Smooth's out market “noise,” this allows us to pay attention to the
trend once in a position and not every price fluctuation.
• Displays direction and strength of the trend
• Presents anticipated support and resistance levels,
• Gives us a reference point to identify a change of order flow when
multiple moving averages are used.
• Typically three moving averages are used to determine:
1. Long-term order flow
2. Current trend
3. Momentum and timing
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 Anticipated support from moving averages

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 Multiple Moving Averages
• Large institutional orders take time to fill, this longer-term order flow is
our baseline for accumulation or distribution, mark up and marks down
periods.
1) We need a system to identify when our current trend (20SMA) is trading
in sync with order flow.
2) We need a system to identify when our current trend (20SMA) is trading
in sync with order flow but price action is not in sync.
3) We need a system to identify when our current trend (20SMA) and
current order flow have changed directions.
• The reason for this is there will be many times when price action has
violated our current trend but order flow has not changed

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 Obstacles, Probabilities and Opportunities
• Moving averages point the way but their story is often ignored
• A lesson that far too many talented traders learn too late (after their
account is drained) is:
• There will be losing trades no matter the probabilities
• ALWAYS strive to allocate money to the best ideas.
• “Less shares,” “planning to be disciplined” or “I have a tight stop”
does not transform a bad idea into a better one.
• Develop the knowledge to recognize high probability trades and the
mindset that those are special opportunities with higher odds of
earning money and ONLY take those trades…

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 #1 MA Core Knowledge: to identify when our current
trend (20SMA) is trading in sync with order flow.
• Public companies report on a quarterly basis which is roughly 60
trading days.
• We will be using the 50 SMA to measure quarterly order flow as a
reference point to determine of our current trend is still valid.
• As long as the 20sma is trading above the 50sma our interpretation
of the current active trading environment is “long only.”
• When price action violates the 20 sma support, the 50 sma support is
the next area to prepare for support.
• A potential change of trend occurs when the 20 sma has crossed
below the 50 sma

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 Price crosses and trend
does change when the
20sma crosses down.

But the 50sma does not

Price crosses but trend
slope down and the op
does not change
trend is intact

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 Short Sale scenario:
20 sma is below the 50 sma
• We will be using the 50 SMA to measure quarterly order flow as a
reference point to determine of our current trend is still valid.
• As long as the 20sma is trading below the 50sma our interpretation
of the current active trading environment is “short sale only.”
• When price action violates the 20 sma resistance, the 50 sma
resistance is the next area to prepare for sellers to step in.
• A potential change of trend occurs (from down to up) when the 20
sma has crossed above the 50 sma

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 20sma crosses below the
50sma

When does this become

a short-sale?

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 #2: a system to identify when our current trend (20SMA) is
trading in sync with order flow but price action is not .

• How to interpret and trade when the trend is still valid but price
action is not confirming.
• When price action is trading between the 20 sma and the 50 sma this
is a time to do nothing.
• We want to allocate capital in optimal scenarios; this is still a valid
environment but current price action is reducing the probability.
• Wait for momentum “energy” type candlesticks to confirm the trend
• And wait for price action to again close above the 20 sma to begin
looking for a buying entry signal again

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 #3 MA CK: to identify when our current trend (20SMA)
and current order flow have changed directions.
• We have previously identified when the 20 sma crosses below the 50
sma a potential change of order flow from long to short sale is
possible.
• What do you need to see to change your analysis of order flow from
being a buyer to a short-seller?
1. Energy candlesticks create the change in price action
2. Price action pauses with melted candles after the energy
3. The 20sma now holds as resistance
4. The 50 sma also now begins sloping lower

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 Energy confirming a
change of trend

Energy not
confirming a change
of trend

Very important to
know what you
“want to see” as
much as what you
don’t want to see-

to confirm price
action, trends and
change of trends.

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 Candlestick Trends
Trend Strategy #3
How to Identify Order Flow and Trends Using Single Candlesticks
In Multiple Time Frames

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 Candlesticks and
Different Time Frames
• It’s important to learn from the
start, that candlestick patterns
can be viewed in various time
frame frames.
• The green candle to the left
could be a 5 minute window
• The red candle on the right could
be a one month candle.
• Strategy #3 interprets candles
from the monthly down to the
daily for order flow and trend
analysis

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 Top-down analysis with Candlesticks
• Similar to using different moving averages (20 sma & 50 sma) we will
apply candlesticks with longer duration to determine order flow
The monthly candle is the current order flow (@50SMA)
The weekly is the current trend (@20sma)
• When the daily price action is in sync with the order flow and trend
entries can be considered
• For this discussion we are considering the current candlestick on
these time frames, in a later discussion we will combine multiple
candles

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 Order Flow and Trend in Buying Sync
Using Single Candlestick Analysis
Monthly Buy Weekly Buy
Order Flow Trend • This is the same concept as the
20sma being above the 50sma
on the daily chart.
• We are forming a probability
based on this month and this
weeks price action being in sync.
• When the daily chart is the
same, intraday buying is the
right game plan…

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 Order Flow and Trend in Sell-Short Sync
Using Single Candlestick Analysis
Monthly Sell-Short Weekly Sell-Short
Order Flow Trend
• This is the same concept as the
20sma being below the 50sma
on the daily chart.
• We are forming a probability
based on this month and this
weeks price action being in sync.
• When the daily chart is the
same, intraday selling-short is
the right game plan…

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 HPQ June 2014
Green for the entire
month=bullish order flow

weeks one and two were

green=
bullish trending weeks

Weeks three and four were

bearish=conflict and
nothing to do because of
conflict with monthly order
flow

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 HPQ Monthly, weekly and daily candles
Setting up daily trades: Green Daily candle=buy days

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 TSLA Monthly, weekly and daily candles: July 2014
Setting up daily trades: Red Daily candle=sell-short days

Red the entire month=

Sell-short order flow

Red the first two

weeks of the month=
Sell short trends

Weeks 3&4 are not in

sync with the monthly
red=

Do nothing weeks 3&4

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 Same Bullish Story; Different Views:
Game Plan=to be a buyer

• Monthly Buy • Weekly Buy

• Order Flow • Trend

20sma
50sma

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 Same Bearish Story; Different Views
Game Plan=to Short-Sell

Monthly Sell-Short Weekly Sell-Short

Order Flow Trend

20sma
50sma

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 Candlestick Order Flow and Trends
Start with the Monthly: Is it Green or Red?
Move down to the Weekly: Is it trading in sync with the monthly?
Move down to the daily: Is the daily candle red or green and in sync with the
monthly & weekly?
• If the answers are YES, time entries on the intraday charts with conviction. (the
same principles can be applied to swing trading).
• If the answer is NO, the BEST decision is to wait. Many traders choose to trade
the short-term trend which changes the perspective of the idea.
• I will tell you unequivocally, pivoting into different time frames is NOT a winning
long term strategy. You are changing your point of view of the charts.
• There is NOTHING WRONG with actively trading shorter-term trends, the key is to
stick to the trend you choose. (we will cover this in detail shortly)

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 Fine tuning your daily candle analysis
How to not get run over by computers intraday
• What if the monthly, Daily candle becomes green
weekly candles are
green, but…
• Current price action
from the open is
going down?
• How do you avoid
guessing when the
short-term selling is
finished?
• How do you craft a
winning set up?

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 Resetting the day with the hourly chart
Identify when the trend of the current hour is in sync with the higher
time frame candles; trade that combination; stop & reset each hour…
A better trade when green hourly and
Open price
last price is above the Open price

6
4 5
3
.5

2
You can trade green
1 hourly candles below
5 minute chart the Open price
Hourly chart

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 Chart Package Note
• Be sure to check the settings for your “month” and “week” on your
charting package
• Some packages can set a week for the last 5 days but it may not necessarily
be a calendar week
• Strive for it to be a calendar month and week
• When a new month or week “resets” during a calendar week; use the
calendar resetting of the month
• For example if August 1 is a Friday, the “week” is over and the first day of
the month and week for this month is today
• If you want, you can choose to use the last 20 days and the last 5 days to
create your monthly and weekly candles as opposed to calendar settings

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 Identifying Order Flow and Trends
Candlesticks on the Charts

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 Candlesticks and
Multiple Time Frame Analysis
“MTFA”
Improving the probabilities

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 Candles telling a deeper story:
Well-bid, well-offered and the close

1) Higher high 1) lower high

2) Higher low 2) lower low
3) Close above 3) Close below
previous close previous close
4) Close above 4) Close below
previous high previous high
5) Buyers 5) Sellers
currently in currently in
control control
B

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 Increasing Probabilities with
MTFA and Candlesticks
Definition: “follow through” or “trade expectation” is the odds of your profit
target being reached versus your stop loss.
It is important to have the correct mindset in regard to losing trades versus bad
trades.
A good idea that “didn’t follow through” is much better for feedback to improve
because this is different that saying a good trade that didn’t make money was a
bad trade.
• Multiple candlesticks in multiple time frames will give us deeper insight into the
odds of a trade “following through”
• When the patterns are clear you trade bigger and hold longer.
• When the patterns are not confirming clear order flow your trades should be
built in pieces until order flow is again confirmed. (if you trade this scenario at all)
• Monthly Order flow has more relevance than weekly order flow

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 • Baseline Order Flow and Trends: Monthly and Weekly Candlestick in Sync.
• When Monthly or Weekly Candles are in sync AND well-bid or well-offered the probabilities increase.
• Always take your Game Plan Analysis further looking for this scenario!
• Increase leverage when the best opportunities are unfolding…

Clear Picture Better Picture

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 Multiple Time Frame Analysis
How increase the odds, identify profit potential
& determine the correct leverage to a trade idea.

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 Goals
• To gain a clear perspective of longer term trends and how they set
up trade entries.
• To understand market conditions that will dictate when
probabilities are in our favor so we can increase leverage.
• To learn how to set profit targets on higher time frames
• To understand how shorter time frames interact with larger time
frames to help us set probabilities, manage risk and time entries.

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 Remember our job is…
Assessing the probabilities.
Determining if the risk is acceptable in exchange for the
potential profit.
Assigning capital and leverage to each idea based on our
assessments and money management parameters.
Apply trade management skills and adjustments to keep risk
under control and to maximize opportunities.
Multiple Time Frame Analysis is how to determine
probabilities.

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 MTFA: how to use multiple charts of the same stock

• This simple picture illustrates the power of multiple time frame analysis.
• The image should be burned into your memory!

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 Multiple Time Frame Analysis:
** a common obstacle is too much focus on short-term price action
• Our job as traders is to identify scenarios that have a high
probability, not one that will definitely work, probably. There is no
guaranteed trade.
• Institutions will make investments that will move a stock in a
direction for days, weeks and months.
• Our job as traders is to:
1.identify these bigger commitments (obvious order flow)
2.enter trades in that direction using short term patterns to manage
risk.
• When multiple time frames are on the same side of a trend you can
expect follow-through.

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 How to Increase Your Odds
with Multiple Time Frames
• MTFA Strategy: making a trade only when you have confirmation of
the idea in all (relevant) time frames
• Trade only in the direction of the monthly order flow and weekly
trends to get a clear picture of overall market direction
• Gain a clear picture of significant support and resistance levels for
proper stop loss and profit targets
• Then: narrow down to the daily and intraday charts to time entries,
exits and determine if momentum is over-bought or over-sold
• Unless a trade looks good on several time frames, it is recommended
you do not make a trade.

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 How to Choose Multiple Time Frames
Trade bias versus traded time frame
• Knowing your trade expectation first- will dictate which time frames you
should monitor.
• Trade expectation: how long you plan to hold a profitable trade.
Strategic choices for trade expectation: Scalp-momentum-intraday
position- multi-day-swing.
• Knowing your risk tolerance and financial ability to take certain types of
risk will also factor into which time frames to choose.
• Each strategy is a valid way to make a living; the only difference is which
time frames you monitor for your resources.
• To be clear: one set of charts will help you determine if you want to be a
buyer or a seller; another set of charts will help you enter and exit.
• It is imperative you choose, dancing between strategies is difficult.

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 Considerations when choosing a strategy
• Trade only in the direction of the monthly and weekly trends to get a clear
picture of overall market direction
** this can be altered to match your strategy:
Monthly & weekly
weekly & daily,
daily & hourly,
hourly & 15 minute
Any one of these combinations can be used to determine your strategy
(trade bias) but remember…
Institutions (big money) do not change their opinion by the hour-
the consistency of monthly and weekly charts tells a clear story even if you
are trading by the minute as a scalper-> trading with the big money is
easier.
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 Why choosing your best time frames matters
• To be successful you must trade a strategy that matches your
experience, risk tolerance, risk capital and skills
• Choosing a strategy and time frames means you have made a definite
decision how you identify a trend and how you plan to enter/exit
• Different time frame combinations are different strategies
• If you are “fighting” a strategy (hesitating on: declaring a trade bias,
trade management decisions or entries) you will struggle
• Trading is about believing in your odds and trading those odds
flawlessly. It is a challenge WITH good odds, imagine how difficult it
can be with weak decision making clarity!

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 Monitoring a trade with MTFA
• Key questions that need to be answered:
Is this a good trade idea?
Is this a good trade idea now? (assess profit potential)
• Once you have identified a direction to trade, you need to determine the
potential risk and reward, this is found on the time frames higher than your
execution time frame. (we have been discussing monthly and weekly)
• A perfect entry signal may not be a perfect trade if significant support or
resistance is close and the risk would not be justified.
• You can make a better decision about the potential of the trade on the higher
time frames.
• Significant levels on higher time frames simply matter more than those on a five
minute chart. (higher time frames dominate=order flow and trends)
• Getting comfortable monitoring trades on higher time frames will also help you
learn to hold good trades longer because you are not watching every print…
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 The benefits of monitoring
higher time frames
Holding profitable trades longer:
• Most active traders tend to exit trades too soon for fear of losing the unrealized profit or
to soothe their ego “I made money”
• By monitoring price action on higher time frames you will uncover aspects of the market
not clear in shorter time frames- for example a momentum move that appears to be
significant may be the start of a much larger and clear opportunity.
• If you react and manage the trade on the lower time frame you will be cutting your
profits short.
Higher time frames force you to trade LESS:
• Some believe using shorter time frames controls risk because you exit bad positions
quickly.
• This may be true but you exit winners too soon as well
• Shorter time frames for a bias will give you many more signals as well. You will trade and
change your opinion more often (remember: big money doesn’t change bias by the hour)

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 Dow Theory: Origin of Multiple Time Frame Analysis
• The assumption made is that there are three movements for a
stock or the market, all of which are in progress at the same
time:
a. The Primary Trend: is the longer term trend, defined as the
broad upward and downward movements known as bull or
bear markets. (order flow)
b. The Intermediate Trend: An important rally or decline in a
primary trend. (trend)
c. The short term trend: Fluctuations of price action. The traders
use of this trend is to maximize profits and minimize losses by
timing buys and sells within this movement.

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 Multiple Time Frame Analysis “MTFA”=Top down analysis

• **All trade analysis starts from the longer term and moves down
to the shorter.
• Monthly, Weekly, daily, hourly and 15 minute.
• Long term trends are the dominant order flow, it takes
significant money to move a stock for days, weeks and months.
• Long term trends are made up of short term momentum, and
consolidations.
• Our job is to find a short term pause in a long term trend and
climb aboard.

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 MTFA and trade scenarios
• All trade scenario analysis starts from the higher time frames.
That is where the dominant order flow is.
• There is no reason to look at the shorter time frames until you
have determined there is an obvious order flow on your main
time frame.
• This cannot be emphasized strongly enough, if the order
flow & trend on your main time frame is hard to read or not
obvious, there is absolutely no reason to look for entry signals!

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 Moving averages and MTFA
• For active trading, order flow is the 20SMA on the monthly and weekly chart.
(or 50sma on the daily)
• Our “traded trend” or the intermediate term trend, is the 20SMA on the daily
chart.
• Our “timing chart” will be individual daily candles or intraday charts
• There will be times when our traded trend (daily 20sma) will be moving in the
same direction as the order flow(weekly 20sma), this is when you will use
more leverage, the probabilities are on your side.
• There will be times when our traded trend will not be moving in the same
direction as the order flow, at this point you need to follow your plan and
either trade a different (shorter) trend (tough to do) or set alarms

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 MTFA/20 SMA

monthly
weekly

HPQ June 2014

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 MTFA/20 SMA

monthly weekly

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 Recap: Strategic Choices for Determining Order
Flow and Trends in Multiple Time Frames
• Draw trend lines on the daily chart.
Advantages: Keeps you in tune with price action phase
Disadvantages: time consuming; subjective
• Simple Moving Averages:
Advantages: Simple to use, easy to set up
Disadvantages: no value in flat market, can become a crutch to reading
price action, can create false levels
• Candlesticks:
Advantages: Simple to set up, easy to interpret
Disadvantages: can become subjective as higher time frames change,
patience is required when this happens.

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 Chart Patterns
How to Read Between the Lines of Price Action

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 Chart Patterns: Continuation or Reversals
• As price action unfolds, repeatable patterns form that lead to reliable
predications of future price movement.
• When analyzed in the context of trends, they can be powerful indicators to
develop high probability trades.
1) Multiple Time Frames: Combining at least two different charts to get a
complete picture of price action.
2) Support and resistance: Areas of supply and demand.
3) Head and shoulders: Reversal pattern.
4) Flags: continuation pattern; usually an entry pattern.
5) Triangles and Wedges; a consolidation generally leading to continuation.

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 Support and Resistance:
Where buyers and sellers do something significant.

• Support represents areas of demand • Resistance represents areas of

where buying occurred and can be supply where selling occurred and
expected again. can be expected again.
• Resistance is a price level where
• Support is a price level where demand is supply is stronger than demand.
stronger than supply. This can be viewed This can be viewed on a chart as a
on a chart as a previous price level where previous price level where selling
buying prevented prices from declining. prevented prices from advancing.
• As price declines towards a previous • As price rises towards a previous
resistance level, sellers will tend
support level, buyers will tend to buy to sell again and buyers will be
again and sellers will be inclined to sell inclined to buy less.
less.

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 Resistance level

Resistance
represents areas of
supply where
selling occurred
and can be
expected again.

Area to be a short
seller or book a
profit on a long

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 Support level

Support represents
areas of demand
where buying occurred
and can be expected
again.

Area to be initiate a
new long or book a
profit on a short sale

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 Breakouts:

A pattern where
price action
pushes through a
previous support
or resistance
level with volume
and momentum

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 Cup and Handle:

Bullish continuation pattern

that consists of a rounded
bottom, the cup, followed by
a consolidation area near
prior highs referred to as the
handle.

The handle should be

formed in lower volume, and
usually the stock will drift
lower creating a slightly
descending channel like
formation.

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 Flags
• The most common
continuation pattern.
• This pattern consists of two
parts: a pole and a flag.
• The pole is formed by a sharp
price increase or decrease.
• The flag forms after a move
(the pole) in the form of price
consolidation.
• Entry is generally during the
flag, seeking a new move in
the direction of the trend.

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 • Triangle and Wedges
• Represent a
consolidation
preceded by wider
price action, generally
followed by a
momentum move and
a new trend.
• A large move is
predicted but not the
direction.

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 Ascending Triangle:
Generally expecting a break out higher
Flag pattern

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 Descending Triangle:
Generally expecting a move lower

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 Symmetrical Triangle: similar to pennant, usually longer
time to develop: Wait for energy candle for entry

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 Channel: long term consolidation Accumulation or distribution
Anticipating a momentum move; wait for energy candles

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 Potential Change of Trend
How to Recognize When Order Flow is Changing

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 Head and shoulders bottom
Entry can be an energy Reversal Pattern
candle or the first flag from down trend to
after the breakout up trend

low Entry trigger is a

higher low break above the
“neck line”
New low

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 Reversal Pattern
from up trend to
down trend

• Head and
Shoulders Top
• Anticipating a
change of trend
lower
• Entry trigger is a
break of the
“neck line”
Entry can be an energy
candle or the first flag
after the break down

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 Swing Points:
defining change of momentum criteria (inside candles are neutral)
Potential change of a bearish trend: any time there is a low made with
higher lows on both sides, this is a “swing low”.
1) Change of trend to bullish occurs when a swing low or the following
candle is well bid
2) The Price action failed to make a new low, creating the short term swing
low. (failed test)
Potential change of a bullish trend: any time there is a high made with
lower highs on both sides, this is a “swing high”.
1) Change of trend to bearish occurs when a swing high or the following
candle is well offered
2) The Price action failed to make a new high, creating the short term
swing high. (failed test)

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 Swing points: Looking for a reversal from the most recent momentum.
Excellent entry signal with order flow and trend or exit signal.

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Spotting a potential change of trend: failed test
“M” top • When price action forms a “M” pattern, a
failed test of the high, this is a potential
change of the uptrend.
• It can also be spotted as a two
consecutive swing highs after an up
trend, the second swing high is lower
than the previous one.
• When price action forms a “W” pattern
this is a failed test of the previous low.
• It can also be spotted as a two
consecutive swing lows after a
downtrend, the second swing low higher
“W” bottom than the previous one.
• A failed test represents a potential
change of order flow, a potential change
of trend.

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 1-2-3 bottom, 1-2-3 top:
“#3 is a failed test” of a previous high or low leads to a new trend when #2 is breached
(similar to a “failed test” pattern, can be easier to spot with 1-2-3

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 1 3
Failed test of high or low and
new trend when point #2 is
breached
2

1 3

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 PCOT:
(potential change of trend)

Drawing
Trend Lines

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 PCOT:
(potential change of trend)

Moving Average
Cross-over

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 PCOT:
(potential change of trend)
Moving Average
cross-over

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 Volume
How interpret the foot prints of Big Money

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 Goals
• To understand how volume will start, confirm or end a
move.
• To learn to recognize the clues volume leaves behind both
on the charts and on the tape.
• To understand that where volume occurs in the price
action phase or during a chart pattern is significant to
assess the probability of the next move.

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 Intro to Volume
• There are 3 types of volume we will be monitoring, average daily
volume, today’s volume and the volume trading right now.
• Average daily volume will tell you what a “normal” activity level for the
stock is.
• Today’s volume will tell you if the stock is trading on pace for it’s average
and will dictate your activity level for the day.
• The volume trading “right now” can be viewed in time and sales and will
help you with routing orders as well as reading the tape (more on this
later)
• We must not only monitor how much volume is occurring, but also
WHERE it is occurring in price action (on the charts).

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Fuel:
volume
that starts a
move

energy
candles

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 Exhaustion:
volume that
ends a move
Similar to
accumulation or
distribution but a
parabolic move
(ends a move)

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 the 7 Rules of Volume
1. Volume should be significant for price action in the direction of the current
trend, to validate the IDEA/ trend.
2. Volume should decrease during a pause (pullbacks/consolidations) against the
current trend for the current trends to remain valid.
3. Breakouts from a consolidation should be accompanied by significant volume
for the breakout to be a valid. (Fuel)
4. Significant volume during a pause (pullback/consolidation) is accumulation or
distribution. Anticipate a reversal.
5. Volume should be monitored from the current “prints” to at least the last
twenty trading days.
6. Volume and liquidity will influence a traders activity level.
7. A fast move a significant distance from the 20sma with increased volume, will
usually end the momentum. (Exhaustion)

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 volume considerations
• Volume combined with price action will show you if the “idea”
behind a trend is still valid.
• In other words: the trend is assumed to remain intact as long as
volume traded in the direction of the trend remains strong and
volume during a pause is light.
• Understanding the phases of price action, volume analysis, pattern
recognition and candlestick charting will provide you with a solid
foundation to make educated trading decisions.

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 Market Analysis
How to Trade with Higher Probabilities

You can absolutely develop great trading opportunities based on the

Order Flow and Trend of your stock, but-
When your stock and the market are in sync you have better odds for follow-through…

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 Defining “the market”
• When someone refers to “the market,” they are usually referring to the
major indices.
• These indices tell us the approximate strength or weakness of the
environment we are trading.
• According to Dow Theory, the indices discount everything. The market
indices present us with a consensus of opinion expressed with money
invested in the market.
• To the experienced trader, the major indices will show the direction and
strength of those opinions, as well as, when those opinions have changed.

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 the three major indices
that compose the general market

1. The Dow Jones Industrial Average: Consists of 30 of the largest and

most widely held public companies in the United States. The
"industrial" portion of the name is largely historical — many of the 30
modern components have little to do with heavy industry.
2. NASDAQ Composite Index: Index of stocks listed on the NASDAQ
stock market. It currently has over 4,000 components. Follows the
performance of stocks of technology and fast growth companies.
3. S&P 500 Index: index containing the stocks of 500 large cap
corporations. Presents a broader more up to date view of market
action than the DJIA.

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 Professional market analysis
• Your odds for success will increase dramatically when you trade
on the same side as the overall market.
• The best and only way to get a feel for market strength and true
direction is to monitor volume and price action every day.
• Your goals for your market analysis are:
1. determine the trend, strength of the trend support and
resistance levels and momentum
2. be able to recognize through price action and market internals,
when the trend may be losing momentum, when it has reversed
and when it should follow through.

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 SPY: S&P 500
DIA: Dow Jones Industrials
QQQ: NASDAQ
IWM: Russell 2000

A Professional will always know

the general market
picture to give context and
trade expectation to stock SPY
trading ideas. DIA

Is it trending?
Bullish?
Bearish?
Neutral?
Are they doing the same?
How do they look in multiple
time frames?

Trading stocks in sync with the

market is a good idea. QQQ IWM is optional

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 More Dow Theory: indices must confirm

• Originally written in 1932 as “The movements of both the railroad and industrial
stock averages should always be considered together.”
• This is why we analyze multiple market components at the same time
• The movement of one price average must be confirmed by the other before
reliable analysis may be drawn.
• Conclusions based upon the movement of one average, unconfirmed by the
other, are almost certain to be misleading.
• The market has changed dramatically since then, but basic principles remain the
same.
• In today's market this part of Dow Theory still holds true, but because of the
complexity and volume, we replace the railroad with the NASDAQ and the S&P
500.
• Reminder: Multiple Time Frame Analysis is a Dow Theory concept
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 two special market scenarios
• One of the biggest mistakes a trader can make in trading today's equities
markets is to draw conclusions based upon the movement of just one market
average.
• If you are trading NASDAQ stocks it is a mistake to only watch the NASDAQ
composite, if you are trading a listed stock, it is a mistake to only watch the
DOW for a market opinion.
• Think of the three indices as legs of a stool. They are all working together and
you can trust the stool, or if one leg is not cooperating and you can’t expect it
to hold up.
1. We started this chapter talking about the incredible daily volume in today’s
market, as active traders, we want to know if all that volume is on the “same
page” or if it’s not. (determining if the “mass market” is showing a bias)

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 Scenarios we are monitoring for from the major market indices:
Must be trending markets. Applies to daily and intraday charts

• The price action active traders are monitoring is two day highs
and two day lows.
a. We are watching today’s high and low, and the previous trading
days, high and low. (this applies to longer term charts as well)
• Very simply, are the 3 indices making new intra day highs or lows
together?
• Are the 3 indices making new two day highs or lows together?
• If they are NOT hitting these levels together, how do we use that
information?

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 Scenario #1 CONFIRMATION

• All three indices are making new intra day highs or lows together.
• All three indices are making new two day highs or lows together.
• Monitor for when the NASDAQ, S&P and Dow are making new intra
day highs (or lows) or two day highs (or lows) at approximately the
same time.
1. When this occurs, you can expect a move of significance in that
direction.
2. This means you can anticipate squeezing more out of an existing trade,
or adding to an existing position.
3. You are expecting follow through.

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 Scenario #2: DIVERGENCE

• Any one of the 3 indices is NOT confirming new two day highs (or lows), intra day
highs (or lows) occurring in the other 2 indices.
• It could be any one of the 3 indices, on any particular day.
• For example: The Dow and the S&P are making new intra day highs, but the
NASDAQ is not.
1. At this point, you can expect this to be a reversal of that new high or low.
2. Do not trade the direction of the break out or break down aggressively.
3. This is a potential change of trend for the entire market.
4. Look for a swing point or melted candle in the lagging market to time the reversal.

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 Confirmation: Point A (expect follow-through)
Divergence: Point B (expect indecision or a reversal)

divergence

confirmation

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 confirmation: Active traders monitor two days

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 Divergence: two day’s price action

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 Monitor two day charts in
all 3 Major Indices to
determine if you can
expect Confirmation and
follow-through or
Divergence and a reversal

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 the tick : measuring market momentum

• The TICK is an indicator that measures the number of NYSE stocks

that are up ticking versus down ticking.
• For example if there are 1,000 stocks up ticking and 400 down
ticking at that moment the TICK reading will be +600.
• Identifies market extremes intra day, identifies when institutions are
active and alerts you when to decrease your activity level and when
to lower your expectations for follow through (look for TEST type
trades).

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 Considerations when monitoring the TICK
• Excessive pessimism and enthusiasm are usually seen at market tops and
bottoms.
• +1,000 is considered overbought (exhaustion buying), -1,000 is considered
oversold (exhaustion selling).
• Extreme TICK reading like this will indicate to you institutional order flow is
present, you should be using more leverage and expect follow through.
• The zero line indicates a balance between up ticking and down ticking stocks.
• If the TICK does not read higher than +500 or -500, there is no institutional
order flow, you should not be too active, not expect follow through, you should
look for TEST trades.
• ** do not monitor all fluctuations in the TICK, only be aware of the significant
levels mentioned… (0, + or-500, +1,000 or -1,000)

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 More Tick considerations: momentum and order flow

• When the market makes new highs but the Ticks DO NOT, consider this a loss of
momentum and buy the next pause less aggressively.
• If the market makes an attempt to test the previous highs and the ticks make a
second or third lower high, consider this a potential change of demand order
flow! You should be alert for a change of trend.
• When the market makes new lows but the Ticks DO NOT, consider this a loss of
momentum and short sell the next pause less aggressively.
• If the market makes an attempt to test the previous lows and the ticks make a
second or third higher low, consider this a potential change of supply order
flow! You should be alert for a change of trend.

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 Trading with the TICK

• When the Tick has a reading of +1,000 or greater, expect that to be the extreme
of up ticking momentum. Scale out or book profits if long. DO NOT enter a new
long here!
• When the Tick moves from +1,000 you should be aggressive trading the next
pullback expecting a successful test of the previous high, this is a very high
percentage trade.
• When the Tick has a reading of -1,000 or greater, expect that to be the
extreme of down ticking momentum. Scale out or book profits if short. DO
NOT enter a new short sale here!
• When the TICK moves from -1,000 you should be aggressive short selling the
next pullback expecting a successful test of the previous low, this is a very high
percentage trade.

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 A 5 minute
candlestick
chart of the
Tick indicator Positive Zero line reading=
buying environment

Can clearly see here aggressive buying is the game plan after 1pm.

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 the TRIN:
measuring under the hood of the market

• The TRIN is a leading market indicator that displays an

intra day snapshot of volume and price action to assess
the true strength of the market.
• Measures the ratio of advancing stocks to declining
stocks and compares it to the ratio of advancing volume
to declining volume.
• A TRIN reading of 1.0 is considered neutral.
• We monitor the TRIN using a 1 minute line chart.

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 Considerations when monitoring the TRIN

• Because the TRIN is a leading indicator think of the TRIN as the markets
“gas pedal.”
• A TRIN reading above 1.2 is considered bearish. A TRIN reading below .80 is
considered bullish.
• The trend of the TRIN is more important than the actual number of the
TRIN.
• If the TRIN is declining, this is bullish, buying with volume is coming into the
market.
• If the TRIN is rising, this is bearish, selling with volume is coming into the
market.
• Drawing trend lines on your chart of the TRIN will help you to assess the
bias and when it has changed.

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 A chart of the TRIN: very bullish:
The trend of the TRIN moves opposite the chart of the market and
confirms the trend

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 The VIX
• CBOE Volatility Index: often referred to as the “fear index.”
• Measures implied volatility of S&P index options.
• Determines the markets expectation of volatility over the next thirty day
period.
• The higher the VIX the more volatility (price movement) is expected.
• The lower the VIX reading, the market is in a period of indecision or
indifference.
• A higher trending VIX indicates a bearish and volatile environment.
• A lower trending VIX indicates a period of mild price movement and
generally a bullish environment.
• The VIX can and should be viewed on daily and intraday charts.

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 VIX daily chart and SPY Daily Chart: 8.1.2014

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 SPY trending higher/VIX trends lower:
July 18, 2014 (5 minute candlestick charts)

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 SPY trending lower/VIX trends higher
July 31,2014 (5 minute candlestick charts)

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 How to Apply the VIX Readings
• Increased VIX readings translate into increased expectation for volatility or
wider price movements:
• As the VIX rises you should plan to reduce share size to compensate for the
wider price action.
1) This means if your trading plan is to risk $300 per trade based on your
money management criteria, you should plan to risk that amount with a
wider stop-loss.
2) For example: a $300 risk for a .50 “normal” distance from your entry to
your stop-loss target would mean 600 shares. (300/.50=600)
3) As the VIX rises the distance to your normal stop-loss will increase.
Therefore to risk the same $300, the appropriate stop-loss target may
now be .75 away from your entry.
4) To risk the same $300, your rising VIX adjusted share size would now be
300/.75= 400 shares.
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 Market Analysis Recap
• Monitor the three major indices to determine the overall tone of the market
• For an accurate picture of market action you should monitor the three major
indices using Multiple Time Frame Analysis (trends, support/resistance,
momentum, price action phase).
• Use the TICK as a tool to anticipate the extreme of a move (+1,000 or -1,000),
and to aid in gauging your activity level (+500 or -500 extremes), momentum
divergence and a potential change of order flow.
• Use the TRIN to get a true gauge of the price volume relationship intra day and
to filter out price fluctuations.
• Use the trend of the VIX for trend confirmation and to adjust share size.
• Use Dow Theory Confirmation and Divergence to determine if the market
should or should not follow through at new highs or new lows.

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