6 Price Action Tips You Can Learn In 6 Minutes

After the massive up move, RUT went through a period of 7-8 months where it consolidated in a very narrow range. After that it went from 1350 to 1600 and back to 1450 over the space of a few months.

Here’s one final example from 2018-2019. Tight Bollinger Bands from July to September proceeded a sharp move lower then back up, then a two moth consolidation.

REVERSION TO THE MEAN

Reversion to the mean is a concept in finance that a stock or commodity will tend to move away from extreme values over time.

Using moving averages is a good way to see how extreme the current price of a stock is.

For example, when a stock gets a long way above its 200-day moving average, we can assume that it will come back to meet that average at some point in the future.

This can occur either through a correction in price, or a correction through time where the average “catches up” to the stock price.

In the second half of 2017, AMZN had been a long way above its 200-day line for a LONG TIME. At the time, I said this regarding AMZN:

“Stocks ALWAYS come back to the 200-day moving average eventually. It could happen in the next few months, it could take 6-12 months. It could happen with a short sharp 25% decline, or it could involve months of sideways action which the 200 catches up with price. But mark my words, at some point AMZN will touch the 200-day line again.”

Sure enough, AMZN topped out in August 2017 and by late October had come back to touch the 200-day line. Not only did it touch the 200, it overshot it by about 20%.

I said the same thing about Alibaba back in late 2017 at a time when no one was willing to bet against the stock. Since then BABA has traded sideways with quite a few big up and down moves, but sure enough it eventually touched the 200.

TRADING WITH THE TREND IS MORE FORGIVING THAN FIGHTING THE TREND

Trading with the trend, will greatly increase your chances of success as a trader. It’s a much more forgiving way to trade.

View single page >> |

Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are ...

more
How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.