So when looking at both price and trends in the market, a rule-based trading methodology means we need to take a more considered approach to price.
What should we look for?
We need to remember that all price movements show relevant information. Both the opening price and closing price, plus the trading range of every individual bar or candle.
As individual prices form into larger trends, it is this ebb and flow of price that offers opportunities to the attentive trader.
Consolidation periods and trends
In part one, we looked at how to identify the primary trend and consolidation periods in the market.
As markets swing between these dynamic price movements and into periods of consolidation, we can observe that the primary movement of the market comes from consolidation periods. Your rule-based trading system can therefore give you entry signals into the early movement of price.
Different time frames can be utilised within the IG charting package and offer many variable settings, giving the rule-based trader a distinctive advantage over a hit and miss methodology.
Price trends occur in all time frames – from one minute, to hourly and daily – with larger primary trends identifiable in weekly charts. By utilising this information, the entry and exit points of rule-based trading can be pinpointed.
Turning points and backtesting
When individual bars or candles are combined, they can also give us insights into the turning points of the market.
For example, the pivot point group of three candles combined in one time frame can give us the turning points on a smaller time frame. This can reveal confirmation of price reversals.
All of patterns and price movements can be found on a repetitive basis. This type of price information can be very easily backtested to build a robust trading outcome.