Sunday, July 20, 2008

Of Fake Moves…Shakeouts and End Runs!!!

I was reading some Schabcker this weekend, and thought of sharing here an important lesson. He terms it as “The Chartist’s Most Confusing Enemy”. These are the False Moves (FM) and the Shakeouts (SO). Both these terms are often and more errantly used to describe identical situations. Let us differentiate between the two as;

  • False Move is more commonly used to designate as somewhat longer price movement. It is less sharp and may extend over a week or more. It is usually considered as applying to puzzling and indecisive, but comparatively limited price movements which proceed out of definite formations in the wrong direction.
  • Shakeout usually lasts for a day or two and is sharper in nature. Shakeouts occur at almost any time inside or outside a formation.

To sum up we can say that SO is definitely engineered by operators in order to gun stops before starting their mark up or mark down campaign, while FM is rather a result of temporary market indecision or withdrawal of professional activity.

Before I carry on to keep this article less confusing, I am using the term FM to describe all price movements which give or appear to give a wrong forecast. If they proceed far enough (in terms of price action) and accompanied by higher volumes they become more dangerous and troublesome of all price formations in chart analysis and practical trading purposes. False moves should not lead us to our actually trading on their misleading implications. Triangles are more susceptible to false moves especially at the apex. The logic behind this argument is that as the apex is neared the activity is so low (remember volume lesson?) and price range so narrow that it takes only a very small over balancing of technical status quo to bring about an erratic and temporarily false price movement.

So now the question is how do we defend ourselves from such a move? One such defense as most pattern trader would agree with me is paying close attention to volume. In most cases if the volume tends to increase on a move out of a pattern or through a critical chart line or an important moving average. Then a move is likely to be genuine. On the other hand if the volume is low or tends to diminish on the move then we have every right to suspect that such move might be a fake move. “Fake moves are attended by low volumes”, an exception to this rule is what we term as one day reversals or turnover days. One day reversal is marked by high volume almost all day, but with price starting in one direction in the morning, reversing itself on volume, and coming back in the later part of the day to the morning levels. When such a one day reversal breaks out o f a pattern it is more a characteristic of a Shakeout! Another assumption is that there is rarely more than one false move out of a pattern. Here again I would repeat the most important premise of Technical Analysis that no pattern is infallible and that in Technical Analysis there are no such words as “always” or “never”. I guess for this reason only the STOPS were invented. Yes STOPS! Use Stops they are the only real defense available to a trader.

AH! I can sense some people beginning to yawn already. So before I wind up this article let me just throw a light on another phenomenon which occasionally shows upon charts and which might appear on superficial analysis, to be related to the false move. This is called the “End Run”. This occurs when the price movement proceeding form a perfect valid breakout, out of a strong pattern, fails to carry as far as the strength of the pattern forecasts, but is quickly reversed into a considerable movement in the opposite direction. End Runs are more often traceable to previous strong support or resistance levels close to the breakout levels. Déjà vu anyone? Doesn’t it remind you of a perfect trade you took on a pattern and it just didn’t go far enough, because you never paid heed to the important S/R level that just lay ahead!!!

1 comment:

Shazia said...

thanks .. that was deja vu for me !!
This aspect of TA is particularly interesting... and happens more than once in reality ... also helps to make corrections in trading pattern and learn more !!