09 Jan 2013 Investor Education Series – Technical Analysis: Minor Trend Change Indicators
Minor trend change indicators are very useful indicators of short-term changes in the price trends of securities and are mainly used by day traders and short-term speculators. There are four of these indicators namely: Key Reversal Day, Inside Range Day, Outside Range Day and Mid-range Close.
It is important to first determine the direction of the trend prior to the indicator. For this you need to look at the previous three days price movements. If prices closed higher on every day, we have an up trend. We will now look at the trend change indicators.
This is one of the best minor trend change indicators and I found it to be correct more than 50% of the time. A key reversal high is found after prices trended up and when prices trade higher than the previous day (new high), but close lower than the previous day. The share’s price is expected reverse and trend lower in the next trading session. A key reversal low is indicated if prices, after trending lower for a few days, trade at a lower low than the previous day, but close higher. It is expected that the price will be higher in the next trading session.
The other reversal indicators do not work often enough in my experience, but here they are. The Inside Range Day (and opposite for Outside Range Day): This occurs when the entire day’s price movements (high as well as low of the day) are contained within the previous day’s price range (when the high is higher and the low is lower than the previous day, we have an outside range day). If prices fell for three days and an inside range day occurs, the price is expected to increase the next day and the opposite for an outside range day.
Mid-range Close: This occurs when the closing price of the day is exactly in the middle of the day’s high and low. There is an excellent chance that the price trend during the last three days will be reversed.
The rationale behind the success of minor trend change indicators is that they indicate that the up and down forces reached equilibrium. The forces previously in control lost the initiative, but the opposing forces have not yet turned the trend. It will happen in the next trading session. Think of it as a sea saw. Both forces are in equilibrium, but the opposing force is about to gain control.
These indicators are very useful to predict what might happen the next trading day. The end of a major price move could also be signalled by the minor tend change indicator, but this assumption is not too reliable.
Head – Sanlam iTrade