12 Dec 2017 Technical Analysis Series Minor Trend Change Indicators
The last in our series on Introduction to Technical Analysis is Minor trend change indicators. They 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 or periods’ price movements (you can use any period, like 5 minute charts). If prices closed higher on every day, we have an up trend. We will now look at the trend change indicators. For this you can only use Bar charts or Candlesticks.
Key Reversal Day:
This is one of the best minor trend change indicators. A key reversal high is found if, after a few days of trending up, prices trade higher than the previous day, but close lower. The share’s price is expected to end 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. These indicators are short term and only indicate the next bar or two.
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.
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.
Example – EOH:
We have used Daily Bar Charts, but you can use the strategies with 5 minute Bar Charts, hourly or weekly. After going up for three days EOH had an Inside Range day on 16 October. The high was lower than the previous day and the low was higher. That indicates the price movement will reverse the next day. Price did go lower, although only for a day.
On 30 October EOH made a Key Reversal Day. The high was higher than the previous day, but the close was lower than the close on the previous day. After trending sharply lower for a few days another Key Reversal Day occurred on 8 December when EOH traded substantially lower than the previous day, but managed to close higher than the previous day’s close. That is a buy signal as the price is expected to reverse trend for at least the next day.
These indicators are very useful to predict what might happen the next trading day or period. 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.