How to Identify Stock Trader Sentiment in Price Bar Configurations

As an investor, market price bar configurations can give you clues about general market sentiment in order to anticipate your next move. You can use these configurations to get an impression of how traders are analyzing and reacting to trades over the trading range.

Tick and bar placement

An uptrend is a series of bars that includes these features:

  • Higher highs together with higher lows.

  • Bars that have a close higher than the day before — up days.

  • The close is above the open.

A downtrend has a series of bars with these features:

  • Lower lows together with lower highs

  • Contains mostly down days (closes lower than the day before)

  • The close is below the open.

Some bars are just a little out of line, but sometimes you see bars that really stand out. When you see the special cases, you know that you’ve got a valuable clue to upcoming price behavior because the majority of human beings respond the same way to the same patterns on a chart in the year 2020 as in the year 1920.

A bar component or even the placement of the entire bar can be random. Random highs and lows, and even a few random bars, are caused by a “greater fool” making a trade at a sucker price or a whole batch of traders mistakenly believing a false rumor. Often, you don’t know the reason for some weird bar configuration. Some securities have a high number of known configurations, and some are prone to out-of-whack (meaningless) configurations. The orderliness and regularity (or lack of regularity) is a function of the crowd that trades each security, and should be a consideration when you’re choosing what securities to trade.

Types of configurations

Just like patterns, when you spot a special small-bar configuration, you’re looking for either trend confirmation or a signal that the trend is at risk of ending. Here are two types of configurations:

  • Continuation patterns: The trend is continuing. The direction and pace of the trend are about the same as they were before. Relax. The more confirmation you can get, the safer you feel. You see hard evidence of the trend continuing, such as a preponderance of higher highs and higher lows marking bullish sentiment on the part of the trading crowd.

  • Reversal patterns: The trend is switching direction. When the trend shifts from down to up or up to down, the configuration of the bar components and their placement across a series of price bars often shout, “The trend is changing!” from the rooftop. Listen up. If you have a position in the security, a reversal pattern tells you to exit. If you hold on to the position anyway, your risk of loss is much higher.

    A reversal pattern is not only a warning to exit when you’re invested in the security, it’s also advance notice that a good entry place may be coming up. For example, when a downtrend ends, you may see one of the very specific reversal patterns that is a reliable precursor to a buy signal.

Trading range

The daily trading range is the difference between the high and the low of the day. You can also say that the range defines the emotional extremes of the day:

  • A bar with a small range in a sea of larger bars: The market is indecisive. Indecisiveness isn’t the same thing as indifference. Indecisiveness can be dangerous — nobody wanted to buy at a higher high, so perhaps buyers are getting tired of that security at current prices. A change in sentiment may be brewing, such as deceleration in a price rise that precedes the end of the trend.

  • One very large bar in a sea of smaller ones: Pay attention. Something happened. Traders are willing to pay a lot more for a rising security, or they want to dump a falling one so badly that they’ll accept an abnormally low price.

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