First Things First – Define Market Direction

2022-02-16

Another day of “crises” in the news and the market bleeds red… again.

This constant, sharp chop is making it difficult for traders to determine market direction.

Stock price helps determine directional bias

Market direction — or directional bias — is a crucial qualifier for traders to establish prior to each open market session.

Reviewing the price levels from the daily time frame, as well as the stock price at the close from the previous day helps determine directional bias. Traders should mark these levels each morning to establish the directional bias of a stock. Can the price get above the previous price?

It can’t be stressed enough the importance of the daily time frame for day trades. Traders look to the charts to determine if a stock price is maintaining a bullish trend and a squeeze – a directional bias.

Find areas with stock prices breaking higher

Traders also look to see how soon the price level breaks higher and whether a sentiment shift occurs once the price rises. After removing the initial 30- and 60-minute highs after the bell, traders look for areas where the price continues to grind higher — along with market expectations.

If traders can match the overall market structure to the stock movement, it makes the confirmation for that bullish trend that much better. Traders should track the indices, like the Nasdaq and the S&P 500, to find the established trend or the bullish bias.

Traders look for the following signals to see if the indexes are in a strong position for a trade setup: squeeze on the daily, strong bullish trend defined by stacked moving averages, and a chart maintaining a bullish trend.

Stocks move along with overall market

When the overall markets are set up to make big moves, trading directionally becomes a good strategy as 85% of stocks move with the broader market. When the overall market is uncertain, traders may do well to sit on their hands.

It is important for traders to understand that the market has no ulterior motive. It’s an order-filling machine that knows the limit orders and where the stops are. This is how the market functions and what determines its direction.

Simpler’s traders know how to recognize when a directional bias, especially when paired with the backdrop of the overall market, makes a good intraday trading setup.

This is why it is important to be a part of the Simpler Trading community – learning from others when the market is moving.