Bar Charts and How They Form

By: Lee Gettess

The following is an excerpt from Lee Gettess’ The Five Step Guide to Trading Profits

This is a very dry title, but one of the most exciting concepts I've ever come across.  Discovering it made a huge difference in my trading.  If you can imagine a daily price bar being created (and this is true for any other length bar as well. . .weekly, monthly, etc.) we are going to try to take advantage of how it is created.

If the market is basically going up for the day, the probabilities is that it will open and make the low first, then travel up to put in the high, then close somewhere up there.  It can make the high first, then go down and make the low, then rally back up to close higher. . .But that is a much rarer occurrence.  So, if you are trying to buy support, you want to buy it as early in the day as possible.  How early?  That is hard to say. . .The earlier the better.  If a market comes down to valid support later in the day, it doesn't make the support any less valid than it was earlier.  The problem is if the high of the day has already been made, where is the market going to go?  You can buy right off the low and still not be able to make any money.  The ideal situation is to buy off the low when the market has the rest of the day to go make the high.

Within my nightly Insider's Tip Sheet, I try to tell you how I expect the daily bar to form for the T-Bond, NASDAQ and S&P 500 markets.  Sometimes, I am 180 degrees wrong, and that should present a fairly decent opportunity as well.  If the market makes the high first on a day I expected it to go up, it still has to make a low somewhere.  Selling resistance on those days can be quite profitable.  On the other hand, the highest probability trades come when the market behaves exactly as we would like it to.  Hitting the resistance first when we want to sell, or support first when we want to buy, are the situations with the greatest potential.  This is how I day trade.

Longer term traders shouldn't overlook this, either.  The weekly low will be made first in an up week; the monthly low normally gets made first in an up month.  Hourly, Quarterly, Yearly, etc. . .each and every time frame must make a high and a low somewhere.  One has to be made before the other.  A market either makes the highs first, then goes down to make the low, or makes the low first and then goes up to make the high.  It isn't always easy to recognize how the price bar is forming, but attempting to do so can give you a tremendous advantage.

I know this sounds terribly simplistic, but I truly believe that focusing on this process is one of the key factors in understanding where we might be headed on any given time frame.  It is a huge help for my trading.  I hope it makes a large difference in yours as well.  Good Luck!