The Handbook of Technical Analysis + Test Bank_ The Practitioner\'s Comprehensive Guide to Technical Analysis ( PDFDrive )

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the hAnDbook of teChnICAL AnALySIS

activity in terms of OHLC data. For example, the illustration in the middle of
Figure 5.10 depicts a series of rising close prices. This is essentially a line chart in
action. Hence, as far as close prices are concerned, it is clearly an example of an
uptrend unfolding. The same argument applies to the other two examples as well.
A trend may be defined in terms of high, low, and mid/typical prices. In fact, the
commodity channel index (CCI) oscillator and the Floor Trader’s Pivot Points are
based on typical prices as an indicator of trend activity.

5.2 QuaLity of trenD: 16 priCe CharaCteristiCs


iMpaCting future priCe aCtion anD trenD


strength


The highest skill any trader can aspire to is the ability to read pure price action.
This is an important skill because price is regarded as the most important indi-
cator of potential future price action. When attempting to decipher the possible
future action of price, we need to be familiar with 16 critical price characteristics
that may potentially impact future price activity, namely variations in:


  1. Cycle Amplitude: Look for decreasing cycle amplitude in uptrends and downtrends.
    A decrease in cycle amplitude in an uptrend is an early indication that there may
    potentially be underlying weakness in the uptrend (see Figure 5.11). In similar
    fashion, a decrease in cycle amplitude in a downtrend is regarded as a bullish
    indication. Note that the up cycle amplitudes must, on average, be larger than the
    down cycle amplitudes for an uptrend to take place. Conversely, for a downtrend,
    the up cycle amplitudes must, on average, be smaller than the down cycle ampli-
    tudes. Nevertheless, it is the change in the successive up and down cycle amplitudes
    that are the most important characteristic for deciphering future price activity.


figure 5.11 Decreasing Cycle Amplitudes in an Uptrend Is Bearish.
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