How to understand any market? - techniques and tips [part 2]

If you are still a trader who is looking for his own way in trading and is constantly testing various tools with the intention of finding the one that best suits his style, then the second part of the article is for you. Today we will introduce further techniques that make it easier to understand the market. We will focus on volatility, momentum and divergences.

Be sure to read: How to understand any market? - techniques and tips [part 1]

Variability

As you know, the price on individual instruments is constantly changing. Understanding volatility is very important because it helps you make sense of current moods and adapt to changing market conditions. We can distinguish basic three ways of interpretation:

1. Information strictly on the price - here attention should be focused on individual candles. The length of the body and wicks, can provide many interesting tips and proverbially show what variability we are dealing with a given value.
2. ATR - one of the basic price indicators. A high parameter means that the previous price range was relatively large. Low, in turn, gives a signal that the price has not changed during a specific candle.
3. Bollinger Bands - the appearance of the indicator can tell a lot about volatility. If the bands are extended, this shows increasing variability. Similarly, a narrow ribbon system is a sign of low variability. Here, the price to external ribbons ratio is also very important. If the price can stay outside of them, this indicates a strong trend.   

Variability. AUD / JPY chart, M15 interval. Source: xNUMX XTB xStation

Momentum / strength of the trend

If we can interpret well momentum, we can estimate whether there is a likelihood of continuation of movement or whether there may be a change. It is also associated with levels of support and resistance, breaking them by price, or defense. A weakening momentum may herald a reversal of the current trend. If we can "read" these tips, it's easier to make a decision about staying in the transaction, exiting it, or adding it to an item. Interpretation of momentum can be helped by some indicators, which have already been discussed in more detail in other articles: RSI, ADX and the Stochastic Oscillator. In a few words:

1. RSI - compares the strength of buyers and sellers. High indications indicate the dominance of bulls, low bears.
2. ADX - trend strength indicator. A reading below 25 indicates consolidation. Between 25-50, the market in trend. Above 50, strong trend.
3. Stochastic oscillator - provides a lot of information about momentum. An indicator above 80 or below 20 may indicate a strong trend and strong momentum.

Momentum. Chart EUR / USD, D1 interval. Source: xNUMX XTB xStation

divergences 

The concept behind the divergences can be a very strong asset of the trader, because it provides a lot of information that is not visible at first glance. divergence may signal that the price is losing strength despite the fact that it reaches higher and higher peaks. If the prices clearly weaken and the price has a problem with the continuation of a given move, divergence may signal a potential stoppage or the end of the trend. 

Divergences. USD / NOK chart, D1 interval. Source: xNUMX XTB xStation

Each learning takes time, but the techniques presented in Part 1 and Part 2 really help to navigate the "world" of charts more effectively. It's best to choose two or three concepts and combine them into one coherent whole. Certainly reading the market will be much simpler thanks to this. Good luck!