The daily bombardment of news updates and opinions as we try to survive one of the greatest economic, social and health crises in generations, makes for a market environment riddled with uncertainty.
However, according to Brian Shannon, the founder of Alpha Trends, avoiding the headlines and concentrate on price action is the path to success as a short-term swing trader.
“We’ve got this amazing volatility, and for someone who is into short-term trading, this is where you really thrive. It’s been a great environment if you can be disciplined and keep your thought on what the economy might be doing versus focusing on price action,” he told Opto Sessions.
“The market is up 30% off the COVID-19 lows, [but] we are seeing record unemployment, businesses still shuttered and things that just seem so bad for the economy. It’s not the headlines that matter, but the reaction to it.
If you just listen[ed] to price action, you would have moved out of any short positions on the way down as it started rallying. Then you would start to look at recovering stocks and say ‘well, maybe I don’t trust them so I’m going to trade a smaller share size’. But price is moving higher and I don’t want to argue with price action because I know who loses in that battle. It’s going to be me not price.”
Lessons in understanding price action
This lesson in price action is something Shannon learnt early in his career. “I used to read research reports and even annual reports, and I would feel like I knew a company well,” he recalled. “But when I would go to buy it, the stock would go down.”
“[On another occasion] I read about a company who was laying people off and then the stock went up and … I thought ‘that doesn’t make sense’. The business is weakening and the stock should go down, but I dug into it and realised it was good for their business because it was cutting costs. We have egos and we place a high value on what we think the market should do. We argue with the logic of it the whole way down.”
“We have egos and we place a high value on what we think the market should do. We argue with the logic of it the whole way down”
Paying attention to price action is particularly important for those using a short-term timeframe, Shannon considers. He cites a phrase by Warren Buffett’s mentor Benjamin Graham: “In the long run, the market is a weighing machine but in the short run, it’s a voting machine”.
Shannon suggests that for those holding a position for any longer than three months should be doing a little more fundamental analysis than he does as a swing trader.
In his technical analysis, Shannon says first and foremost he focusses on price action. He says something a lot of people miss, however, is using multiple timeframes.
“Let’s say we first look at a daily chart going back 200 days to get a bigger picture understanding of what the trend is then … I’ll switch down to a 30 minute or a 15-minute chart, meaning each candle is 15 to 30 minutes of trading,” he explained.
“A longer-term timeframe is to identify the opportunity, the intermediate timeframe is to come up with a plan and the shorter-term timeframe of two or five minutes is where I can fine-tune my entries. But I want to wait for price confirmation that says the buyers are in control so I can manage risk before I commit my money to the market and trade.”
“A longer-term timeframe is to identify the opportunity, the intermediate timeframe is to come up with a plan and the shorter-term timeframe of two or five minutes is where I can fine-tune my entries”
On a typical day, there are about 30 stocks from a list of 300 that Shannon will have an interest in. He usually focuses on 10 of those, setting up price alerts at key levels. “So, as [a stock] approaches the level, I take a look at it closely on a shorter-term timeframe and start to get a feel for it,” he said, adding that you begin to anticipate entry over time.
“I want to listen to the message of the market. For price action, the market knows more than I do.”