The Essential Elements of Trade Analysis

Acronyms and mnemonic devices are learning techniques that aid in information retention. I use them to recall patterns in charts and when teaching a logical approach to trading. The acronym I use most often when creating trade strategy is VERTEX.

Each letter in this acronym is an element I research for every trade. The V stands for value. Value is simply the price at which buyers and sellers transact most often, a.k.a. high-volume price.

Once I understand what the fair price is, I can determine whether bulls or bears control momentum or energy, which is what the first E in VERTEX pertains to. Energy or momentum is defined as the move either up or down from a fair price.

The R stands risk. Risk is defined as a change in momentum. There are many ways to determine risk. One of the most popular is to use a moving average (MA). For example, a bullish position may be held until there a close below a five-day MA. I often hold long positions until there is a close below a daily high-volume price, and I will exit a short position when there is a daily close above the fair price.

The T refers to timing. When looking to enter a trade, we want to know if the timing is right for a breakout or vertical move. Trends often begin after a series of three to seven days with below average ranges and volume. It is common to see a few exceedingly small-bodied candlesticks (similar open and close) just before a breakout. Timing the onset of a trend is especially critical for option owners. By doing so time decay will be less of a factor.

The second E in VERTEX stands for entry. Locating support (buy levels) and resistance (sell levels) is a skill that can be honed. Generally, support and resistance levels are determined by checking history in charts. Buyers often emerge when an old low is retested, and sellers frequently surface when an old high is revisited. Prices where critical events (economic reports or earnings) occurred often provide support/resistance when retested.

The X refers to eXit. Exit can be a profit target for which I prefer to use ATR (average true range) to project how far a market is apt to move over a given time frame (day, week, etc.). Exit can also be a trailing stop. Trailing stops allow us a lock in more profit as time passes.

Good traders are typically well organized. They tend to have specific and consistent methods of analysis to react when an opportunity is presented.

John Seguin
Senior Technical Analyst
Market Taker Mentoring, Inc.