The Power Of Price Action Reading

Abstract

Evaluating the effectiveness of technical analysis has always been a challenging task. Translating each technical pattern into a quantifiable measure is often unfeasible, leading to the perception of technical analysis as more art than science. Proving its utility rigorously remains elusive. This study aims to investigate the value added by incorporating discretionary technical trading decisions within the context of stocks experiencing significant overnight gaps. By creating a bias-free simulated trading environment, we assess the profitability improvement of a simple automatic trading strategy when supported by an experienced technical trader. The trader's role is to restrict the algorithm to trade only those stocks whose daily charts appear more promising. Additionally, we conduct a test where the experienced trader micromanaged the open positions by analyzing, in a bias-free environment, the daily and intraday price action following the overnight gap. The results presented in this paper suggest that discretionary technical trading decisions, at least when conducted by a skilled trader, may significantly enhance trading outcomes, transforming seemingly unprofitable strategies into highly performing ones. This paper provides empirical evidence supporting the integration of discretionary judgment with systematic trading approaches, offering valuable insights for enhancing trading outcomes in financial markets.

Keywords: Momentum, Swing Trading, Day Trading, Technical Analysis, Overnight Gaps, Gaps, Gap&Go, Algorithmic Trading, Risk Management, PEAD, Earnings Gap