Tad DeVan is a Senior Forex Analyst for Market Traders Institute and host of the Ignite Trading Room. Join the FREE Room.
Traders need significant market movement in order to succeed. Price action that only moves sideways might not cause a loss, but it will often waste a trader’s time. Using daily encapsulations in trading charts could help show you when the movement of a stock or currency pair is worth buying or selling.
A daily encapsulation works well in a chart with timeframes that are less than one day (15 minutes, one hour, etc.). It creates a box around each day’s movement and allows the visualization of a currency pair’s movement within each day. In some trading software, it also can calculate a daily moving average.
Within each day, a currency pair’s movement is called its daily trading range (DTR). If a pair is moving within the average trading range over a period of time, the movement in that pair is viewed as being in a consolidation pattern — also referred to as moving sideways, or having less potential for profit.
So when a daily range exceeds the recent average for any given currency pair, a trader is able to identify that movement as a profit opportunity. If the price of the pair is high, a bullish move pulling the price back could be expected next.
A trader looking for several small wins, however, might use this indicator to spot reversal points in a pair’s price.
SmartTrader’s daily encapsulation tool operates automatically with the click of one button. Pairing it with a daily trading range indicator can show how volatile a pair is (or isn’t), and whether profit potential truly exists within its waves of movement over a period of time.
Jared (aka FX Chief) Martinez’s DTR in SmartTrader, for instance, is capable of showing a 20-day average. It automatically calculates an average by looking at the high and low prices during that period and places a quick-reference number in a trader’s chart.
SmartTrader also provides a Weekly Encapsulation tool, which uses the same functionality to provide weekly information rather than daily for a broader, more long-term look at timeframes for moving averages or other information.