"Dodgy": the complicated qualities of a simple graphic model
Simple graphical models on and stock exchanges allow not only to get an idea of possible change of moods of market participants, but also to reveal their preferences. This is achieved by joint analysis of volume and price dynamics.
The reasons for the origins of the Dodgy model
The simplest example is the formation on the chart of the Dodgy modelswhich characterizes investors' uncertainty about whether the current trend will continue. As a rule, it is associated with ambiguous news background or expectations of important events, in anticipation of which the market freezes, preferring to play facts rather than rumors. As a result, there is a semblance of balance on the chart, which is expressed in the close location of closing and opening prices.
According to the researchers, the emergence of the "Dodgy" graphical model in a growing market, in the context of declining transaction volumes, indicates a depletion of demand, which may eventually provoke a reversal of the bullish trend or a correction to it. The same is characteristic for the bear market. In this case we are talking about supply exhaustion.
Thus, in the conditions of the downward trend of the futures on the USD/RUB currency pair at the end of 2012, the decrease in the daily volume of transactions, confirmed on the hourly chart, led to the development of a correctional movement (see Fig. 1).
Possible filters for trading signals of the "Dodgy" model
At the same time, in order to increase the analytical value of the "Dodgy" model, the trader sets a system of filters for himself, which is not always logical and effective in a particular situation.
For example, volume comparisons with 3-4 previous bars or lower (higher) closing prices in an initially existing uptrend (downtrend) can be used as such.
Does it mean that a trader should pay attention only to doji bars characterized by low trading activity? Not necessarily! As practice shows, the key to understanding and effectively using the Dodgy chart pattern lies in identifying market preferences by moving to an intraday time frame.
Dodgy graphical model on high trading volumes
In early January 2013, the palladium futures market formed a "Dodgy" graphic pattern on high volumes, which should have received more attention (see Fig. 2).
Moving to the hourly chart and analyzing its structure, we could note the following: first, a bar with a wide spread and increased volume was located far from the resistance line, which should always cause doubts based on the question "if someone buys on good news, who sells to him?". And secondly, it was followed by the "Range Contraction" configuration, the realization of which confirmed the presence of strong bearish sentiment in the market. As a result, futures quotes fell to six-week lows (see Fig. 3).
Thus, we should not emphasize large or small volume related to the "Dodgy" chart pattern. It can be much more useful to try to explain the behavior of individual investors by moving to a smaller timeframe.