Trend is up......short! Price retrace......I am right.... I have seen this many times before. Price goes up higher......p&l in the red....I'll average down like before Price keep going higher........puke The collective puking caused the trend to go up further.... Anything can happen.
I'm a day trader so my comments pertain to intraday trading using mainly a 5-min chart. Once a trend is in progress, price normally makes a minimum of 3 pushes up or down before even attempting a reversal. In a strong trend you'll get 4 or more pushes. So if price has double-bottomed or double-topped (or an approximate DT/DB), and one push off that zone has transpired, you join the trend when price pivots off the pullback. You can continue to add to a position or join the trend again as long as a higher high (in an uptrend) or lower low (in a downtrend) was put in. Most of the time price pulls back to the rising or falling 20-bar moving average (20 MA) before pivoting and resuming the previous move. If the trend is very strong, it may never pull back that far, so many trend-followers average down into their positions when a partial pullback has occurred (and of course stop out if the trend line/MA line breaks down), and if the trend resumes without a full pullback they'll then add on to the winner. Shallow pullbacks in a strong trend trap counter-trend traders and add to the fuel for the next push up, when those stops get triggered. These first mouse get trapped and that's why the second mouse gets the cheese, the mouse who waits patiently for the double top/bottom ( or LH/HL) before taking a contrarian position. Now once a DT/DB or something close to it is put in, you take a contrarian position to the trend because the bulls or bears who were in control are not so excited about these prices any more and the opposite camp starts moving in, licking its lips. You can be aggressive and take a position right away, or you can wait for confirmation (the first lower high/higher low). I personally am aggressive with those DT/DBs, because the stops can be placed very tight. Yesterday I traded CL (oil) and my first trade was a with-trend trade to the long side off the 3rd higher low from the overnight pivot low. I caught a nice piece of a measured move up. It wasn't too late after all. Then once a lower high was put in off the new high, I shorted and got stopped out on a little spike. This is common when you try to catch the reversal of an existing trend so you can get into the new trend early. Don't let those head fakes get you down; prepare to get right back in unless the previous trend really resumes by way of yet another higher high or lower low. I did just that, getting right back in at about the same entry price as my first attempt, after the spike that stopped me out left a still lower high, and then I caught a strong push down; got back in on the rally to the falling 20 MA, caught the next push down; back in on the rally to the still-falling 20 MA, and caught a 3rd push down. So that's how you get in on an existing trend, and also how you watch the reversal into the start of a new trend. This is low-risk, high reward trading. I move in and out of positions with each push, but many trend-followers stay in their position as long as the 20 MA isn't breached and in fact continue to add to it on each retracement to the trend line.
Nodoji: First of all, thank you for taking the time and efforts to write many excellent "articles" with well articulated analysis on ET, including this one on trend recognition and trend following. I am quite convinced you are brilliant at doing this price action thing. I have one question for you though. I found trend following is much harder to do than spotting the beginning of a trend. For each of the push down you target (for short), how do you know how far each push down is going? Often I have no paitence to wait for the retrace to the 10 or 20ma to join the trend perhaps due to fear that I am missing the current (big) move so I jump in (chase) at market and of course that would soon turn out to be a very wrong entry not to mention the large stop I have to put in. Meddling a trend with too many trades has caused me to ruin many nice trends that could give me great potential profit. Perhaps just staying with the 20ma until breached is the way to go, but it is quite a psychological battle seeing spikes and not taking it. OC
OC, I do like to write and analyzing this stuff cements in in my brain more and more. I can't emphasize enough how amazing Al Brooks' book has been for me. Bighog recommended that book last summer and I'm still working my way through it (very tough read). Combine that book with daily live screen time and pretty soon it starts to become easier and easier. I've missed entry into beautiful strong trends because they never pull back to the 10- or 20-MA. In a strong trend that's why you have to make a decision to get in on a shallow pullback and maybe average down if it continues further to the MA. I never do that at this point in my trading career. A "safer" way to enter a strong trend that I sometimes use is wait for price to come sniffing around near the last high or low, and get in just before the test of that level or a tick above/below that level. If it breaks out you catch a nice break out up or down whichever the trend may be. If it fails to break out you can quickly stop out and reverse because that would indicate a double top/double bottom formation. How to know where to target an exit? A trend-following purist will likely stay in the trade, adding to the position at each pullback, and finally exit when a pullback violates a certain level, such as breaks through the rising or falling MA instead of finding S/R there, or price double tops/double bottoms. I on the other hand like to get in and out along the trend, and I usually use previous S/R points to help me target my exit. If I'm trading stocks I use stochastics to target my exit. In my CL trades yesterday I was targeting a few ticks above previous support. So price rallied to the falling 20 MA and I shorted when price stalled there and started back down. Price should now make a new low below the low it just rallied off of. I look at the previous support level it will test when making the new low and place my order a few ticks above that. Sometimes price will blow right through a previous S/R level and if your trading more than 1 lot of something you can always scale in and out. I was trading 1 lot CL, so I placed hard targets.
Trends give clues when they are ending and that is the early warning for the beginning of the next trend.. FTT's, consolidations, narrowing of time bars, Support and Resistance when they hold... trends give clues when they are continuing too... what is difficult for me, and has cost me a lot more $ than I want to admit is trying to catch the first trend in the morning.. you can't use anything that involves moving averages, there aren't enough bars to have an average.. lots of volume pushes take the market [ES or YM] in the wrong direction first.. it's a problem I've not solved... looking at daily bars can give a clue about the morning but not consistently and major support and resistance can help but wow, still a big problem for me and I can never resist trying to grab that brass ring early in the day...
But with futures you have the overnight and pre-market action to get a view of what's been happening, so you do have a moving average and S/R levels to watch. I often see some very nice moves before the opening bell.
NoDoji, are you referring to this book by Al Brooks: "Reading Price Charts Bar by Bar"? I am pretty much a beginner. I've read a couple of books...haven't traded anything yet. Do you have any other books you could recommend that would be helpful to a beginner like myself? I know I'm not ready for Al Brooks book, but I think I'm going to get it anyway and see if I can wade my way through it.
Nodoji, thank you for your insights as always. Yes through reading your journal I also got Al Brooks book and indeed that is a good book (really hard to read and I am barely a quarter through). Maxpi, I also trade ES and as Nodoji said you have enough bars from overnight and pre market actions to form moving averages. Sometimes overnight and pre market actions are flat and in that case the moving averages are probably not indicative. However I notice Al Brooks in his book was showing ES charts with overnight and pre market data omitted so his 20ma used data only from the regular market sessions.
Mr Doji, I have never read ur stuff before. You are right on.. in perfect clarity. Where the hell were you back in 1994, when I started? You could have saved me a lot of money back then I just said in another post that this website has wisdom amongst all the crap and your posts are that wisdom!