The trend is your friend! – It depends…
Trading and investment strategies are basically guided by the idea of following an existing trend. This makes sense, however, only to a certain extent.
Of course, if you have an open winning trade it is wise to stay in it as long as possible. At least, as long as the movement is stable. We all have learned to let our winners run and cut our losers short, i.e. close the losing trades as soon as they dare to touch our risk management limits.
The main questions are:
I. How can we identify the early stages of a trend unemotionally to jump in? AND
II. How can we stay away from “ripe” trends that have run too far to be entered?
Have you ever experienced that a trend suddenly “turned around” shortly after you had opened your position? I have, oh yes, I have.
One thing is for sure, the market is not against you or me.
However, he is also not for you or me.
Actually, the market does not care about us. It just keeps on moving.
If you can identify a trend with your naked eye, it is usually too late for an entry. Then the price movement has already advanced too far in one direction and chances are that the market would suddenly and unexpectedly stop and turn. Then fate takes its course! The open position runs into the stop loss and we throw our money into the open arms of other market participants. Just another experience that the market does not care about us. If we enter the market or not, if we stay in our trade or not, if we lose money or not….
Let´s just face the hard truth, that we simply had entered the trend too late again!
So what can we do, if a trend appears in front of our attentive eyes?
1. Check! Check, if the trend is already too “ripe” to enter. If we can identify Elliot Wave no. 3 it is too late. Elliot Waves are perfect to show the end of the trend, not an entry opportunity.
2. Wait! Just wait and stay calm. Usually, two different scenarios may appear:
a. The price movement slows down. In this case, volatility decreases, and candle bodies become shorter. We can reveal this process easily by applying the Bollinger Bands 5min time frame. When the Bollinger Bands narrow – often sidewards – the price consolidates and prepares for a new brake out.
b. A chart pattern appears. Cups, flags, wings, head and shoulders patterns, and many others may appear. They also indicate that the market prepares for the next brake out.
3. Draw support and resistance lines and prepare for the approaching price breakout. There is no reason to open a position in the meantime. We want to use 1h charts at best or want zoom in to the 15min chart. It is also good to have a 200MA.
4. Price breakout! Don´t rush! Wait for trend confirmation!
It requires high volumes to let the price break through 1h support or resistance lines. High volume is exactly what we want, what we are waiting for! Profits are made in periods of high trading volume, increased volatility, and moving markets.
You find price confirmation when a broken resistance becomes a new support line (long position or uptrend) or the other way around, found best in 15min for day trading. If the market continues to run in the new direction, we want to open our position, set a stop loss and take profit, lean back and watch the market filling our pockets. Voilà!
5. In most cases, it is not as easy as that but requires practice, practice, and practice again. No guarantees either. Just increased probabilities.
You will find out more about WHY these breakouts may occur in my next post.
See. EURUSD, 15min chart, Friday January 20, 2023; ADX (14), MACD (10,22,9); brakeout at 4pm CET (UTC+1), confirmation at 4:45pm. A new trend is born! My entry at 1.08230, SL at 1.07960.
Trading and investment strategies are basically guided by the idea of following an existing trend. This makes sense, however, only to a certain extent.
Of course, if you have an open winning trade it is wise to stay in it as long as possible. At least, as long as the movement is stable. We all have learned to let our winners run and cut our losers short, i.e. close the losing trades as soon as they dare to touch our risk management limits.
The main questions are:
I. How can we identify the early stages of a trend unemotionally to jump in? AND
II. How can we stay away from “ripe” trends that have run too far to be entered?
Have you ever experienced that a trend suddenly “turned around” shortly after you had opened your position? I have, oh yes, I have.
One thing is for sure, the market is not against you or me.
However, he is also not for you or me.
Actually, the market does not care about us. It just keeps on moving.
If you can identify a trend with your naked eye, it is usually too late for an entry. Then the price movement has already advanced too far in one direction and chances are that the market would suddenly and unexpectedly stop and turn. Then fate takes its course! The open position runs into the stop loss and we throw our money into the open arms of other market participants. Just another experience that the market does not care about us. If we enter the market or not, if we stay in our trade or not, if we lose money or not….
Let´s just face the hard truth, that we simply had entered the trend too late again!
So what can we do, if a trend appears in front of our attentive eyes?
1. Check! Check, if the trend is already too “ripe” to enter. If we can identify Elliot Wave no. 3 it is too late. Elliot Waves are perfect to show the end of the trend, not an entry opportunity.
2. Wait! Just wait and stay calm. Usually, two different scenarios may appear:
a. The price movement slows down. In this case, volatility decreases, and candle bodies become shorter. We can reveal this process easily by applying the Bollinger Bands 5min time frame. When the Bollinger Bands narrow – often sidewards – the price consolidates and prepares for a new brake out.
b. A chart pattern appears. Cups, flags, wings, head and shoulders patterns, and many others may appear. They also indicate that the market prepares for the next brake out.
3. Draw support and resistance lines and prepare for the approaching price breakout. There is no reason to open a position in the meantime. We want to use 1h charts at best or want zoom in to the 15min chart. It is also good to have a 200MA.
4. Price breakout! Don´t rush! Wait for trend confirmation!
It requires high volumes to let the price break through 1h support or resistance lines. High volume is exactly what we want, what we are waiting for! Profits are made in periods of high trading volume, increased volatility, and moving markets.
You find price confirmation when a broken resistance becomes a new support line (long position or uptrend) or the other way around, found best in 15min for day trading. If the market continues to run in the new direction, we want to open our position, set a stop loss and take profit, lean back and watch the market filling our pockets. Voilà!
5. In most cases, it is not as easy as that but requires practice, practice, and practice again. No guarantees either. Just increased probabilities.
You will find out more about WHY these breakouts may occur in my next post.
See. EURUSD, 15min chart, Friday January 20, 2023; ADX (14), MACD (10,22,9); brakeout at 4pm CET (UTC+1), confirmation at 4:45pm. A new trend is born! My entry at 1.08230, SL at 1.07960.