Tuesday, March 1, 2011

Keep the trend type in context while trading

Trends come in three broad varieties. The usual most common is the elastic trend, which snaps back and forth based on buying and selling pressure. Most traders expect every day to act like this and will lose big on the other two type of days.

The second type of trend is a soft trend which essentially maintains a slow grind (usually up) pulling back only a tick or two below previous bars. Shorting such days based on any standard setups is a recipe for bleeding your account every six bars or so.

The third type of trend is a hard trend day which moves (usually down) relentlessly. There are up moves, but none of them are worth trading since they take your focus off what you should really be doing: wait for a with trend move and hold till end of day or climax.

By the first two or three bars you should have already known that this was a hard trend day. And on hard trend days, there is only one rule: There are no counter-trend trades. Yes, the move from b15 to b19 was good but that was the exception. Most counter-trend trades lost today and almost any with-trend trade succeeded. The other interesting feature of hard trends is that overshoots need to be very deep to give pullbacks. And only an obnoxious overshoot with a large climax bar can terminate the trend. Hard trend days need to break and go into trading ranges before they can continue or reverse. On many days such as today, they will push relentlessly till the end of day.

There are very few entries from the perspective of a normal or elastic trend. Today we had the 1st reversal on bar 1. If you watched the bar forming, You would see it popped up 4 ticks in the first few seconds and then stayed down. A reversal bar off a sharp overshoot above a gap is a signal any trader should take. b5 was a 1st pullback and if it wasn't for the impending news which often runs stops is the best swing entry of the day.

If you missed that, there was an A2 on b23, which was also a good swing entry. The entire lunch move saw only failed H1s in a hard trend and you could short below any pullback that did not have a large tail. This takes some practice to do and I often let them pass. A final A2 at b75 gave 6 points. Its never too late to enter with trend on a hard trend day.

No comments:

Post a Comment