Thursday, May 26, 2011

Dont fade a trend till after a trendline break

Repeatedly trying to fade a strong trend is the surest way to empty your trading account. If there is only one thing you ever take from this blog, let it be this: "Counter-trend trades are low probability until there is a trendline break."

Today was a very illustrative day and we saw almost every reason to fade the trend fail. Many traders will short a strong bar such as b40 assuming an overshoot and climax but when such a bar occurs right after the break of the prior HOD or LOD, its usually re-affirming the trend. Climax bars in general are fine to exit but they are unreliable fade entries. Often you will have another climax bar or two right after and even then, you may see sideways consolidation.

Minor overshoots (b46,48) and tails(b25,33) usually set up with-trend entries in a strong trend and you should never fade them.

A trap bar (b52) is an outside bar and trading range and is likely to fail from within barbwire. A better trap bar is b5, which did not traverse too far up before stopping out the 1PB traders.

The short below the small bar b67 near the high of the FF but even this is not a high probability setup until there is a trendline break. Once the move from b67-69 broke the trend line, counter-trend trades are acceptable and any reversal setup such as W or DT become tradable.

The right thing to do if your trend fade entry is stopped out is to right away draw a trend line and if it wasn't broken, enter with trend on every minor touch or attempted touch until you do see a trendline break.

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