Wednesday, May 18, 2011

Strong Trends

While a large gap often indicates the possibility of a trend day, its not necessary. If the first few bars move beyond the range of the prior day and give a breakout pullback (b7), the day is likely to be a very strong trend day. A reversal bar right at the ema (b2) also often indicates a strong move.

The only thing that you should never do in a strong trend is trade counter-trend. Simply stated, you could make far more buying pullbacks than shorting minor pullbacks.

An overshoot giving a sideways correction (b19 to b34) is usually the sign of a very strong trend and a possible fW should be anticipated. In addition when the first move up is a channel like move (b1 to b20), a second leg after a horizontal move is normal.

Possibly the most important sign of a strong trend is the absence of successful counter-trend trades. Until the second W at b57, not a single pullback went 6t below a swing high signal bar. This itself should assure you of the trend's strength and keep you on the right side throughout the move.

The trend weakens when you start seeing large bars (b43,b56) and two closes below the ema (b59,60). The move also broke the trend line, but such strong momentum practically guarantees at least a test of the high and usually a higher high (b80).

The single rule of taking only with-trend trades until at least one counter-trend trade has already proven successful would save many traders from fading an unstoppable trend.

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