Wednesday, July 27, 2011

Hard trend identification and trading

Hard trends are trends that begin strong and carry strong for many bars. This means minimal pullbacks and large moves. Such days are hard to trade for a few reasons. The first is they are comparatively rare, so the trader has no experience with it. Second, 2 legged pullbacks and pullbacks to ema are rare, and due to the large distance to the ema, a pullback to the ema is strong enough to appear to be a mini trend, possibly a reversal. The third and most important reason is that hard trends rarely reverse. They may break and go into a trading range or turn into a channel but reversals are rare and they almost always require a couple of hours in a trading range or TTR first.

The first clue that its a hard trend day is a large gap and an open beyond the range of the previous day. The second clue is a strong 1st bar. The first bar cannot be very large (2 to 3 points is ideal) or it could act as a trading range or turn into a spike and channel. The last clue is that any attempt to create a pullback turns into a doji or inside bar. So by b4, you should have identified a hard trend.

Trading hard trends is very simple yet hard to do. You can short below any bar that has a shaved or a 1t tail with a stop above that bar. So other than large bars like b8 (which give poor risk/reward), very few strong closes would disappoint.

When a hard trend is broken such as by the move from b16-25, the trend has ended and will either enter a trading range or channel. Today, we channelled (b28-50) and then had a BO attempt that failed and gave a second hard leg down. Often the hard trend break will simply channel till the end of the day, without any easy swing entries. This is why its important to enter early in the AM and swing some as far as possible.

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