Thursday, April 5, 2012
Trading a broken trend
Once the price moves many bars beyond the trendline, the trend should be declared broken. When the market touches a live trendline, it reacts like it touched a live wire (b12,b15). When the market closes below the ema in one leg and stays below it and well beyond the trendline, the trend is likely over.
A broken trade is inherently hard to trade since its not really a reversal and its not really a pullback. When the original trend is strong, there is a possibility that the market will present a slow channel moving in the same direction as the original trend. Occasionally such as today, the channel may be in the opposite direction.
These channels are inherently hard to trade and most moves would take a really long time to give a 2 point profit. The right way to trade them is to realize that channels are wedges and wait for three pushes (b29,40,54) before trading against the channel. The best option is to wait for a test of the prior extreme or wait for a new breakout and enter on a pullback.