Learning To Read Part 2 – The end of the trend, that was your friend, until it bends
The textbooks would have us believe that markets are smooth and orderly. We have a nice downtrend and then when it ends we have a nice uptrend. In theory all we have to do is wait for the right time, buy, profit.
Reality is messy and choppy, and most of the time we are unsure if the old trend is in play, if we have transitioned into a trading range, or are trying to reverse. Each new bar of price action gives us critical information, until we can rule out each of these options. Eventually we get betting odds, and we bet.
Today I’d like to explore the tell tale signs that a new move has the potential to become a trend, and not just a counter trend rally. Then we will look at the signs a trend is ending, accelerating, reversing or transitioning into a trading range. You can use these principles
- For discretionary trading
- To get better exits on your systematic trades
- To identify objective conditions in a trade with open profit where you would want to tighten your stop
- To identify objective risk/reward points for system building
- To stop you being a sucker and betting on trend reversal when it’s not going to happen
- To identify those rare points where you want to be “all in” on trend reversal
- How, exactly, to trade those “lottery ticket in your pocket” type trades where you get a good entry, for example AAPL in 2003, and you want to ride it all the way to the beach. For those times when banking 10R would be embarrassingly bad.
As we go more advanced with the tape reading you will see repeatable and identifiable conditions which become some of the highest probability outcomes in trading.
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