It’s great to sit comfortably in a chair, analyzing past market trends and with 20/20 hindsight say “ah this was an easy trend to milk if only I had entered near the beginning“. It’s another thing to actually have the tools (both mental and technical) to actually exploit such trends.
The first thing to realize is that when you’re trading on the far right hand side of the chart, you just don’t know what’s going to happen:
- you don’t know if what you’re playing is going to develop into a strong trend or not
- you don’t know whether tomorrow it’s going to make a 180° turn and move against you
The best we can do, as trend-traders, is have a set of tools that will:
- locate potential trends
- allow us to insert ourselves into the potential trend (possibly contemplating pullback entries, consolidations and breakouts)
- allow us to monitor the trend strength in real time
- get us out out of potential reversals
Notice how I used the word “potential”. That because you just cannot know what’s going to happen and thus each decision you make must be based on a solid principles which are independent from what may happen this time round.
The First Step Is Locating a Potential Trend
This is the easy part. As we described in a previous article a trend is nothing more than higher highs and higher lows (uptrend) or lower highs and lower lows (downtrend). And a trend is self-evident. If you can’t locate one within 10 seconds, there simply isn’t one. Of course it’s also a good idea to pre-plan the breakout into a trend, which Sam detailed here.
I’m going to use a recent example from a coaching student of mine to illustrate a strong existing trend, a retracement phase, and a re-entry. The asset in question is Soyabeans. The recent downtrend was established in March 2017 after clear lower high/lower low steps. Of course we would not have known what was going to happen, so we’re hypothesizing a simple breakout entry.
The Second Step Is To Protect the Entry
The initial entry is the most delicate phase because the market may not behave and simply make a 180° turn. We will never know for certain ahead of time. One way to mitigate the risk of a false move is to pay attention to the drivers behind the move. If the drivers are clear, the odds are stacked a little more firmly in your favour.
In order to exploit trending markets to their fullest, you cannot just contemplate one single entry. It doesn’t give you enough flexibility, nor is it the most effective way of exploiting continuation moves.
Using some easy retracement entries as detailed here, the objective is to compound into the trend or take short-term forays into the trend, to enhance your average holding price. This allows you to sit through more extended retracements if/when they happen. Just be aware of the different objectives for the two scenarios:
- by compounding into a move, your average price will move along with the trend and your total position will become much more sensitive to marginal retracements. It’s a more aggressive stance, not to be used carelessly.
- by attempting to take intraday profits around a core position, the objective is to “protect” the initial entry which is a more conservative stance but can potentially allow you to sit through deeper pullbacks (if it makes sense to do so, that is).
The Third Step Is To Be Vigilant
In any case, you need to be on guard. The market will give you subtle signs of an exhausting trend. The momentum low on March 14th was one such occurrance. After a strong press lower, the market rallied with equal strength. This doesn’t mean that the trade is over. It means that you should start paying a little more attention. The market can do a number of things:
- consolidate and then continue on it’s merry way
- consolidate and then retrace
- consolidate and then reverse
The key point being: be careful when the market starts to stall. Your trade can go stale fairly quickly. Notice the weakening of the trend and prepare for the various scenarios.
In our example, the market maintained it’s structure, and broke through the consolidation without staging a retracement of any kind, giving other opportunities to take small profits or to compound into the trend.
Then we come to another consolidation phase. This time it was different: the market initially rallied hard (Apr 4) but fell back towards the lows forming a lower daily swing high. However the market failed to push through the Apr 3 Low on Apr 7th (Higher Low Alert). The previous swing high held on the subsequent retracement and we pressed through the previous low (Apr 11) but suddenly rebounded. Momentum shifted and the previous lower high came under pressure. At this point, it is entirely logical to exit the trade alltogether because the primary trend structure (Daily) is being pressured/broken. The trade is reversing.
The Fourth Step Is To Be Patient
We need then, to take a step back onto the primary (Daily) chart and gauge the state of play. the longer term downtick had paused but then found new live into the middle of May as we printed the false breakout of highs, a lower high (May 17th) and a breakout through the previous low. The move down has started once again.
We can adopt the same tactic: taking chunks out of the market using retracement entries, and paying attention when the market starts to lose steam and consolidate. This final consolidation into the beginning of June was the precursor of the current counter-trend leg that Soyabeans is experiencing. The signs are exactly the same as last time. Study these examples and get a feeling for how other assets stall & reverse.
Over to You
It is really pointless to observe long-lasting trends that already completed on your charts. You need to have core tools that allow you to tackle the market as it reveals itself each day. They are simple but require a very clear understanding of what your objectives are:
- select 1 primary timeframe from which to identify the trend and monitor the swing high/low structure
- keep an eye on the drivers behind the trend and know when they’re going out of focus
- keep an eye on the trend strength (momentum) and know when there are the first signs of stalling
- have various setups that allow you to engage with the trend, and re-enter after extended pullbacks
Basically, don’t focus on trying to select the best trends – you’ll never know if it’s going to be a great trend or not. Focus instead of squeezing the juice out of any potential trending phase and trading in the here & now.
About the Author
Justin Paolini is a Forex trader and Coach. He is a member of the team at www.fxrenew.com, a provider of Forex signals from ex-bank and hedge fund traders (get a free trial), or get FREE access to the Advanced Forex Course for Smart Traders. If you like his writing you can subscribe to the newsletter for free.