Friday, October 31, 2008

Trend Trade

One reasons I want you to study this lesson is because it is too easy to get caught up in a complex method or system. Remember, it doesn't matter what approach you take to the market, the market can only do one of three things:
1. Go Up
2. Go Down
3. Go sideways

The move below is such a classic that it is worth studying. The more you can identify and recognize a good move, t he better the chances you have of becoming a good trader.
Let's have a look at the first daily chart of the GBP/USD (Pound/Dollar). If you look at the red line marked resistance, you can see that the market tested this area twice before but couldn't break through. This is your first clue. The more a market tests an area without breaking thro ugh, the more likely the move will be explosive when it does happen.

In this particular case, the GBP was unable to break the resistance area for months. The market came back up to the resistance area and that is where you would pay careful attention. In a situation like this, the market will normally do one of two things:

1. Break through previous resistance, in which case you could expect a big move.
2. Fail at this level and make its way back down.

Let's look at each scenario. If the market breaks out, we can expect a big move because it has tested this area before and a push above the resistance area will take out a lot of stop loss orders. If this happens we should be ready to jump on and hang on in there until we have reached our target. If we missed the initial breakout, then we should be ready to take advantage of any pullbacks to get in.
The second scenario is that the market fails to break through previous resistance and start back down. If the is the case then there is nearly always an area of consolidation. If the market passes back through support then there is an opportunity to go short.

As it happened the market did break through resistance and never looked back.

Now look at the next chart. The market made its move, which began at point A, made its way up to point B and pulled back to point C. This is a classic Fibonacci move and you should have been ready again for another trade at point C. It doesn't matter what happened after that up bar at point C because you should have been ready and waiting for it to happen and made enough just from that one bar to justify a trade.

Daily Chart of GBP/USD

The next one hour chart shows how code traders could have taken multiple entries, pyramided or just waited for a trade with the code method. Even without any indicators to help you, it is obvious that the market is in a trend and will make little pullbacks on its way up. Every time the market pulls back and then breaks through previous resistance is an opportunity to trade. At Point B, you can see that the market couldn't breakthrough the previous resistance and this would have been an early warning that this leg of the move was coming to an end and a bigger retracement was coming.

The brave amongst us might have tried to trade the short side down to a Fib level or the more cautious would have waited for the market to hit a retracement level and try another shot at the long side.

Hourly Chart of the GBP/USD

Markets repeat themselves. Patterns repeat themselves and this is an excellent example of a trend trade that was just a classic move in the markets. Whenever you see a pattern or move in the market that is very obvious I want you to print it out. Make a book of patterns and moves, which you can refer to, and the next time you are not sure if the move is a real or not, refer to your book of patterns and moves.

For new and old traders alike, it will help your trading to train yourself to recognize a good move. Even if you can't see the move in the beginning, just print it out after the move. As time goes on you will being to see the move as it starts. Remember, most indicators are lagging. That mean something has to happen before the indicator can tell what has actually just happened. In many cases this will be too late. That is why, nothing will ever beat your won eyes. If the market is taking off like a rocket and your indicators are telling you something else, what are you going to believe? The market is always right! (

Bookmark and Share Join My Community at MyBloglog! Add to Technorati Favorites Stumble Upon Toolbar


Template by - Abdul Munir | Daya Earth Blogger Template