Tuesday, February 1, 2011

Detecting and trading extremely strong trends

Folks who are used to trading with indicators often destroy their accounts shorting all the way to the top on a very strong trend day. Learning to identify a strong trend and going with it instead of against is very important to your trading success.

One of the biggest signs of a strong trend day is a large gap. Anything larger than half an average day is a large gap and you should be on the lookout for a strong trend move. Average to small size bars is a good indication this will be a strong trend day. A first pullback (b3,4) instead of a reversal is another indication the price wants to move up. A 1tf of the short entry on b4 is another indication of strength.

At this point you should be buying any pullback for any reason. A second one tick failure at b9 indicates a very strong day and you can even buy the low of any inside bear bar on limit as long as the bars are reasonable size. You can also buy above any bull inside bar to take an H1 entry. You can continue to do this until there is a strong trend break. However, when the bars get tiny, there is a real chance of a TTR, which simply a trend ending where an up move turns sideways and is part of the nine transitions. Buying only above bull bars reduces your chances of buying in the middle of a TTR as does buying after a deeper pullback since TTRs are normally shallow.

What about wedges? is b11 a third push up and therefore a wedge? The single most important thing to remember about Wedges are that they will not pullback without an overshoot and they are best tradeable after a trendline break. Therefore, b11 or even b20 should not be expected to give a large pullback. b43 was possibly a W since the move from b20 to b23 could be a marginal trendline break and it did overshoot a tick or so. However its a poor W without an obnoxious overshoot on a very strong day. Even though it did move 3+ points down, it was a harrowing move for nearly two hours. However this move did give a strong break of the trendline and the next W at b77 is more comfortably shortable.

The most important point to note about trading days like these is that you should have identified a strong trend day decided early in the day to only trade long or just enter after a deep pullback and swing till an obnoxious overshoot or strong trendline break.

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