Tuesday, May 3, 2011

Choosing the right reversal


Most traders lose money trading counter-trend and this is mainly because they are trying to fade a trend that is still strong. The right time to change sides is after the trend is broken and its low is tested. Of course, an overshoot into a Wedge is the other possibility.

Today opened as an expanding triangle breakout and after the price failed to break to a new high at b28, moved into a test the low at b16. Until the price breaks below b16, its still not a real trend, since an expanding triangle can indeed become a narrowing triangle.

Once the price broke below b16 decisively on b48 which also happened to be a failed G2, the trend was in place and only short trades should be taken. Traders who bought anything that looked like a reversal bar lost on b49, b52 and possibly b57.

Once the trendline breaks, especially if the break is on a strong trend bar such as b60, the next signal is a high probability entry after a nominal lower low (b66). Any move that goes much lower should not be bought and a new trendline break is required before any counter-trend entries.


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