Wednesday, September 14, 2011
Price Action Basics II - Reversals and pullbacks in trends
When the market is in a trend move, it will continue to be in the trend until there is a very strong overshoot or a very clear trendline break. When in a trend, every counter-trend signal is probably a trap and you should ignore it and wait for its failure. Even with the very clear and obvious W at b53 after an obvious buy climax, the risk of failure is high.
An obnoxious overshoot such as b11 or an obvious trendline break such as b74-79 and a successful test of the extreme is necessary before any counter-trend trades are attempted. A failed L2 (b13,15) after a bullish reversal (b11) is a strong confirmation of the reversal and the next buy signal is usually good for a swing.
The W entry is the only counter-trend trade you ever need to take since it usually gives a confirmation and a with trend W1P right after. Every reversal signal in a trend is probably a pullback and nothing more until counter strength is demonstrated. You should look for with-trend signals near the ema or trend line. Ignore signals far away from them (b30,46,52) since they imply possibly another leg in the pullback.