Imagine being able to pinpoint the exact turning point of any trending market.
Imagine being able to ride that change of trend all the way to the reversal in the other direction.
It would certainly be an incredible event that would no doubt make you a lot of money.
The reality is though that you can’t do it with any consistency and those times you nail the turn, trust it was probably luck.
Go Against The Trend
Many people still try to attempt it though and you can try by limiting your risk. There’s an obvious point where you know you are wrong and that is where the stop would go.
Those losses will add up though and the death from a thousand cuts will bleed your account dry.
Patience in trading is often talked about and after a recent conversation with someone entering the trading world, I wanted to put an example together on how I look at patience.
I am going to use Forex as an example because I much prefer to swing this market, use higher time frames to do so, and this pair was brought up to me by a trader. Unlike intra-day trading, swing trading is an arena where you must exercise patience or you may catch yourself going the wrong way in the face of a trending market.
Trending Markets For Swing Trades
In a swing trade, I look to capture a clean swing in a trending market.
Markets move in an impulse/correction pattern and an intact trend will have the impulse move larger than the corrective move. As well, if in a counter-trend play, abrupt ends to the correction especially with a large influx of buying/selling pressure may not give you enough notice to reduce risk or take profits.
In reversals of trends, rarely will we get a V shaped turnover as many trends end with a consolidation period. Seeing this formation and the details on lower time frames can give you hints as to the intention of the big money.
Here is a portion of the daily chart of USDJPY.
After many months of consolidation, this pair broke the high of 2013 in Sept 2014 and hit the high in Dec. The pullback is the largest pullback in price but not time since the breakout. It’s obvious that after such a long run up, there’s people looking to short the first opportunity. Not the cleanest of pullbacks which should alert you to the possibility that a reversal of trend may not be in the cards.
You can see where there was attempted violation of an area that supported price and price was rejected back in the direction of the trend for about 500 pips.
Those that were looking for a reversal had the next day put in a rally of 200 pips. You can imagine that those shorts had to take action to protect themselves.
As an intra-day player though, there were probably some good opportunities depending on how you approach your day plays and which “trend” you decide to trade.
While this bounce may have been an opportunity for intra-day players or shorter term swing traders, I look at higher time frames.
This is a portion of the weekly chart in the same date range which showed the bounce. If not already long on the daily, what does this weekly show you?
- Decent strength in the buying pressure
- The attempt to drive price lower was sharply rejected.
Does it give you any indication that the uptrend is in any danger?
Which direction still has the higher probability of not only seeing the resolution but also larger moves?
Chat About Trend
Let’s head to a chat I had with the trader that actually prompted this article.
This trader had positioned himself long in the direction of the weekly by playing a move after the bounce. He bought a pullback after the bounce around 117.00 by dialing into the 60 minute chart.
The issue he is having is that price has gone into a range after he scaled out and he is wondering if he should position himself short.
I am not one to tell anybody what to do with their position and maybe shorting is the right play.
But I see this on the weekly:
- Price is taking a breather and working off the upside move.
- Price will coil and break to the upside.
- Multi-week strong run up in price.
That would be my working plan and would look for patterns to get me into the pending move off daily chart patterns if I traded this pair.
However in trading…you have to be ready to just go with the flow:
- It is not beyond reason that price could rocket to the downside and never look back.
- We could also see price break to the upside out of this pattern and then be overtaken by selling pressure.
This would obviously have me curbing any sort of position to the upside in this market.
For now…..patience in allowing what was the trending market direction to continue is needed if this was my plan.
Many traders will not sit and wait for whichever market to show its hand but instead will rely on assumptions to get them into the market against the trend. Assumptions usually don’t work out in your favor.
- Big run up would equal overbought and primed for reversal. SHORT
- Too long in consolidation would equal lack of buying interest. SHORT
- Price divergence would equal reversing move. SHORT.
I have found patience was one of the hardest things I have had to accomplish in trading. Not just in entering trades but also holding trades that have not been invalidated but are just not moving. Swing trading though demands patience and patience pays off when you let the market tips it’s hand and you just go along for the ride.
To end this, here is another part of the weekly chart from the middle of 2013.
A. Price had rallied from Sept 12 (77.12) and capped in May 2013 (103.72).
B. Price broke to the downside (93.76) and then formed the same pattern as we see now.
C. Price broke to the upside and capped at 121.84 where we find ourselves now.
Is a swing trade short really in the cards right now or is history going to repeat itself? Have patience and let the market show the way.