With the market making new highs every day, do you ever wonder when it will all stop?
Every market run comes to an end at some point.
But how do we know when?
It’s a question that baffled me for years…until I realized that the answer depends on how you trade.
Everyone approaches trading differently.
However, you must try to identify the trend and its key levels of what traders call support and resistance.
Expect a lot of fakeouts along the way.
That means risk management is essential.
Don’t let your pride get in your way!
Today I’m going to teach you all about trends.
Who is it directed to?
The profitable trader, the break-even trader, and the unprofitable trader.
If you fit in any of these three categories then, please…
Problem – Ignoring the Broader Trend
Let’s start with two different charts. When you look at them, can you tell me the trends in each?
Chart A has no real trend. Chart B has a clear uptrend. Here’s the interesting thing, these are charts on the same stock, just different time frames.
Lots of new traders look at one chart and one time frame. They keep a narrow focus and don’t consider alternative realities. The fact is that longer-term time frames mean a lot more to the trend of a stock then the short-term ones.
Solution – Focus on the Daily / Weekly Charts
Newer traders should always look at daily and weekly charts, especially if they’re trading intraday. The longer time-frames give the trade context.
Imagine trying to play chess but only focusing on four squares at a time. You would miss all the other things going on around you.
Weekly charts won’t always impact small time-frames like a 5-minute chart. However, even daily charts will help you get a sense of the general trend behind the stock. If chart B was the daily time-frame for a stock, wouldn’t it be easier to pick up long trades rather than short ones?
The Breakeven Trader
Problem – Anticipating Reversals
Everyone gets itchy trigger finger, especially near market highs. They want to be the one who picked off the top to a tick.
Believe me, this is a recipe for a broke account casserole. Market trends last a lot longer than you would think, and often longer than you can remain solvent. The same thing goes for trying to pick off bottoms when stocks are in free-fall.
So how do we get ahead of these and anticipate the reversals?
Solution – Use Support & Resistance Levels
It may seem obvious, but the entire point of support and resistance levels is to provide support and resistance. It’s here that we look for signs of price slowing down.
There’s a few candlestick formations you can look for that indicate a reversal. Use these as the first clues that things are changing direction. You can also use them to create the stop-loss parameters for the trade.
- Engulfing candles: These form when one candle’s body eclipses the previous one to three candles. You want to see the close of the candle land above the highs/lows of the previous candles based on support/resistance.
- Indecision candles: There’s several types of indecision candles you can use from Doji’s to hammers. Any of them work well. The key is you want to see corresponding volume
- Gap and fail: Stocks that open higher or lower that then reverse and finish at the other end of the spectrum provide good clues that a reversal is underway.
The Profitable Trader
Problem – Differentiating Between a Reversal and a Pullback
One of the hardest tricks to learn is how to identify a reversal versus a pullback. It took me years to glean the one honest truth…they’re sort of the same thing.
I always fretted over whether what I was looking at was a genuine reversal or just a simple pullback. The fact is that you won’t know until it makes it obvious for you.
Solution – Look for Breaks of Swing Points
Swing points identify critical levels in stock trading. Every time you break one and close above or below it…that’s a signal that a trend changed.
Take a look at this daily chart of my favorite stock…ROKU.
ROKU daily chart
Notice how when price closed below the intermediate swing (1) that it then took its next leg lower. However, when it failed to close below the second swing point and reversed, that was a signal that we were seeing a broader retracement.
I used this exact idea to trade ROKU back in October.
There’s a reason I score with calls in this stock over and over. I know the trend and I play it well.
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