Tag Archives: Trend

When to Doubt a Pullback

I find the "grey areas" on a chart fascinating; the areas where our bias or premise start to show signs of breaking down and our decisions are clouded by the uncertainty that prevails at the hard right edge of our screen.

This is where real learning happens! Where your knowledge, skills and attitude are pushed just beyond their limits.

downtrend pullback

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Conflicting Trends on Different Timeframes – How I Read This Chart!

Here is some great email Q&A with a YTC Newsletter reader Thomas…

Question:

Hey Lance,

Hope you are well!

Got one question for you. Looking at the below 3-minute chart when would you say we went from uptrend to downtrend? I often have a hard time reading the market after a large move in one direction which then slowly starts grinding in the opposite direction. At first I look for pullback opportunities because the trend has not technically changed, but at some point in time it becomes obvious the sentiment has changed.

Your thought much appreciated.

Thomas

Chart:

(CLICK ON THE CHART TO OPEN A LARGER COPY IN YOUR BROWSER)

Reply:

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When Does The Trend Change?

The following chart sequence shows a great example of how I define a change of trend. The chart is a 1-minute chart of the 6B. The market and timeframe are irrelevant though. The concept applies to all markets and whichever timeframe you’re using to define the trend. I just happen to currently use the 1-minute chart.

As a background to the price action we see price in an uptrend leading into a resistance area between 1.5796 and 1.5802. Momentum clearly slows as price makes three failed attempts to breach the area (1 x test of resistance and 2 x breakout failures), before finally breaking the swing low between breakout attempts 2 and 3.

I call this break of the swing low the “objective” change of trend.

 

 

“Objective” refers to the fact that there is no discretion involved. Price traded below the swing low – there is no doubt.

However, for me, a change of objective trend definition does NOT mean a change of trend.

I define a change of trend as requiring two components:

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Where to Trigger Entry into a Pullback

Some more great email Q&A…

Question:

Hi Lance,

Had a question on breakouts. I know you subscribe to the breakout, then wait for a pullback to get in. I was monitoring GBP/USD last night. I set an alarm for if price got up to resistance at 1.5080. It then broke thru. Sticking to my rules I chose not to enter but to instead wait for a pull back. Which it did after first shooting up 30 pips or so. What I wanted to know is specifically how you play breakouts. That is, after the pull back…what triggers you in? Do you wait for another breakout,….perhaps on a smaller timeframe? Or do you maybe look for a pullback to a minor support area and then enter and NOT wait for momentum to kick back in in the direction of the breakout (that is, not to take out another additional high), etc.? Things like that. Because what I am doing now will involve more and more of entering after price breaks thru. And I want to make sure I play these right without getting burnt too often on false breaks.

Very much appreciate your thoughts on this.

A.

Response:

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How I Define the Trend

I occasionally get email requests asking how I define the trend, so to save on future email replies here’s the short answer…

It seems that perhaps many people assume I use an EMA, given that the charts shown in my newsletter typically display an EMA(20). That’s not my trend definition though.

I use fairly standard definitions.

  • An uptrend is a sequence of higher swing highs and higher swing lows.
  • A downtrend is a sequence of lower swing highs and lower swing lows.

So, let’s look quickly at how this works.

A swing high is simply any turning point where rising price changes to falling price. I define a swing high (SH) as a price bar high, preceded by two lower highs (LH) and followed by two lower highs (LH), as per the following diagram:

 

 

The Swing High is candle C. All other candles reference this one.

  • Candle A has a high which is LOWER THAN candle C’s high.
  • Candle B has a high which is LOWER THAN candle C’s high.
  • Candle D has a high which is LOWER THAN candle C’s high.
  • Candle E has a high which is LOWER THAN candle C’s high.

 

Likewise for the swing low.

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The Confusion of Trends on Different Timeframes

Here’s another great question from a YTC newsletter reader…

Question:

Lance,

I have another question. Its to do with “the trend”. We are told, “the trend is our friend”. We are also told, “the trend is our friend until the end”, and we are told, “trade the trend until it bends”.

But the weekly and daily charts of a currency pair can show down-trending. Yet the hourly and 30 minute charts of the same currencies can show up-trending. So what does one do? Wait for the smaller time frames to down-trend like the weekly and daily, or seize the opportunity and trade the up-trend on the hourly and half hourly charts, which oddly enough, means trading against the trend of the higher time frames.

Thanks,

Brian.

 

Answer:

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Trapped Traders – Part 1

Trapped traders are a simple concept you may wish to incorporate into your trading strategy, due to its potential to offer higher reliability trade setups.

These are price action based setups in which traders suddenly find themselves trapped in an undesirable situation, either:

  1. Stuck in a losing position, desperate to get out; or
  2. Stopped out of a position that then moves back in their direction, leaving them desperate to get back in.

 

The key in both cases is that the price action has placed traders in a position where their normal human emotional response will compel them to make a trade. We can then increase our odds by trading in the same direction as this new surge of order flow.

There are numerous ways this can present itself on a chart. We’ll look at one of my favorites today, and follow up with other trapped trader patterns in future articles.

Today’s pattern is called a 3-swing retrace.

You might also hear it referred to as an ABC correction, or an ABCD correction. It could also be considered in some cases a bull or bear flag.

We’ll start by examining a 3-swing retrace in an uptrend.

 

trapped traders - 3 swing retracement

 

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