Excerpt from email received at YTC:
I have attached a couple of 5 min charts for you to take a look at. Both charts show a strong quick move, one is 60 pips, the other 80 pips. (I trade using 60/30 min, 5 min, and 1 min charts… so 5 min is my trading timeframe)
I am often very hesitant to trade after a move like this. Could you share with me your thoughts and the process you would go through in assessing the market after this type of move?
By the way, the second chart does form a complex pullback and then breaks the low by 12 pips or so at the time of this writing.
Lastly, I would like to again thank you for all you do. I’ve been following your web site for about 4 years now, and purchased your YTC Price Action Trader book just after Christmas. I’m well on my way to realizing my dream of trading for a living. I’m not there yet, but on my way!
Excerpt from Reply:
Yes, these long directional moves provide a difficult environment. Most often you'll only see these occur when it's a news driven move; either something completely unexpected or a planned economic release that creates a bit of a shock. In both cases though, price will drive for a long single leg without any opportunity for pullback entry. So there are two main considerations, assuming we weren't lucky enough to have been positioned in that direction prior to the move; (1) how can we get into the move while it's happening, and (2) how do we assess the bias after the move has exhausted.
(1) Getting into the move requires either of two options.
One is to stand aside and await a pullback, accepting that in a fast move such as this you'll just miss opportunity and have to wait to seek it elsewhere (in another market or in this market post-exhaustion). Some people are happy to do this and that is fine. Not every environment suits how they see the market movement (and opportunity within the market) so if the environment does not offer opportunity that suits your needs, stand aside.
The second is to, immediately upon realising a fast move, move to a lower timeframe. Whether via the YTC Scalper approach, or just YTC Price Action Trader on maybe a 2 min chart, the lower timeframes will often (not always) provide some type of pullback entry into these fast moves.
(2) How do we assess the bias after the move has exhausted?
An exhaustive move (climactic move) is often considered as a potential reversal pattern. Of course, "reversal pattern" is one of the worst names ever assigned in the field of TA as they don't necessarily reverse price. Usually we should expect a retest of the point of exhaustion, and then either a reversal or change to a sideways market.
But here's the problem… given the lack of swings on the way down, the trend change point is way back up at the initiation of the news release. This essentially leaves us with a trend that is (based upon strict application of the definition) downwards, despite the obvious fact that after exhausting at the lows price is clearly trending back up.
Please note though that our trend definition does allow subjective overriding of the definition. This is one case where it's necessary.
Here's one way you might want to approach this.
Take the last consolidation within the trend move prior to the final push down, as a potential trend change point. I'll show this below, on the images for both of your charts. The fast-move trend paused here for some reason. People opposed the trend move down at this point, and lost. As price returns to this level, it will likely act again to cap price.
So essentially this point becomes like a swing high and can be considered a potential trend change point. While price remains below this (or even pokes through it and fails) then your bias remains short. But if price holds above, then change to an uptrend (or sideways trend) recognising that the point of initiation of the news move IS going to form strong resistance when price gets back there.
The diagrams should make this clear (see below).
One additional point. I recommend always passing on the first pullback following a strong and overextended move such as this. There will more often than not be a second leg higher so wait for the complex pullback entry short. (An exhaustive move, although strong at it's beginning, should be considered weak at the end, therefore requiring a complex pullback rather than standard pullback).
Unbelievable I forgot what I learned from this very article. I’ve just had 3 consecutive losing trades because of taking first pull back. ****ing stupid but it’s ok I will remember it forever and I wrote it in my notebook.
You do know now that the next time the market provides a strong impulse move, and you stand aside on the first pullback, it will continue on to provide massive profits without you. 🙂 You’ve gotta love the markets! 🙂