V. 22:9 (46-56): Set Up Your Trades With The Swing Indicator by Teresa Lo
Knowing when and where classic chart patterns tend to form is as important as identifying the patterns themselves. Here’s how one trader uses a combination of indicators and simple geometry to set up trades.
“The trend is your friend except at the ends, where it bends.” — Ed Seykota
Investors and traders are no doubt familiar with Ed
Seykota’s oft-quoted saying, as it describes price action
found in the capital markets. This idea has inspired traders to focus on finding stocks that are trending in order to enter on retracement patterns; however, not all trends are created equal, as those traders have no doubt discovered.
Sayings aside, there are qualitative and quantitative differences between “a bend” and “the end.” Traders who can gauge whether a given bend is a large pause instead of a reversal are more likely to capitalize on the trend. Knowing how to identify areas where larger retracement and price congestion patterns actually begin is useful, because large consolidation patterns tend to form and set up price breakout trades in larger
time frames in the direction of the prevailing trend.
THE BEND THAT ENDS THE TREND
An uptrend that emerges after a long period of base-building is often distrusted, recognized only slowly by participants; the upward price movement can be unconvincing. Meanwhile, the late stages of an established uptrend are characterized by extreme positive sentiment, skyrocketing prices, and wild speculation by that portion of the public engaged in momentum trading.