Pinpoint Market Turns Ahead of Time
03/08/2013 9:00 am EST
Predicting when a market is about to change directions is one of the most difficult things a trader can attempt to do. However, there are some telltale signs that will appear as the markets get ready to change trends. This will be the case no matter if it is a simple intermediate pullback, or an actual overall trend change.
One of the most common things to look for is a trend line break. The biggest problem that most traders have with trying to use a trend line break is the fact that they have no idea what time frame to use. Quite often, I will see traders talk about the trend changing on an hourly chart. This isn't the trend, but rather what the market is doing in the very short-term. A trend is something that takes time to build, and something that almost everybody on the planet can see as they look at the overall markets. What happened over the last 50 pips is hardly worth getting bothered by.
One of the best time frames that I have found over the years is to draw trend lines on the weekly time frame. This doesn't necessarily mean the unique trade weekly chart, but rather is a great way to differentiate between what the trend is and isn't. Simply put, as with all things technical analysis related, the higher the time frame, the more important it is. This is because it takes more trades and therefore more emotional input to affect how price moves on a weekly chart as opposed to a chart that is based on the half an hour time frame. It just takes more volume, and that, of course, is what you can use to measure whether or not it's true market sentiment.
Because of this, when you see a trend line break on the weekly charts, it should catch your attention. With this being said, there are other things that you can look at in order to predict a market turn.
Although I am not a big fan, personally, of moving averages, I am always aware of where a few of them are on the charts. If you are on the daily chart, you should be aware of where the 200-day exponential moving average is currently situated. This is because a lot of former stock traders tend to get into forex markets, and as such they pay attention to the 200-day moving average because it represents the amount of trading days during the year. (The stock market trades 200 days a year, and although forex markets actually trade 5 1/2 days a week, which of course isn't 200 is year, this large group of people seems not to care.)
The 200-day moving average doesn't move very quickly, so that being said: price doesn't typically sliced through very often. If you see a sudden impulsive move through the 200-day moving average, you can bet your bottom dollar that somebody else has seen it, too. This is exactly the kind of move that you need to take advantage of as you need other market participants to step in and give you a hand.
There's also something known as the "one, two, three pattern." Simply put, this means that a market may pullback from an ongoing trend, and that would be what you would consider the "one" of the pattern. The "two" of the pattern is a continuation of the overall trend that does not make it as far as the initial search does. In other words, this means that they failed to make a higher high or lower low depending on the direction. The "three" of the pattern is when they pullback from the overall trend even farther than they did the first time. In other words, if we were in an uptrend and had a pullback, the second leg wouldn't go as high as the initial search, and the third leg would go lower than the original pullback. This would show that momentum was not only waning, but the sellers were starting to take over.
Just make sure it's obvious
One of the biggest mistakes that forex traders seem to get sucked into is the idea that you have to be constantly different than the herd. I cannot think of a more dangerous bit of advice as far as trading is concerned. You do not have the volume or the capital to move the markets yourself, and as such you need the rest of the market participants to play along with you. This is why I like to use obvious clues and setups that are so blatantly obvious that the entire world is paying attention to them. I don't want to be the sneakiest trader in the room, just a profitable one.