For a free 3 day pass to Gabe's trading room, fill out the short information at the bottom of this page
One of the most prevalent axioms found in conventional trading books is that you must trade in the direction of the prevailing trend in order to be successful. How many would-be traders haven’t heard the refrain “the trend is your friend”. These same books also tell you that the biggest “no-no” is trying to pick tops and bottoms. On the surface it seems like pretty reasonable advice. However, because most markets are a zero-sum game, you have to be careful looking at the markets through the spectrum of conventional thinking. Moreover, if trading was as easy as following the trend why is it that statistics show that 90% of traders lose their money in a 12 to 18 month period of participating actively in the markets? If you understand the proper skills on how some institutions are highly profitable buying low and selling high, picking tops and bottoms could be feasible. In this article we will explore alternative, possible low-risk entries, that will allow us to anticipate trade changes and thus not fall prey to the high risk way of looking at trend analysis. Conventional technical analysis teaches that one must always wait for trend confirmation. One method is done by connecting a series of highs, or lows at three points. A second analysis is where moving averages sloping higher confirming an uptrend. Price confirmation of trend can also be used by simply identifying a series of higher-highs or lower-lows. This is all text book stuff that most of you already know. So, why am I going over? The answer is, although we may be able to use these tactics, the fact is, if we utilize them in the wrong manner we will end up taking high risk trades; which will result in us losing more of our hard earned money more often than not.
The reality is market trends are formed by saw-tooth type patterns, not straight forty-five degree angle lines. These undulations tend to trap trend traders because they wait for too much confirmation before they engage the trend. The most likely reason this happens is because of how traders are conditioned to trade trendy markets.
An example of this flawed thinking is, when a market is trending higher it’s safer to buy when it makes a higher peak. Conversely, lots of traders are trained by many conventional trading books to sell only when the market breaks to a new low. When the market is trending higher, most of the new peaks are followed by counter-trend moves otherwise known as corrections. Therein lies the problem when buying after the new high price has printed because until after price holds a higher low point can you conclude that the down move was indeed a correction. If it breaks, conventional analysis tells you that a trend reversal may be in the making. This is lagging information, and thus will never produce a low-risk trading strategy.
* Please note that the information contained in this letter is intended for clients, prospective clients, and audiences who have a basic understanding, familiarity, and interest in the futures markets.
** The material contained in this letter is of opinion only and does not guarantee any profits. These are risky markets and only risk capital should be used. Past performances are not necessarily indicative of future results.
*** This is not a solicitation of any order to buy or sell, but a current market view provided by Cannon Trading Inc. Any statement of facts herein contained are derived from sources believed to be reliable, but are not guaranteed as to accuracy, nor they purport to be complete. No responsibility is assumed with respect to any such statement or with respect to any expression of opinion herein contained. Readers are urged to exercise their own judgment in trading!