The Cycle Of A Trend
In this lesson we are going to look at the different stages of a trend and how it can help you position yourself for a trade. It is commonly accepted that there are four stages of a trend. These stages make up a cycle and each cycle has smaller cycles contained within them. It doesn’t matter whether you like to trade with 5-minute charts or monthly charts. Each market will be in some stage of the cycle as you are observing it.
Before you even think about getting into a trade you should have some idea of where the market is in the cycle. This will help you avoid making the wrong entry. For example, if you have identified stage two of the cycle it doesn’t make sense for you to be short in an up stage.
Stage One
The start of the cycle (stage one) is where there is very little happening and the market is generally flat. At this stage the market is normally oscillating in a certain range. As this stage ends you often see a breakout of the previous range. The breakout can often be explosive particularly if it has been in consolidation for a long period of time. For markets that can measure volume an increase of volume is an early indication that the breakout is real.
Stage Two
Stage two is after the breakout has occurred and we begin to head North. Depending on the force of the move the market may rally and not come back to the breakout point or it may come back and test that area.
The market broke out of the range and then rallied to R1 where it began to retreat to S1. These two points are very important. If S1 were lower than the breakout point or S1 were to rally slight but still remain below R1 then break back down past S1 then the start of the cycle would be in doubt.
What actually happened was that the market came down to S1 and then rallied past R1. The aggressive trader would already have taken a position on the breakout and most likely add to the position as R1 was taken. If you had not entered the market yet then this would be an ideal opportunity to jump in.
The second point to note is that the moving average began to turn up after the breakout giving further support to the beginning of the cycle.
In the case of the chart example I have selected a simple 40 period moving average of the closes. You can use any moving average that suits the time frame you are dealing in. Stage two continues making higher peaks and higher valleys and may come back to test the moving average a few times.
Stage Three
Stage three is the final thrust of the cycle. You may notice a spike or a double top formation as the trend begins to run out of steam.
In our example the top is fairly flat. R2 is formed and the market retreats to S2. What happens next is the opposite of the start of the cycle. The market stops at S2 and then rallies slightly. The fact that the rally did not exceed R2 is what is significant. Instead the market only reached R3.
As soon as the market broke through S2 it signified the end of the trend. You would also note that the moving average turned down at this point further give support to the end of the up move. If the top was not easily identifiable and positions closed at that time then once S2 was taken an y long positions would have been closed.
Stage Four
This is the final stage of the cycle and perhaps the most interesting. Depending on market conditions some traders may now go short. A potential shorting point would have been on the break of S2. The market in our example is making lower valleys and lower peaks. This tells us that there is now a move to the downside.
Before initiating a short on the break of S2 you could measure the start of the whole move at the beginning of the cycle to where the market topped at stage three. You could then calculate th e 61.8% retracement. This would give you a downside target to aim for and if there was enough meat left in the trade initiate a short trade.
Stage four can be difficult as the market may either go into consolidation again or continue down.
So how can this help your trading? Well, the first thing to do before you enter a trade is decide where in the cycle you are. If you are at stage two then it could be dangerous to go short. It could also be dangerous to enter short if stage two had b een building for a long time. Remember the market can’t go up for ever.
On the other hand if we were entering stage four you wouldn’t want to be long. Just by identifying the different stages of the market it can help you lock in profits, make better judgments decisions on whether you should be in the market at all and perhaps give you clues for entry and exits.
Martin Chandra (forex-trading-tutorial.com) is a full-time investor. He has been researching investment strategies and make his own living. Get limited offers at forex-trading-tutorial.com
Previous Articles Highlighter:
The Advantages Of A Disposable Cat Litter Box (1)
The bigger the box, the better and more desirable it is to be transformed into a cat box. A storage box with a minimum of twenty-four inches in length and width is ideal.
Discover Your Healthy Glowing Skin (2)
Taking good proper care of your body by combining the right foods with the right amount of positive activities in your life not only does wonders for your body - but for your skin as well.
Factors To Consider In Choosing A Dog Training Collar (3)
Budget Each type of dog training collar may vary from the most affordable to the most expensive. Among the different types of collars, the electronic dog collar is the most expensive.
How Forex Trading Works (4)
If the equity (the value of his account) falls below his Used Margin due to trading losses, his position will automatically be closed. As a result, the trader can never lose more than he/she deposits.
Hospitality Career Enjoy Nature And Travelling By Being A Travel Guide (5)
Knowledge in geography will also arm him with better decisions especially in times of weather change. The comfort of the tour participants is the prime objective of the travel guide professional.
Is Forex Investing A Risky Business? (6)
Without a doubt, investors in the US are behind the curve with regard to learning about and participating in this market. Active equity and futures traders who appreciate liquidity, strong technical indicators, and a multitude of short-term trading opportunities will find the forex market especially appealing.
A Career In Hotel Management (7)
Hotels usually have different strategies in order to enliven the spirits of their guests. Sometimes, prizes are at stake in such games or entertainment held at hotels, which may be in the form of free one night accommodation or free accommodation vouchers in some hotels under the same management.
How To Make Consistent Forex Profits (8)
A few weeks ago I visited an ex-floor trader who has set up a trading operation backing young aspiring traders. I was interested to find out from him how he trains his team.
Discover Almodovar And Aljustrel In The Alentejo Region Of Portugal (9)
The ramparts of that period have disappeared, but when strolling through the streets of the town one cannot avoid noticing the monumental main church, the small Sao Francisco Convent; and the Misericordia (Mercy) Church close of the former town hall where paintings by Alentejo artist, Severo Portela, are on display.
Why You Must Seek A Professional Web Designer For Your Website (10)
This is exactly the same reason you don't want your website to look like everyone else's. Some of the key points to keep in mind when you are having your site designed are listed below: 1.Don't use auto looping background music.
Newer Articles Highlighter:
Selecting Mobile Ringtones For Your Cell Phone (1)
Some of the most popular ringtones these days are hooks from current popular songs. In fact, there are several music services that allow you to download multiple rings and save them directly on your cell phone.
Transplanting Trees & Shrubs (2)
Though some trees and shrubs are easier and more successfully transplanted than others, these general guidelines will give your plants the best possible chance of survival. Tim Birch is the publisher of www.gardenlistings.com.
The Big Secrets To Making Money With An Affiliate Business (3)
Find a product that you can believe in and then educate yourself on the ways of internet marketing to insure a future income stream. The big secret to making money online from affiliate marketing is to learn how to use technology to your advantage.
Is Using A Credit Card Onboard A British Airways Airline Safe? (4)
While this may be true it is still up to you to keep taking the necessary precautions to ensure you are not a victim of credit card fraud, whether on the ground or in the air.
The Advantages Of Using Online Postage Stamps (5)
Online postage stamps have surely made snail mailing somehow faster and easier. It had made the whole thing convenient, especially if you have to send quite a number of letters.
Chicago Cubs, Kentucky Derby And Dallas Mavericks Tickets Are Hard To Get! (6)
While eBay is fine if you want to buy collectibles and stuff like that, you can easily get scammed on ticket purchases. With eBay you will have zero protection if the event is canceled or the tickets are not genuine.
Common Mortgage Terminology Explained (7)
Satisfaction of Mortgage - Document issued to a borrower on the occasion of their repayment of said loan. Second Mortgage - The acquirement of an additional, subordinate mortgage on a property that is already mortgaged.
Gardening With Groundcovers (8)
Steep slopes, where rain water can wash away the soil, are often successfully planted with groundcovers. Their roots will hold the soil in place and prevent runoff. Where mowing is difficult groundcovers are a useful alternative.
How To Choose The Right Tent (9)
Adequate roof vent: You will want a large enough roof vent, as this is what you will need to keep the tent from getting stuffy. The roof vent allows for good airflow helping to eliminate condensation in the tent.
Devoted To Dermal (10)
The primary ingredients in Dermalogica's natural Skincare system are essential oils and their extracts, salicylic and lactic acids, balm mint, rice bran, green clay, and fruit enzymes. All are non-comedogenic.