Be on Guard for Changes

BE ON GUARD FOR CHANGES        

I must reiterate that no one, no matter what, can foresee the future. Therefore, you must be aware that changes can and do occur. You must understand what drives these changes as reflected on the chart patterns. Once you can master identifying what drives price changes or trending market conditions, then you need to learn how and when to execute a trade based on those signals. Then the next phase is to manage the risks of the trade and to learn how to exit the trade to harness the profits accrued in the trade.

I will teach you how to spot these changes and what you can do to protect yourself from giving back profits by scaling out of trades, which will be covered in Chapter 10. First, you need to be aware of the process that markets go through. Prices do go in trend mode as we have covered so far. From a technical standpoint, there are certain clues that candle charts illustrate to show you the true condition of the market. Pivot point analysis will also help guide you as to price targets, either the high or the low or both of a given session. If you have the understanding that markets can either continue the original trend or reverse it on a dime, then you will be able to filter out preconceived emotional opinions rather than “fight the tape,” as it is called. You will read that the mind can, will, and does play tricks on you when you are trading. So you need to focus on what the market is showing you at the current moment.

The graph in Figure 2.7 seems a bit harsh that a market condition could be so bullish and yet completely fall apart at the seam after a consolidation period.

 What can and usually does happen is that a trader gets a preconceived notion that the value of a given market should continue to move in one direction. Most traders will continuously buy breaks after a consolidation period. Granted, that might be a correct notion; but it might not be the correct move, especially when proven wrong by the markets’ conditional changes as highlighted by specific candle patterns.

As you can see in Figure 2.8, the 5-minute e-mini-Standard & Poor’s (S&P) chart shows how a market moves from bullish (or an uptrend) to the consolidation phase to a complete trend reversal. Drawing a simple trend line would help you identify a breakdown of the support; but the one most important element that signaled a trend reversal was the fact that once the market traded below the consolidation sideways channel support more specifically, closed below that level and remained below the channel support level you had sufficient evidence to identify that the market’s bullish condition had changed.