Trading Habit #13
“Trends never turn on a dime. Reversals build slowly. The first sharp dip always finds buyers and the first sharp rise always finds sellers.” – Alan Farley
It is important for traders to understand that trends do not go straight up or straight down they tend to zig zag back and forth from a new high back to a lower high then to a higher high and back down. Markets and stocks rarely just plunge straight down day after day or go straight up in price. Even the strongest up trends in stocks and markets tend to pull back to the 10 day EMA over and over on their way up to new all time highs. Down trending stock indexes usually bounce a few times at the 30 RSI before continuing lower. Bear markets also almost always have strong rallies back to key moving averages like the 200 day SMA before they finally roll over and drop for multiple days in a row. It is important to step back from your daily trading and get a perspective of the daily chart’s longer term trend. You have to find good key price levels to enter where you can position your stops to not be hit before you are able to capture a piece of the current larger market trend. In stock indexes down trends tend to bounce near the 30 RSI while uptrends tend to stall near the 70 RSI. The MACD (Moving average convergence divergence) technical indicator attempts to measure a change in trend and signal a possible entry at the beginning of a new short term trend. A trader can decide how much of a trend they want to try to capture in their chosen time frame and how much of a profit giveback they are willing to risk to capture more of a trend. We have to get in the habit of finding ways to capture trends as price zig zags and then continues in the primary market direction. Ability to filter out noise and capture a trend is the primary job of the trader during system development.
You can read all 39 Trading Habits in my book.