The 24 Million Dollar Question

Hi Folks......I'm sitting in front of my computer watching the price go up and down on the various pairs and it came to me to ask a question to the folks here on the Forex Factory...

My question is this....."How do you know when a current trend has stopped and a new trend has begun"

For example: on the eur/usd the over all trend was up....until it had a nasty 3707 pip fall from grace....so at what point do you decide that it is either going to go back up or it is going to keep going down.

What is the tipping point that a trend changes direction and does that same tipping point apply to only one time frame or different time frames.

Still learning and thanks for your input.

Billser

well if you're expecting technical analysis explanation then look at the massive double top on eurusd and it traded between a range of 1.6-1.53something....break of that and you got it

I don't trade like that though...too blind.

Read up on Edwards and Magee's 'Technical Analysis of Stock Trends' or Brian Marber's 'Marber on Markets' for some technical definitions. I think it was Magee who suggested a daily close of 3% or more beyond a trend line and Marber adapted this to 1% for the FX markets. Don't quote me on those though, they're just off the top of my head.

For me, a trend ends when it stops making progressively higher (lower) highs and higher (lower) lows. A trend reverses when price begins making progressively lower (higher) lows and lower (higher) highs. This definition needs further qualification to filter out consolidation patterns (flags in an uptrend may make lower lows and lower highs but will lead to continuation 65% of the time) and this might be done by using some moving average gradient, the crossing of some indicator or observing the momentum. In truth, it's a lot easier to see where a trend has ended after the fact than when it's on the right hand side of your chart, perhaps indistingiushable from consolidation.

It is said that the point at which a bull market ends is often where it looks the most bullish and amateurs are 'extrapolating', when all they are doing is picking up the other side of the professional money. Sheep get slaughtered. If you're late to the party and aren't nimble enough in mind or ability to see the signs then the pro's might be feasting on your meat too.

If you're watch the market daily up's and down's ... then you're probaby watching the market on a lower timeframe, such as 1min, 5min, or 15min. If so, those timeframes are mostly "noise". True trend is usually on the higher timeframes such as the Daily chart (though, Im not saying the lower timeframes doesn't have trends. Technically, all timeframes have trends).

"To each his own!". Every trader has some form of another in helping him determing trend changes. I myself, look towards "Momentum". Other traders may look to candle formations and another group may look toward oscillators (indicators) such as MACH, Stoch, RSI etc. So, "differnt stroks for differnt folks".

The best way to spot market reversals is Support and Resistance and Price Action. You could also add Trendline Breaks if you want.

So where can I get my 24 Million Dollars? Thanks.

Trading intra-day, which is what it sounds like...

The answer is this: When a reversal pattern occurs, start thinking reversals.

But then again reversal patterns lie to you in a trend day, so if you're looking at a major drive day... don't look to fade anything until it doubles out on another session. Be careful about double distribution days tho, where the big move ends with a consolidation period... it's easy to get faked out then.

If you're dealing with a non-trend day, look for IBs, tails, small doubles, etc.

Once a reversal pattern occurs you can confirm it's move by watching S&R on a small time scale. Like the M1 and M5. Watch for little supports turning into little resistances, or little resistances turning into little supports. Read up on Wyckoff, some of that material can be used w/o volume.

Be careful tho, on a fast moving range S&R won't materialize much (hence there won't be a time when S becomes R, and vice versa). You might see some at the 50% area, but that's not the best entry. In a case like that you need to know ahead of time if you're trading ranges and simply fade tails or double LHCs. You can fade IBs in a range, but play them tighther... IB reversals tail off more often, which means it's time to flip your position.

Depending upon the type of day you can trade w/ indicators, just don't use them in the wrong setting. Ie: a moving average cross can work really well to pick up a slow trend day entry (usually does at the start of a major session, look for it), but will cost you dearly during a ranging day.

All in all it amounts to experience. The more you trade the more your brain will pick up on changes in sentiment during the day and the easier it'll be for you to trade those changes.

1 what are double distribution days?

2 IB = inside bar, correct? What about tail and small doubles? Is possible some chart example or better clarification?

3 what are double LHCs?

4 in range days first trade is fade the IB, but if it reverses then stop and reverse the trade, right?


sorry but it is the first time i read these terms


thanks in advance.

It's where price rotates (ranges) for a bit, breaks out in a big move, then ranges the rest of the day.


Inside bar, yes. Tails are like pin bars and key bars, it's where price has rejected off a level. Tail bars have to be put in context tho, they're only as good as the movements that led up to them, where the rejection is, an whether you're looking at a trend day bias or a rotational day bias.

A "double" is just a double top or double bottom. Nothing new there. Intra-day doubles on the M5 and M15 are extremely useful if following a large move at the right time. This is especially true if price has gone just slightly past yesterday's high or low, since it can indicate a failure to advance... such situations often reverse, and such reversals are almost always very large. Treat it like a box trade.

As for charts, I probably have some, they show up all the time. I'll keep my eyes out and start saving them.


Classic price action. Double bar low with a higher close, or double bar high with a lower close.


Don't get tied up in the terminology or technicalities. In a range day you want to fade any sign of sentiment change. An IB can be such a change, tail bars can be too.

Let me see if I can explain this better. Think of the day to day market has having an invisible quality to it, we'll call it "the weight limit."

A high weight limit means it can support a big move in one direction or another, slightly smaller means it can support moves, but they have to retrace a bit to keep the interest. Slightly less and you end up with a range that's angled in a direction. Less still and you end up with a range that's more or less even. Even less and you end up going sideways.

In a market w/ a high weight limit you don't want to take fades at all, if you trade against the trend in any way you're going to get hammered and it's going to hurt. In these markets reversal patterns will lie to you, they'll tell you about a reversal that just doesn't happen. Well it does happen, but it's good for maybe 3 or 4 pips, lol. Not enough to trade for most of us.

In a strong market like that you trade breakouts, that's it. Oftentimes there isn't even a pullback to trade, and by the time a pullback happens the move is already over. In a market like this the energy has to slow down before it can reverse.

But as the "weight limit" gets smaller, changes in sentiment mean more. They go from meaning a 10 pip retrace to a 20 pip, to a 50 pip, to a 100 pip, to a 500 pip move or more. A range has a low "weight limit" and any sign of a change in sentiment means price will retrace.

An IB means "eh, we're not sure... let's sit around and do nothing till someone gets things moving." It's not a super powerful reversal, but in some situations it can be pretty useful. A big tail against the trend (assuming some kind of leading motion) is price's way of going "That's too much!" If you put a stop entry right outside of the bar and an SL towards the end of it (classic PB trade), then price usually fades pretty strongly. Usually to the other side of the range.

But that just goes to tell the story of the day. If the tail breaks the other way that tells you something too, doesn't it? It's not the bar patterns that matter, it's the story of the market at a particular time. Patterns can help tell you this, but that's just part of it. Price, recent movements, location relative to yesterday's high and low, and when and how long all of this took to happen... all help to tell the story too.

Trying to determine this "weight limit" in advance is the trick. It's not easy, the patterns are complex and change frequently. To some extent it can be read by watching yesterday's action relative to the overnight action. There's no way to teach that stuff tho, it can only be had by trading thru it and figuring it out in your own terms.

Even then it's not perfect. These factors can change in the middle of a trading day, so you need to learn to spot when it is changing and act accordingly.

I use trend-lines.

Billser, you have just asked a question everyone wants to know, not a soul here will have a "good" answer for you. If people here knew when a trend was over they would be millionaires now (24 million maybe?) and wouldn't be on this site. Having said that, there are rather simple technical ways that give a guide to "catching" a big drop. You can choose just about anything. The person above likes trend lines, others like pure PA, I like MAs. They really are all the same when it comes down to it. People looking at the past to try and figure out the future. For what it is worth, candles are indicators too.

I am well aware they are criticized, but if a 200+ MA is used (I use 300+ MA on a daily chart) properly it can "catch" a huge trend with no more then four or five BAD, not to be confused with false, signals on average, even in the "chop" periods. The last trend (which I didnt bet a lot of money on and of course regret) gave a entry at 1.49xx on the short side, which trade would still be open today. Would you have made your money back lost on the bad signals and then got out, or would you still be in a couple thousand pips later?

The long term reality of the trading has yet to be conclusive, either way it is all I will use as a guide from now on, everything else will be simple "buy and hold" approaches. With those big 200, 250, 300 MAs the price will go through it eventually and simply not come back for a long, long time. It is quite elementary and again, whether it works in back tests or spreadsheets isnt my concern (it cant be figured anyway because exits are PURE discretion, meaning you cant wait for the price to simply come back to the MA and exit, it wont work). How you react to the crossing of those lines (yes, you have to create a "system" with this as well) with initial SL and TP and how you trade there after is where money is made, or lost. Put a 300 MA on a daily chart, any pair, it really is the "best" I could find after years of searching in terms of catching large trends. Not to say it will work, I am still here

Thank you everyone for your posts and amazing insights. It's a lot to digest.

Sometimes I think to my self that I over complicate trading by "thinking" too much.

Having said that there is a wealth of information that you have provided and it definately deserves a re-read many times over to understand completely what has been written.

Many thanks and please feel free to add a chart or two if you come across any thing that you think will add to the subject matter.

Have a happy V Day