During my trading journey, I regularly encounter very interesting people from various fields. Aspiring traders who are just starting out are unable to reap consistent profits off the financial market, some even having been involved for many years and having tried various approaches. I assert that this is due to the lack of a fundamental understanding of trends, which is why I’m attempting to demonstrate how price action is interpreted correctly.
The nature of trends is the first thing an aspiring trader needs to fully comprehend. Trends do not stop from one moment to the other but last for a significant amount of time. A trend evolves in a sequence of support and resistance levels along its way, and reversals always take place after breaking an aforementioned level.
There is always enough time to spot a reversal and to adjust your position accordingly.
How to Recognize Trends
Take the 1-hour chart of the SPY for example. You will notice a repeated pattern of uptrends (higher highs and higher lows), downtrends (lower highs and lower lows), and trading ranges where the price moves up or down forcefully but without a resolution.
A break of any of the aforementioned pattern is taken as an entry opportunity to catch a reversal and follow a newly established trend. The specific method for trading reversals has been elucidated here and here. Consistently great opportunities are reversals to the opposite direction after trading ranges.
You never do anything prematurely and always wait for the market to tell you what to do. By doing so, you will avoid entering and exiting positions based on gut feel.
Let us think back to our childhood when we got our first bike. Our parents might not be particularly good cyclers but they knew one thing: to ride the bike we must be able to balance. Consequently, they do not bother teaching us how to shift gears, or how to do dirt jumping. They leave it at the basics. But this is what aspiring traders fail to understand. They start off with the most challenging stunts like scalping and picking tops without knowing anything about price action. Seeking answers in indicators is one of the mistakes they succumb to.
Back to the Basics
Whenever an aspiring trader comes to me, I will ask him to turn off all indicators, then give him the basic understanding he needs to start trading profitably. This includes price action, understanding the battle between bulls and bears, and trends. After that we go into more details such as risk management by using stop-loss orders properly.
To my surprise, many are able to find entries and manage positions with a bit of assistance within a few weeks, or have developed a totally new strategy with the help of the basics I provide. Most importantly, they do this without looking at any indicators that they used to love so much.