Beware the News

ALWAYS check when the News items are coming out.  You can do this by going to www.forexfactory.com and generally only take notice of the News items that have a high impact (coloured red).  I made the mistake today of not checking the News.  Take a look at the 10 minute chart of the Dow Jones below.  At Point A I went short (an upthrust).  However, at Point B the market turns around and we have what looks like a test/shakeout, so I get out.  The market then falls, to my annoyance, but on seeing the turn around at Point C (a down-bar, low volume, closing in the middle), I go long (buy), and make back my losses.  So ..... break even today too!

I then (obviously too late) checked the News, and there was News came out at 3pm - hence the confused signals.  If I had known News was coming out I would have been wary, and probably not entered the market until seeing a principle as a reaction to the News coming out - hence I would have saved myself the hassle.

When not to trade

Sometimes the market will go sideways, and even though you believe it to be weak or strong, if you enter a trade and nothing happens after 5 or so bars, then it is time to consider getting out.  I believed the market to be weak today at the market open, which, at the time of writing, appears to be the case.  But for most of the day it has gone sideways, then when it finally dropped, there was no clear evidence that it was going to do so at that time.

So no trades today.  I'm off to the supermarket.  Deep joy.  But I would not be surprised if I came back later to see there was an opportunity whilst I was out ..... happens so much!

Ignore the signals at your peril

Tom Williams often says "ignore the signals at your peril".  I did just that today and only managed to break even.  Below is a 15 minute chart of the Dow Jones, followed by a 10 minute chart.  If we focus on the 15 minute chart we see at Point A what we call preliminary buying.  As the market has fallen (and I was short at this point), high volume comes in, and the software has picked this up and given a green signal.  At Point B we see confirmation of this - a test/shakeout, at which point I closed out at took a 20 point loss.  However, on seeing the market's change of direction, I went long and closed out at a 20 point profit, so broke even overall.

Take a look at the second chart (10 minute), at Point A.  It was at this point that I closed out my second trade, and took my profit.  The bar at Point A has low volume (volume less than the previous two bars), as it approaches a resistance level (see the black line above).  Always be careful to watch what the market does at these levels of support or resistance.  If it approaches a resistance level on no demand (volume less than the previous two bars) then beware - this could be a sign that the market will turn around.  In fact, the next bar was down, but the bar after that continued up.  It can be annoying to watch the market go your way when you've closed out, but be happy with your profits.  There will always be another day.  It is caution and consistency that is the key to success.

Never try to tell the market what to do.  On my first trade I was convinced the market was bearish overall (by examining the daily chart), so even when signs of strength were coming in on the lower timeframes I chose to ignore them, thinking that the market will continue down.  The market may well be bearish, and finish down overall today, but in the meantime it will whipsaw, go up, down, sideways - this is how the professionals like to knock us out of the market.  So always beware, take notice of the signals, and use the utmost caution.

Trade the Trend

The chart below is a 10 minute chart of the Dow Jones.  Although the title of this post is 'Trade the trend', I saw an opportunity for a short position at Point C.  At Point A we see that the market has come up to a resistance level, marked R3.  My Tradeguider software makes it possible to put in support and resistance lines.  They are important levels.  Many traders use these levels, so they are significant and must not be ignored.  Watch the market as it approaches these levels.  If it is slow and approaches a resistance level on no demand (volume less than the previous two bars), as it has at Points B and C, then it is possible the price will fall in response.  Also, the bar at Point A has very high volume signifying possible selling by professional money, and hence a sign of weakness.

Now I say 'trade the trend', because the trend is very powerful.  Any trades against the trend (like I did today) are risky, and don't expect them to last long.  If the market is bullish then any down-moves might be small.  The power is in the trend.  However, as I was out this afternoon and looking for a trade in the evening I took this short position (sold) at Point C.

A lesson

Yesterday (Monday) I took a small loss - 10 points.  There is always a lesson to learn when this happens, and it's always tempting to walk off and try to forget what happened.  The best thing to do is to go back and look at what you did.  The chart below is a 5 minute chart of the Dow.  I saw a test in a rising market in this chart at Point A.  The market did not respond and instead went sideways, at which, at a 10 point loss I got out of the trade.  It turns out my analysis was correct - the market went up.  However, the lesson is - stick to your trading plan.  My plan says to trade on the 10 minute chart, and because I did not do this, and knowing this, I lost courage and closed out.  So stick to the trading plan, no matter how tempting it is to do the opposite!

Another good day

On looking at the daily chart it appears that we are back in the general down-trend, with this week's first two days being down-days.  So my overall analysis was that the market is still weak.  The market opened and went up at first on high volume.  The first chart below is the 30 minute chart of the Dow.  You see at Point A (the market open) we have high volume on an up-bar, signifying possible selling by professional money and hence possible lower prices.  But we want to see how the market reacts to this high volume.  And at Point B we see a down-bar, so we could call both these bars a top reversal, and a sign of weakness.  However, we want to see confirmation that the market is weak.  To myself, a top reversal is not sufficient confirmation to go short (sell).

In the second chart below, which is the 10 minute chart of the Dow (which I follow and make most of trades on), we see at Point A a no demand bar.  After the initial whipsawing at the market open, and high volume (weakness) we get, at Point A, a narrower spread up-bar on low volume (volume less than the previous two bars) - this is no demand, and the confirmation we are looking for to go short.  I went short at the close of this bar - and look at the powerful reaction (on the following bar) to this principle of no demand - a rapid down-bar.  I took 20 points profit.  Another good day.

The Upthrust

A very powerful sign of weakness, and usually a very reliable one too, is the Upthrust.  For an upthrust to be effective there must be weakness in the background.  Study the background of your chart - there must be weakness, ie. evidence of professional money selling, seen as very high volume or ultra-high volume on an up-bar.  Today the upthrust appeared, see chart below.  The upthrust is marked Point A.  It is a bar which has gone up only to fall and close on the low.  This is done to trick traders into thinking the price is going up, and to catch the stops of those who were short (selling).  The price shoots up, triggers lots of stops, knocking those traders out, and shoots down.  I went short (sold) at the close of the upthrust bar and took 20 points profit.  That's it for today.  Going out tonight.

This Week

This week we witnessed what we call a Shakeout on Wednesday, marked at Point A.  A shakeout is a very powerful sign of strength and usually signifies higher prices to come.   The chart below is a daily chart of the Dow Jones.  At Point A (the shakeout) the price shot down significantly during the day only to close on the high.  This is done deliberately to catch stops, to knock traders out of long trades, and to mislead traders into thinking the market is falling.  The following two bars, at Points B and C confirm this shakeout by being up-bars.  These bars have very narrow spreads and show not a great deal of enthusiasm for the upside.  However, Tom Williams (who I saw today) says that the shakeout is the strongest force and this is what influences his analysis that the market is bullish at the moment.  We will wait and see this week.  It is often common for the professional money to test the market on a Monday, which would look like a down-bar, narrow spread, with low volume, and would confirm higher prices for the week.  But this does not always happen.  Always be careful in thinking you can predict the market.  The market is designed to mislead you.  If I do not see a clear principle then I am happy to admit I do not know what the market is going to do!  It's better to be safe than sorry.