In this episode of Truth About FX, Walter spill the beans on the million dollar question: how do you know when a trend ends? And what should you do? According to him, you never really know. BUT, you can follow the retracement. He lets out some key point on how to spot a good retracement candle. And did you know there are two ways to spot a possible trend end.
Hugh also makes some points on fear of personality and how this is an important key on understanding your own trading judgement.
Download (Duration: 07:34/ 9.1 MB)
In This Episode:
00:33 – Million Dollar question
01:53 – absolute worst part
03:48 – draw a trendline
04:43 – focus on low-volatility trend
05:47 – a little bit picky
06:56 – try and trick yourself
Announcer: Sometimes, forex trading is a wild and wooly place to be. That’s why Hugh is here, to post your questions to Walter, the naked forex guy. Hugh’s got questions and Walter’s got the answers. Here at the Truth About FX Podcast.
Hugh: Hi, Walter. How do I know when the trend is over? The Million Dollar question, right?
Walter: Right, awesome. You do not know. Really, it is tricky because one thing I’ve learned from Martin Pring — there’s a book called “Pring on Price Action”. There is another one called — I’ll put it in the show notes. Technical Analysis Explained that is the other one I know. Martin Pring on “Price Pattern” and “Technical Analysis Explained,” one thing that is interesting about the way that he talks about retracement is that you actually have this weird thing where, at the end of a retracement —let’s say the market is going up.
You’re trading the Pound against the Dollar. It’s going up, up, up and then it retraces. Often, the very last candle, the very last bit of that counter trend retracement is the strongest one in the countertrend direction.
Now, if you think about it, that makes it really hard to find at the end of the trend. If you believe this, go back and test, see for yourself if this is true but it often is. What that means is you are going to be most likely to think the trend is over at the absolute worst spot because it’s just the end of the retracement and the trend is going to re-engage now.
It’s awful. I mean, it’s like everything in trending were totally built to go 180 the wrong way but this is important to know. If you know this and you see this, then you should pay attention.
When you see a really strong candle at the end of a retracement move, pay attention because that could be the end of the retracement. It doesn’t mean it’s always this. This is what I will recommend if you are looking for the end of the trend.
There’s two ways to do these. The good news is if you are getting into a trend at the end of a retracement, you can usually get in with a really tight stop, which is great because you don’t have to write that often. You can still make pretty good returns.
Let’s say you are in this trend and the trend goes for 600 pips. If you can get in on a 30 pips stop and you can only get a third of that, that’s 30-pip stops with a hundred pip reward there. That’s pretty good.
That’s kind of thing that you’re looking for when you are trying to ride the trend. But, at the end of the trend, I think the best thing to do is to wait for a double top against the trend.
There’s a couple of different ways you can do this. Let’s say that the trend is going up. You watch the trend going up and then it falls and it goes down. You think the trend is over, then it comes back up and then it’s not able to take out the highest high that it made during the trend and it falls and it tries one more time.
Now, it made a second lower highs. You have the highest high, then it comes down,then it goes up, and then it comes down, and it goes up again but it still can’t take out that previous high so you’ve got two lower highs. That is a pretty good way to do it. The other way, really simple, is to draw a trendline whether the trend is going up or down. If it’s going up, draw the trendline on the lows. If it’s going down, you put the trend line on the highs. You wait for the market to break that trend line and then come back and touch it. That’s about it. I mean, you’ll never really know when it’s over.
You know that if you’ll look at indicators, you’re going to see during an uptrend— if it’s an uptrend everything is going to be overbought. In a downtrend, everything is going to be oversold. You just never know.
I think the best way to figure it out is just to look for the lower low or lower high thing. If you’re in an uptrend and you want to sell it, you think the trend is over and it’s going to fall.
The reason why everyone wants to take those sells on an uptrend is because they know they are usually pretty fast moves. If you can get a double top after the uptrend seems to be over, that is a good sign. Or a little double bottom after the downtrend seems to double, that’s a good sign too.
the other thing to do is focus on the little volatility. Let me give you an example — trading the NZD for example. NZD against USD, often times it’s usually like the Pound, CAD it is not going to be that crazy.
Pretty smooth going, not always for a lot of time but pairs like that 506 after the downtrend seems to be over, that is a good sign too. I mean, you just really know what to know.
The other thing to do is focus on the low volatility trend. Let me give you an example. If you are trading the NZD/USD for example. The NZD against the USD, oftentimes — not always but often times — it’ll be pretty… It’s not usually going to be totally crazy like the GBP/CAD. It is not going to be that crazy. It is going to pretty smooth-going, not always but a lot of times.
Pairs like that, you can find these really clean, nice trends and if you get this big, massive candle that is going against the trend, you’re going to say, “Okay, something is going on here. Maybe this is the end.” Then wait and see if it touches the trendline again on the other side or does a double top or whatever and then, maybe you can get in.
That is kind of easy. It’s easier, I find, to trade the low volatility trends because it is so obvious when the trend is over because it gets really volatile. But, if you are in a higher volatility trend, sometimes it is not that easy because you do not know if it is just a regular high-volatility retracement or it’s really the end of the trend.
So, that is another way if you are a little bit picky but I really do not know. I mean, it is one of those things like trying to pick at the end of a trend, who knows? You just do not know.
You can set up some rules, some trendline based rules or double top or bottom rules but other than that, you’re better off just making sure that you have a really good expectancy with the system.
It’s not that when you don’t have to be right that often. You can be right 22% of the time and still make money, something like that. Hopefully, that makes sense. I know it is probably not what everyone wanted to hear but there are a couple of different things you can do there.
Hugh: Yeah. It also has the fear of personality too. I think some people are just like that.
Walter: Yeah, exactly. Like you might be really good at trading the end of the trend and you really like the strong moves that you get when a trend collapses. Whereas, I might be one of those guys who just spills at so much safer to just ride the trend instead of keep trying to pick at the end of the trend.
I can trick myself if I want into trading the end of the trend by really trading at the end of a retracement. A lot of traders who know that they should be trading the trend but they just can’t help themselves, you can try and trick yourself by trading at the end of the retracement.
You know what I mean? Like, zooming in on your chart or something. You’ll say, “Look at this. This is the end of the trend” sort of thing. You can do that too. It’s one of those things that is tricky but I would just stick to really solid rule you’ve found in your backtesting.
Like, the trend line retouch or the double top or whatever and then make sure that you’ve got a good exit that has a really high reward to risk. In that way, you can mess it up a few times but would still go right.
Hugh: Okay, cool. That is a great tip. Thanks, Walter.
Walter: Thank you.