You've recently read how and why a trend pauses or interrupts. Once you recognize a strong trend, then you only have to recognize the type of correction, sharp or sideways, and then decide what it will take to confirm the trend's continuation. Today, you will learn simple ways to confirm that the trend has continued and if you decide, to join that trend as it ideally continues.
Which Correction Point to Enter
The two types of corrections we looked at in the last article was sharp and sideways corrections. A sideways correction moves around between a price ceiling and floor making the shape of a rectangle. Another common correction pattern looks like a wedge or triangle between converging trendlines. Both of these types of corrections have after an established trend or a new trend with strong fundamentals and often result in a strong thrust in the direction of the larger trend which trend followers seek to join.
The sharp correction comes close to the higher low, but does not break the higher low proving the trends existence once a the prior high is taken out. When looking to the point of trend continuation, traders often look for the break of the lower high in the direction of the trend. Many FX trading trend followers will place their entry order to buy above the higher low so that they'll only enter on a breakout. The benefit of breakout trading is that it prevents traders from being involved in a non-trend continuing move, which can take up both time but can also increase risk.
The other approach that trend traders will take because it favors a better risk: reward is to attempt to buy the higher low in an uptrend. There is a key benefit and risk to this approach. The benefit to this approach is that it allows traders to risk less while seeking a larger reward relative to their risk. When a trader has a better risk: reward, they can reduce their overall win rate and still end up for the week, month, or year. The risk to this approach is that you may be buying as a new downtrend is starting since you are buying low.
Buy low and sell high is popular in stocks as the stock market has an upward bias but the FX market is a dualistic market meaning one currencies strength is at the other currencies expense. The easiest and most recent example as of March 2015 is the EURUSD. As the drop from 1.3992 to 1.04 in less than a year has amazed many people, very few have benefited from buying low especially compared to selling short in the direction of the trend like this series favors.
Decide when the Trend has stopped
One thing every trader must do, whether a trend trader or not, is to decide at what point you're view is wrong. The easy thing to do, which is a quick ticket to trading failure, is to not accept responsibility for a trade and wait for it to swing back in your favor. Because trends have a habit of continuing, if you're on the wrong side of a big move, the merciless market will drain your account. This is only quickened if you're using leveraged but delayed if not.
What Trend you can expect based on the Correction Type
Few, if any trends are worth fighting but knowing what type of correction is taking place can let you know what is ahead. Typically, the weak and flat corrections happen towards the end of the trend as few are willing to aggressively fight the prevailing trend. The sharper trend corrections tend to happen near the beginning of the trend meaning that an entry off of this type corrective move may have more upside than a flat correction. Either way, it's best to keep an eye on prices that create a higher low and mark those in case they are broken in future corrections, which could mean the trend is over or at least no longer worth the risk exposure.