How Trend Termination Happens?
Trend termination By Definition could mean if a trend fails to continue then it will go into a trading range, but of course this is not the case every time. It is saying something like a price area that does not continue up or down in either direction. This itself is not extremely useful to any traders in real time though.
However, a trader may gain value from understanding the patterns that preceded a failure in trend continuation, differentiate these failures that are likely to lead to a dramatic reversal and those that would transition into a sideways trading range. Plus, looking for a specific risk management points for trades within these areas.
In most cases, failed pullback are preceded by some form of momentum divergence. But, momentum divergence itself is not sufficient for us to call for a trade in the opposite direction. It is however a sign that the trend is losing their conviction. The most important factor is to have price action in the lower time frame and emerging market structure on the trading time frame to justify a counter trend trade.
Another common condition for a failed pullback is extremely high volatility, indicating possible climax or exhaustion. Along with multiple trend legs in the same direction too! After maybe more than 3 pushes, it is likely the market needs further consolidation before continuing the trend. Chances are pullback failures are more likely to happen with each subsequent trend leg.
Trend always ends with some form of failed pullback pattern, which is one of three different forms:
- Pullback fails by transitioning directly into a trading range. There is no move out of the pullback as price stabilize around a price level in the pullback itself. The initial range is small and may expand through a series of excursions above and below the confines range. Each attempting breakout traders to trade at these spots. Buyers and sellers have reached equilibrium and there is no imbalance to propel higher price. Also no reason to be trading this formation as well
- Pullback may also fail on a test of the pivot level that defines the previous trend extreme. Take note that there is not much difference between tests that are precisely at the pivot level, those that fall short or those that slightly penetrated the level. The last scenario is a typical dangerous scenario that leads to a sharper counter trend momentum due to trapped traders who enters on false breakout. This situation signifies the lack of conviction beyond the previous extreme as the market finds balance between supply and demand. The figure below demonstrates this situation:
- Pullback may also fail when a series of counter trend momentum consist of a small pullback (which would setup for a good trade usually) but a strong counter trend emerges (opposite of the initial trend). The swing at A below is a confirmation that the trend had stopped at least for the time being.
The patterns above shows a transition from trend into a trading range which is also signifies failed pullback. It also ties itself in a way that failed pullback relates to trends stopping too. Hence, the point of trading methods is not to predict the future but rather, understand the forces at work in the market at any time. Such as their relative balance and what resolution or outcome of the emerging price structure.
When something change, a good trading method will make adjustments to their trades based on these changes. However, exact method would depend on your preference, personality and your chosen method. Market is a fluid environment that changes all the time.
Trade Management Issues
Beginner traders would assume that catching the end of a trend is profitable trade because the market will reverse. However, the market doesn’t always reverse into the opposite direction. Although it feels really good when this happens, it is a rare outcome.
Many trend ends by transitioning into trading ranges. When this happens, aggressive traders might find themselves taking multiple small losses as they continue to position themselves for a large trend change that never comes. Moreover, in most cases, especially when the trading range manage to hold and consolidate near trend extreme, trend continues. Because it is likely to be a trend continuation than reversal pattern on higher time frame.
What we’re saying is that trend termination can be possible for trading. But you have got to demand lower expectations trading in these trading ranges. Which is sometimes what the market only offers at that point of time.
Once a position has a suspected trend termination, the first thing to lookout for is confirmation that it has terminated. It is important to monitor price action within the trading range. There will be tests of extreme within trading ranges that will develop springs and upthrusts. These are failure patterns that marks the tests in successful trend termination. A momentum beyond the previous trend extreme is undeniable sign that the trend is continuing.
Once trend termination is successfully identified, it is important to take higher time frame into consideration. On trading time frame and lower time frame, trading ranges will most likely be noisy, volatile and more or less random. On higher time frame however, structures is likely to resolve into either continuation or reversal patterns in higher time frame trends.
So it is important to always take into account of what the market structure of the higher time frame is telling you. And also relate them with the trading time’s structure. Such as a trend on a trading time frame may terminate into a range with a trending consolidation on the higher time frame. Going for a trade against the higher time frame trend is usually a bad idea. Because the higher time frame trend could simple be in a pullback and continues.
SUBSCRIBE to BO Sentinel to receive Latest Scam Reports, New Trading Software Testing Results and Free Educational Material! 🙂