Further talk on trends from the start
This lesson will cover the following
- Economic reports may also lead to trends from the start
- Even the best patterns can fail to meet traders expectations
- Spikes as signs of trends from the start
Economic reports may also lead to trends from the start
Sometimes macroeconomic reports, released early in the morning, may lead to a reversal bar, a breakout bar or a huge outside bar, which have the potential to mark the start of a strong trend, lasting during the entire trading day. In this case computerized trading programs have a considerable advantage over individual traders. Computers receive fundamental data immediately, process it and this leads to certain decisions how to enter (in what direction and on what order). As this usually occurs within a matter of a second, it gives trading programs considerable edge over individual traders. Because the latter are at a disadvantage, they should enter into trades upon the release of reports in very rare cases. Computer programs will eventually reveal what the always-in trade is (this usually happens within 2-3 bars. The other possibility is that computerized trading may set up a trend reversal. Either way individual traders will be provided with the opportunity to make entries in the appropriate direction, if they do not rush in at the moment of data release.
We should also note that the strong bar, which could lead to the beginning of the trend, may not appear at the moment of data release, but several bars before or several bars after the release. However, the strong trend bar appears on reports in quite enough cases, so that traders can anticipate it and make their entries as soon as the always-in trade is clarified.
Even the best patterns can fail to meet traders expectations
Experts suppose that in about 40 percent of cases patterns do not develop in line with expectations of most traders. In case prices do not pause by the third or the fourth bar, this implies that the market has moved quite far and quite rapidly. So, such a situation increases the probability of a trend reversal instead of trend continuation.
Spikes as signs of trends from the start
In case prices trend for over four-five bars with no pulling back (sometimes one or two large trend bars), this appears to be a strong move (a spike). As we already said, the spike represents an area where buyers and sellers come to an agreement that little trading should be executed, while the price needs to rapidly move to another level. If the spike appears within the first several bars, the trading day usually becomes a trend from the start day. The trend may continue during the entire trading day, but in some cases the price may reverse and even break out in the opposite direction. If such a scenario unfolds, it may trigger a trend in the opposite direction, such as a spike plus channel type of trends. Other possibilities are if the trading day turns out to be a trending trading range day or just a trading range day.
As we already discussed, bulls who went long early during the spike will probably take profits at some time, which will create a short pullback. Another group of bulls, that missed the earlier opportunity to position themselves, will probably go long massively on the pullback. Others will probably prefer to increase their position size also at the pullback. Most of these bulls will probably enter long on limit orders at or below the low price of the previous bar in anticipation that this current bar may move below the preceding one, which will enable them to buy even at lower levels. There will probably be also those who prefer to enter long on stop orders above the high price of the pullback bar.
Three possibilities following the spike
Every spike is to be followed by one of three possible scenarios. First, the prices may have moved quite far and quite rapidly, thus, the market may be showing signs of exhaustion. If a pause or a pullback (in the form of a small inside bar, for instance) is to be observed after this strong move, a small breakout and even a reversal are a possibility. This reversal may last for a few hours at times.
Second, trading may go sideways for a few hours (the market may enter a tight trading range), after which the original trend may continue into the close of the day (the trading day will become a trend resumption day). The sideways price movement is a common scenario, especially after a sharp spike, lasting even up to ten bars.
Third, the most common case includes a more moderate-sized spike, which is followed by a trend channel. Now the trading day turns out to be a spike plus channel trend day.