How to trade “trend from the start” type of trends
This lesson will cover the following
- How do different traders perceive trends from the start?
- First attempt to end a trend usually fails
- The case with pullbacks
It is useful to note that the majority of strong moves demonstrate at least two legs. Therefore, if a trader manages to enter on the first pullback, then he/she has a good opportunity for a successful trade. What is more, this entry is of utmost importance during a trend from the start day in case the trader has missed the first entry. However, it is worth mentioning that during strong trends the move, which is to represent the first pullback, often is unclear to be seen. It is so, as these trends often create two-three sideways bars, which do not breach any key trend line. So, they may not be considered as important enough in order to represent a pulling back move. Some traders, however, think that even though no actual retracement or pullback is to be observed, because a pause is a sideways correction, it can be perceived as a version of a pullback.
How do different traders perceive trends from the start?
An important moment to note is that trading particularly strong trend from the start days is complicated, because the trend does not appear to be that strong as it is developing. No prominent spikes or high-probability pullbacks to the exponential moving average are to be spotted. Price action creates a lot of trend bars in the opposite direction, while pullbacks occur after every few bars. It often seems that the market has entered a weak channel.
Beginner traders often do not seem to notice that all pullbacks are short, prices do not manage to return to the exponential moving average and the market is gradually distancing from the open. Traders with more experience usually notice these circumstances and take them as signs that the developing trend probably has considerable strength. These traders may feel confident enough to take even swing trades. Despite that bars seem to belong to a weak channel (which implies low-probability trading setups), if these bars appear during a bull trend day with small pullbacks, they provide high-probability swing trading setups.
Any pullback, that occurs during trend from the start days, provides decent opportunities to enter in the direction of the trend, no matter how weak a pullback may appear to be. In fact, some traders may still be confident to make entries in the direction of the trend even after a pullback breaches a key trend line. During a strong uptrend one should look to enter the market long at or below the low price of the prior bar. The size of pullbacks, occurring after the start of the trend, is another factor to take into consideration. If we have a bull trend with small pullbacks and the largest of all pullbacks during the past 2-3 hours has been only ten ticks, a trader should buy on a limit order at, say, six ticks below the daily high. If we have a strong downtrend, a trader should look to go short at or above the high price of the prior bar, or on every bounce, which appears to almost match the size of the average bar.
First attempt to end a trend usually fails
As the market has gained momentum, the first attempt to halt a trend usually is unsuccessful. If a key trend line has been breached and a considerable pullback has occurred, this means that the first leg of the trend has probably ended. Even in such a situation the first breach of the trend line may have a good chance to produce entries in the direction of the trend, which would eventually cause a second leg of the trend, thus, a new extreme level in this trend.
The case with pullbacks
Pullbacks in these trends, in many cases, contain weak signal bars and a number of trend bars in the opposite direction. During a strong uptrend the majority of bars, providing buy signals, may appear to be bear trend bars with small bodies or doji bars, while several of the entry bars may be small outside bull trend bars. They may appear after a number of bear trend bars or bear micro channels. This selling pressure urges traders to look for appropriate sell signals. These signals, however, may not be strong enough, but traders take advantage of them, because they appear more reliable than buy signals. They spot a pullback after almost every buy signal, that extends enough to trigger a breakeven stop, which makes them believe this is probably a sign of a weak uptrend. Some traders may be willing to enter long, but have trouble deciding exactly how, as they view every buy signal as not so reliable. All pullbacks are short, while setups are not strong.
Because of the rare occurrence of trend from the start days within a month, many traders are conditioned to other trading days, when selling pressure usually provides opportunities to go short. Because of that, they continue to sell short setups, which seem unreliable. These setups are unreliable, because they mark the start of bull flags and not reversals (to the downside in this case).
Traders with more experience, on the other hand, will probably understand the whole situation, when spotting an uptrend with short pullbacks, which does not fall below the exponential moving average. These traders know that others have probably been trapped out of their long positions and also been misled, looking for peaks, while, at the same time, being unaware that this uptrend is actually particularly strong. Experienced traders know that quite many other traders have been playing against the trend and will need to exit their losing short positions, after which they will probably chase the uptrend. This will likely lead to tension on the upside (many traders would like to go long, but do not), while experienced traders would buy massively and end the trading day at considerable profits.