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Great site Kenny.

Technical Analysis written in a straightforward way so that everyone understands.

There's only a small few who get it consistantly correct and you are certainly in that group. Chris

Thanks for putting this all together and sharing! BHW

Awesome Stuff! Kenny has shown time and time again the ability to show us direction in these markets. Khalsa

Kenny, I appreciate your insight and analysis. You make sense of what I can rarely see.

Thanks for sharing.

Took a gold short at 1240 just closed at 1203 :-)))))))))))))))))) ........ top call!!  Gekko

Trend Trading - Trend Reversals

Technical Analysis of Stock Trends 

Trend Trading - Trend Reversals

The trickiest part of trend trading - trend reversals a CIT ( change in trend), or is it? We don't think so as the exit process is just a follow on from the whole logic behind the theory of our trend trading strategy.

The most important thing is not to get caught up in the fear and greed cycle that drives the markets. Our trend line trading strategy is based on logic and knowing when to exit the trade is an essential part of that. There are no emotions or guess work involved in this, we simply let the market tell us what to do.

Change in Trend (CIT)

We described in part 1 of this trend trading tutorial how trend traders do not attempt to call tops and bottoms. They enter trades on breakouts, and only exit again once the trend has broken down again in a change in trend (CIT).

We also described how it does mean that part of the move is missed at both ends, but this is more that made up for by the high success rate of these type of trades. By waiting for the breaks and letting the market tell us what to do, losing trades are kept at a minimum. No system will ever give 100% success of course, it is all about odds and probabilities.

Trailing Stops

The highest level of risk is incurred by the trader right int the initial phase of the campaign at B1, first trade entered, at B2 the risk levels are tightened right up by raising stops to S2 for both trades, thereafter the strategy became risk free as there should already be enough profit in the trade from the first entry to counteract any potential loss on the second entry.

Raising stop levels as we describe is called a trailing stops strategy and is core to the success of our trend trading strategy. If we did not raise stops in this way and the market turned against us, we would then end up losing at a much faster rate. If you take a look at the chart below to see what happened next, you will see very clearly what can happen and why we absolutely must trail stops as we describe.

The Cycle Completes

This chart is quite busy but it gives a good overview of the complete cycle we have been following. It is worth remembering at this point that each of the additions to this Trend Trading tutorial have all been published here in real time. This was not an example specially selected from a library of historical charts just to fit in. Just as with any other trade, we had no way of knowing in advance how it would resolve.

trend trading trend reversals

Trend Reversals

Trend reversals can be swift and once the trend has reversed back through our trailing stop a trend trader can then consider whether to enter a new trade in the opposite direction. The chart above shows where the next option to enter short and where the stop was.

Due to the speed of of the recovery of this particular move, there was very little opportunity for traders to enter a second trade as part of a trend trading strategy in this case.

Even with the fast recovery, using our trend line trading strategy in trend reversals could still have banked a very quick 50 points or so for that single trade entry at Red B1.


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