Retracement methodologies require entering on a pullback or a corrective reaction of the initial trend. As Torero loves to mention, an uptrend occurs on a series of higher lows and higher highs while a downtrend occurs on a series of lower lows and lower highs.
There are several other ways to determine a trend. You can use moving averages such as the 8 or 21 period moving average. If price is above the MA's price is in an uptrend. If price is trading below it, it is in a downtrend.
Another way to determine a trend is when there has been a large standard deviation move in price. An example would be when price expands out of the Bollinger Bands.
It is important to determine whether price is in a trend or a range. Once you identify a trend, you can use several methodologies to enter safely.
- The 21 period moving average can offer support. This can be an entry point.
- Wait for price to pullback and enter on a TICK hook. If price is in an uptrend, it is likely that TICK's are trading above zero. A safe entry would be on a TICK hook at the zero line.
- Buy above the previous high with a stop several ticks below it. If you chose to use a wider stop, you can use the previous low as your stop.
- Watch price action, momentum, and volume. If volume is low on the pullback compared to the rally, we are likely to see a continuation of the trend.
These are just some methodologies one can use to enter on a trend. For pivot point traders, we have a tendency to fight the trend at key pivots. Remember, pivots work nicely in a rangebound market or when the market is in equilibrium. In a trending market, becareful at key pivot levels. If sellers are getting absorbed at pivot levels, the chances are prices will lift further. The only safe enter point based on pivots are the S3 and R3 pivot levels. If you observe these levels carefully, the markets have a tendency to reverse with high probability.
Money is made slowly in an uptrend while quick money is made in a downtrend. Be patient with your trades in an uptrend. As long as prices continue to make a higher high, your longs should still look good. Warning signal exists when volume dries up or the
flow of the tape gets caught in traffic.