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I am primarily a reversal trader. My main concern of course is to make sure I am not taking a reversal trade in the middle of a strong trend. I am wondering what methods others use to gauge trend strength, breadth, etc.

 

Does anyone use a reasonably reliable indicator that gives them an idea if they should stand clear of reversals for the moment because of a trend?

 

Just curious what others out there have used when trying to identify a move strong enough to end up an intraday trend.

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This could turn out to be a great thread.

 

I'll throw out two nuggets to chew on, and hopefully spark further input.

 

1. Gap days where the gap never closes within the 1st half hour. I personally avoid reversals on this type of trend day.

 

2. Wave counts... three is average, four is not uncommon before significant reversals... but once the market charges beyond five waves, often the trend just continues like an energizer bunny... (with a few a-b-c's thrown in for good measure) Taking every reversal that presents itself in this type of situation can take a real toll on your equity curve. Often times the best thing to do is just back out a time frame to look at the bigger picture for more significant longer term points of support or resistance the market may be driving towards.

 

snowbird

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Yours is the 10 million dollar question.. when to jump on the reversal..

 

I am not sure what timeframe you trade. I trade the TF on a 3 minute chart. I look for either extreme oversold/overbought and then watch the tape and up/down volume as well as the NYSE ticks. These will align for a reversal. My goal when I enter a trade is to get enough profit out of 1/2 of the trade to cover a breakeven stop. Each reversal for me is an attempt to get into a long term trend change.

 

 

Hope that helps.

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For me, if I try to fade a strong trend, and I fail, I just reverse positions (under the right circumstances...depending on context, S/R, etc.).

 

This happened to me just yesterday...I caught a long in the EUR/USD yesterday that was the start of a reasonable intra-day trend...if I would have ridden it to the top, it would have been nice profit...however I kept attempting to fade it (reverse short)...but as soon as my fade attempt failed or began to fail, I quickly switched back long. This happened a couple times. I would have been more profitable to just hang on to the long, but it still ended up profitable...it would have been a lot worse if I had only attempted the reversals and didn't jump back in to the prevailing trend.

 

:2c:

 

EDIT: Ideally, I would detect the strong, prevailing trend and avoid fade attempts unless there's a really good contextual reason (S/R, etc.)...however, I'm not always able to do that. ;)

Edited by Cory2679

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I can relate to your question and to your way of trading. I used to have a lot of success fading markets but like you said, on a strong trend day you can really get bit. What I learned was that a reversal trade should be teamed up with some other types of setups too, so you can take advantage of the current market condition. I wound up giving back a lot of hard earned gains by trying to fade a charging market. No indicator will give you the crystal ball information you seek. If it were that easy, it wouldn't be legal, right? You have to be the federal government for the right to print money.

 

I ended up arming myself with different setups. I teamed my reversal trades with a breakout trade, a continuation trade and the willingness to stop and reverse based on the rules to my tradeplan. I went out and learned about dynamic trade systems that tune themselves to market conditions based on price action. Now if I get in a reversal long for example, and that trade fails, I'll get a short setup that will cut my losses on the long reversal and will get me short for a high percentage chance of succeeding. It's all about living on the right edge of the chart. Best to not be one dimensional, in my view.

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I can relate to your question and to your way of trading. I used to have a lot of success fading markets but like you said, on a strong trend day you can really get bit. What I learned was that a reversal trade should be teamed up with some other types of setups too, so you can take advantage of the current market condition. I wound up giving back a lot of hard earned gains by trying to fade a charging market. No indicator will give you the crystal ball information you seek. If it were that easy, it wouldn't be legal, right? You have to be the federal government for the right to print money.

 

I ended up arming myself with different setups. I teamed my reversal trades with a breakout trade, a continuation trade and the willingness to stop and reverse based on the rules to my tradeplan. I went out and learned about dynamic trade systems that tune themselves to market conditions based on price action. Now if I get in a reversal long for example, and that trade fails, I'll get a short setup that will cut my losses on the long reversal and will get me short for a high percentage chance of succeeding. It's all about living on the right edge of the chart. Best to not be one dimensional, in my view.

 

I'm not really looking to change my trading strategy, just improve my ability to identify strong intraday trends. Not seeking a crystal ball, just looking for other's ideas on ways they have found that help in finding the trend.

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I see. Well looking at the higher timeframes help. Alexander Elder ("Trading for a Living") talks alot about identifying the trend on a time frame 3 x higher than the chart you are trading, and then taking trades in the direction of the higher time frame trend.

 

One thing you could look for is a 3rd or even better, 4th attempt at a resistance level. If you can find a resistance level that has failed a few times, and then watch as the price comes up to retest it again, perhaps the breakout on that 4th attempt will give you higher odds of succeeding to the long side, but if you just want to reverse, at least it might clue you into not taking the reversal when that happens. You might not take as many trades but you'll be trading for quality vs. quantity. It would be fairly easy to backtest that idea too. Contrarily, perhaps the first or 2nd time a level is hit, you would fade, which I realize, is what you want to do.

 

You could look at a linear regression on the higher timeframe. There are some good custom stochastic settings and macd settings, and of course the obvious MA's that people use, but the problem is that most, if not all indicators, lag the market. It's also easier to interpret them after the fact but hard in real time. Trends can change before the indicator catches up. Or the indicator signals a change in trend that has already happened and now it might be ready to turn again. If its too sensitive it will give you a lot of false signals and if its too loose, it will be Johnnie-come-lately. If it is just right, then it will only be just right for a short time, as markets always shift and change. So you have to consider them as just one piece of the puzzle but don't give too much weight to them.

 

Also, you could look for volume on the breakout. A breakout on declining volume might indicate a false move or headfake, if you will, and perhaps that's what you need to clue you in on a reversal trade. But a breakout on increasing volume should indicate a real move perhaps you would avoid those. You could also watch correlated markets to see if another market is leading the charge (or decline). It's not always the ES. Sometimes the NQ will lead. Or the YM. Maybe even a heavily weighted stock. Hope that helps. Keep in mind, nothing is guaranteed but anything you can do to put the odds in your favor while keeping your risk well managed should give you an edge, and a positive result over time.

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Dinerotrader,

 

I guess my response would depend on which market and time frame you are looking at. One indicator that I use is the 144 EMA. Depending on your market and time frame you could take a look at this and work around it as much as possible.

 

For example, you could avoid trades that go against the 144 EMA all together. Or you could make sure if you do take a trade against it that your entry point is on the other side (short entry below 144 EMA, long entry above 144 EMA).

 

I know this is very basic but it might be something to build around or use as a starting point.

 

Cuttshot

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Blu-Ray posted a set of indicators for Tradestation in another thread. One of them in particular, the squeeze indicator may be useful for you. It essentialy is a measure of volatility, as the indicator moves up volatility and trendiness is increasing. It's plotted as a histogram oscillator so you can also look for divergences and key levels.

 

ADX is another indicator commonly used to measure trend strength, or weakness, and is available in most if not all charting packages.

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Squeeze divergences work well in ranging markets, but will fire off multiple false divergences in a row in strongly trending markets.

 

For those that have found it useful for determining strong trends, I would be curious as to exactly how you are using it (i.e. No reversals when around the "zero" line, monitoring squeeze momentum on a longer term time frame, etc.)

 

snowbird

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Snowbird, what do you mean by squeeze divergence? I'm not sure I'm following you. A very simple and reliable indicator set that I have often used, called a squeeze by some, overlays a bolinger band on top of a keltner channel. When the bolinger band squeezes together, inside the keltner, and then begins to expand out of the keltner, that indicates a breakout of some sort is probable. You could team it up with a momentum indicator of sorts for confirmation. It's a simple explanation but it can lead to a very effective style of trading. Here's a screen shot to illustrate the idea. (btw, the bolinger bands are shown in pink, and the keltner in red.) But I don't follow what you mean by squeeze divergence.

5aa7101592214_squeezeexplJun_2121_18.thumb.gif.252ca0710aae73f5f47f51d745f7e9cd.gif

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Amtrend, Snowbird is referring to an indicator that highlights the squeeze without needing to plot the bollinger bands and keltner channel on the chart. There are several versions of this indicator. Blu-Ray has posted one version, this picture shows a slightly different version.

 

Whenever the squeeze is in effect the midline dots change color from blue to green (first bar in squeeze) to red (remaining bars in squeeze). Once the squeeze is over the color of the dots goes back to blue.

 

The histogram measures strength of directional trend, and this can be implemented in different ways, which is why we have different versions of the indicator. You can apply divergences to the histogram and that is what I assume Snowbird was commenting on. But if all you care about is knowing when the squeeze is on then just focus on the midline dot colors.Squeeze.jpg

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TraderWill explains this very well... and as for squeeze divergences, he also captured one in the above chart in the blue area highlighted.

 

You will see at ~10:41, price makes an equal low or double bottom, while the squeeze indicator puts in a higher high (diverging from price). This would be the indication to go long, and in a ranging market would likely work. However, in the chart posted, price is in a strong downtrend, and the long quickly falters as price peters out and the downtrend resumes.

 

snowbird

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TraderWill explains this very well... and as for squeeze divergences, he also captured one in the above chart in the blue area highlighted.

 

You will see at ~10:40, price makes an equal low or double bottom, while the squeeze indicator rises putting in a higher low (diverging from price). This would be the indication to go long, and in a ranging market would likely work. However, in the chart posted, price is in a strong downtrend, and the long quickly falters as price peters out and the downtrend resumes.

 

snowbird

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Thanks for the chart and explanation TraderWill. And thanks to Snowbird too for explaining the squeeze divergence. I'm curious who has had experience trading this idea and if it is going well.

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Cutshot, if you do a search on the forums for Blu-Ray and squeeze you should find one of his post where he provided several indicators, including his BR_Squeeze. It's slightly different from the one I showed, I think he uses a different measure for the histogram, maybe MACD. The one I posted was from the Tradestation forums, search for BB_Squeeze there.

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Here's a picture of what I am interpretting as a squeeze trade. If I understood your explanation correctly, The trigger happened right at news in this case, on a TF 233 tick chart. I found the BBSqueeze indicator and added it. You can see the bolinger bands had squeezed into the keltner and then back out. The price broke down with a read bar and the bbsqueeze histogram broke lower with the dot changing color. Also, a momentum indicator that I have used broke lower as well for extra confirmation. I think I got it right??

5aa71015ca941_ScreenHunter_01Jun_2310_21.thumb.gif.9effaa73bc71e51b806bf2a152b5ec54.gif

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AmCan, I think you got it. The squeeze itself is indicated by the center line dots, they change color when Keltner moves inside Bollinger. The histogram has nothing to do with the Keltner and BB, it's just a separate directional indicator. Could be a MACD, CCI, price oscillator, whatever.

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I was thinking the same thing AmCan. A simple start would be looking at ATR and taking a multiple of that for a target. It would be interesting to see what tick/volume/range charts it would work on as well. Day trading vs swing trading? If I can get motivated I might have to look into some of these ideas over the weekend.

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Would be interested to see what you come up with. Keep in mind that much has been written on this trade technique and while it might not be THAT well known, it isn't a novel idea. The folks at Trade the Markets base their bread and butter on this exact approach, I think, although I don't really follow them.

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Yeah I have seen variations of this before but have never done anything with it myself. I know John Carter uses it quite a bit. In fact I think he just had it programmed for thinkorswim charts and has been doing some free training on it.

 

Not reinventing the wheel here by any means. However, adding a twist here or there could lead to something interesting.

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