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All About Market Trends & Trend Corrections

forex trading A good time to start learning how to trade the financial futures monetary markets successfully is today so get on the road to profitable trading now... It is frequently said "the trend is your friend" in numerous trading articles and trader books on the subject of commodity futures and forex trading. For the most part, this is absolutely correct. However, even the trend can fail to be your friend if you do not realize when it has likely come to an end.

Excellent trading profits, many traders still try to trade against the trend. Why is that? I believe it's safe to say most futures traders feel once they try to enter that trend, it will soon end. They try to trade against the trend because they feel that it has run its course, and they want to get a jump on the new opposing trend (sell the very top, buy the very bottom). And of course, most are unable to determine when it has actually ended, finding themselves just another victim of the forces of the trend at hand.

In an attempt to minimize the hazard of entering a new trend as it may be ending, some have turned to Elliott Wave analysis is based on counting the waves that form within a trend. For instance, the basic teaching of Elliott is that a trend will have at least 5 waves. Three of these waves will be with the trend, and two of them will be counter-trend, or a 'correction' of the trend. Each correction is expected not to exceed 100% of the original thrust or wave leading to the beginning of that correction wave.

For example, if price starts a trend up by making 100 points (wave 1), when it starts to drop again (correction wave 2), it is expected to drop less than 100 points if the up trend is indeed valid. When it does end, the original trend resumes what is called Wave 3, which must exceed the end of Wave 1 (beginning of Wave 2) and move higher before it too corrects into Wave 4, and so on.

With EW, some figure that if they do not count 5 waves, then the trend must not be over yet. However, it has been found that EW can be quite subjective. Getting every EW Analyst to agree on the count is futile.

Examining 1000s of commodity futures price charts over the years, I have noted price tends to trend at certain angles. A strong bull trend will usually start at some angle of ascent, and either increases its angle as it nears its end (a rush to buy from those just realizing the bullishness of the market), or simply maintains the original angle.

Trend lines have proven to be an indispensable time tested tool when it comes to highlighting a trend and its angle of support. Though it may be said that drawing a trend line is also subjective, I have found that with experience the trader/analyst can become quite consistent in its proper application.

When a new trend begins, it may not be so readily apparent for many. Yet, a new bull trend may appear at first to simply be a bear trend correction, but then exceeds a prior bear trend correction's bottom and top. Alone this would not be enough to suggest the bear trend is over, but when that new bull trend corrects for the first time and fails to take out the very bottom of that trend, but rather starts up again, this higher swing bottom is yet another clue that a bottom is in and the bull has arrived. Further rise in price that then exceeds the last swing top formed (the start of the last correction down) continues to suggest that the bull is in force.

Suppose we number the beginning of each wave for discussion sake. The new bull move starts from the very bottom that we call (1). When price tops, and then corrects (moves down), we call this top (2). When price stops dropping, and if this is a bull trend we expect it to do so before reaching the low of (1), it will start up again. The beginning of this move up we'll call (3).

An easy way to draw a simple trend-line is to place the line below bottoms (1) and (3) out into the future. This gives us our first angle of ascent to watch for. It is advisable that the move from (2) to (3) be at least 38% of the move from (1) to (2) before you consider that correction low of (3) for your trend line reference. Less than 38% suggests that you may not have seen the (2) to (3) correction just yet.

A good bull trend will usually operate above this trend line. As a matter of fact, that trend line will often serve as a good support reference line, where price that corrects later on may start to resume the trend once again. Always be mindful to note whether price starts to become parabolic (starts moving more vertical at a sharper angle). If it does, you may not see price correct again to your trend line, and a new one may need to be put into place once price corrects again to give you a reference bottom to do so.

The standard definition of a Bull Trend is that price will make higher swing bottoms (the end of each correction). At some point, a correction bottom may drop below a previous correction bottom. This may suggest the bull is weakening, though not necessarily over, though it could be. If price were to drop below two prior swing bottoms, the bull trend is considered over. This is one way to note that a bull trend is coming to an end.

The best time to consider trading short the end of a bull trend is not necessarily the very top. Rather, it is when price fails to move price above the prior swing top (the current bull top) and starts correcting down again. This is because the standard definition of a Bear Trend is that price will make lower swing bottoms and lower swing tops. So when you see a bull trend make a lower swing bottom rather than a higher one, be on the lookout for the possibility of a lower swing top following.

The trend line again can be quite useful here. When the bull trend is correcting and you note that it just made a lower swing bottom rather than a higher one (it went lower than the last swing or correction bottom), see if it also did so below the trend line you have established as valid on your chart. If it did not, then be careful to assume the bull is over. However, if it also moved below the trend line, the bullish trend may be over.

Understanding the relationship of market trends and trend corrections can go a long way in helping the trader or market analyst trades with the trend rather than trying to guess the trend end end-up trading against it. It can help the trader stay in the trade longer while the most recent trend is still intact. In addition, noting when a correction is greater than expected can help the futures trader make plans to be more aggressive with their stop-loss orders, preparing for the end of the trend which is likely due soon.

reprint permission from web.trading & Rick Ratch ford - www.profitmaxtrading.com

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