Good Thursday, Traders!
One of the crucial chart patterns for successful trades is to identify and capitalize on turnarounds in a market price action.
If we can identify a turning point that sets up a price reversal from a big downturn, then we can cash in by buying into a market at a good entry level and ride the market back up to higher prices.
Yesterday, we presented a turnaround in a cheap technology stock that I have inside my Top 5 service with SAP ADR (SAP), a major German-based technology company.
For more on this and the other trades in the works for Josh’s Top 5, click here.
But how do we properly identify genuine U-turns in a market price over fake U-turns?
Today, we’ll go through the vetting process.
U-Turn Basics
We have to learn several terminologies if we want to thrive when trading stocks, and one of these terms is the U-turn.
The signal that reflects a 180-degree change in the sentiment of the market, signaling us to buy, is called a U-turn.
Now, remember that we’re not mind-readers, so we cannot tell when to enter the market; we can only make sound decisions based on probability.
So, if the market entered into the buy zone and came to the backside of the old downtrend line, now we’re kind of hesitating to trade.
The question is, “Why is it not going up?” There’s a new up trend line here, but is this the U-turn or this is a false U-turn? Let’s talk about that…
Higher Highs & Higher Lows
One of the things that you’ve got to understand when it comes to trading is that the markets move away from what we traditionally think.
So, if the market is going up, the market normally will make higher highs and higher lows on the way up, and the market will traditionally use the same angle.
If the market were to fall, it would usually break the trend line, come to the backside and then make lower lows and lower highs on the way down, and then we draw down the trend line.
That’s how the market moves in a nutshell. According to the research, the bear trend is a short-term trend, and we’re actually going to expect the market to U-turn a rally towards the north.
What will end up happening is that the market ends up creating the bullish wave movement, making higher highs and higher lows.
Once the market breaks the downtrend line, we start making higher highs and higher lows, and therefore, the market creates a new uptrend angle across these lows.
What that normally means is that the people who bought during this time and took the rally towards the north caused the market to create a wave down, similar to a false reversal.
We’re going to anticipate the market to fall down, and then it’s going to look like a bearish reversal. It’s going to look like structure breaks, but it’s going to rally back up, according to the research.
Managing Risk
More than likely, this market may fall and then rally towards the north. This means that in trading, our job is to manage risk.
According to the research, in the longer time frame, we are anticipating the market to change in the long term.
However, how often we enter into a trade and the trade goes against us first and then eventually goes our way is uncertain.
We might think that we’ve invested too much money or that there is too much risk on the table.
So, how do we know when a trade is against us? Well, at the end of the day, we don’t have a crystal ball or the ability to predict the future.
What we can do is we can lean on probability and formulas, which suggest if we buy in the buy zone, at an uptrend, by default we should win more than half our trades.
The Bottom Line
If we buy now, we have to be aware that we’re above the uptrend line and the fact that it could come down before going up.
If we decide to take this trade, we should decide for ourselves and determine if we can manage the risks involved in our decision.
At the end of the day, regardless of what our decision is, we should never be caught off guard by the movements in the market.
When we risk too much, we’ll lose too much. This will prevent us from making the most out of our stocks.
For more on the markets as well as trading education and trading ideas like this one, look for the next edition of Josh’s Daily Direction in your email inbox each and every trading day.
I’ll be bringing you more of my stock and futures contract trading tutorials as well as some additional trading ideas.
And if you know someone who’d love to make this a part of their daily trading routine, send them over to joshsdailydirection.com to get signed up!
Keep On Trading,
P.S. I have been teaching more and more traders how to make their own trading accounts work so well that they can effectively become a side job with plenty of regular earning opportunities. And in particular, learn how this is really working with digital currencies such as BTC!
To learn how to do this effectively using the strategies developed inside my War Room, click here!
The post Don’t Get Faked Out By False U-Turns appeared first on Josh Daily Direction.
