Lessons from the Pros


Trend Changing in the Forex Market

Hello traders! This week’s newsletter will go through my thought process as markets change from up/down trending to sideways trending.

First off, I’d like to reiterate what has been written about trends in previous newsletters. An uptrend is a series of higher lows and higher highs, with the bulls/buyers in control. Our general plan is to join this trend by buying any pullbacks to demand. A downtrend is a series of lower highs and lower lows, with the bears/sellers in control. Our general plan is (you guessed it!) to join this trend by selling any rallies into supply. A sideways trend is where the highs are relatively the same and the lows are relatively the same. We look to buy near the lows and sell near the highs, back and forth, until a new uptrend or downtrend has formed. Simple enough, right?

Working from left to right on this 180 minute EURUSD chart, you can see that we were in a steady, easy downtrend. For the sake of clarity on this chart, I’m only marking in the supply zone that was formed in mid-May, and the demand zone that was formed in late May (actually it comes from July of last summer.)

How to trade the sideways trend.

Here are my thoughts as this chart was unfolding:

  1. Free Trading WorkshopA short opportunity, joining this downtrend on a rally into supply
  2. After trailing my stop, taken out of the trade with a small gain
  3. Another potential short entry, this time must be more conservative
  4. After trailing stop on this second trade, taken out of the trade with a nice gain
  5. Choppy action, not any clean levels for entry
  6. Too late to buy, too early to short
  7. Going long the pullback to demand in this uptrend
  8. After trailing stop, taken out with a small gain
  9. Short opportunity
  10. Taken out with a flat after trailing stop
  11. At this point, the observant trader should recognize that we are potentially coming into a sideways market. Some may have taken a short at this zone, but it would have been too aggressive for me as the ECB had an interest rate decision at this time. So, I would have missed that entire move, as on this time frame there were no rallies into supply to take the short.
  12. Long trade at demand; would have been stopped a few candles later for a flat. Sideways trading baby!
  13. Long again at bottom of channel
  14. After trailing stop, out with a profit; supply zone wasn’t good enough for a short entry.
  15. Long again at bottom of channel; should still be in trade at the far-right edge.

There are a few things I’d like to point out before I get a thousand emails about this chart!

Depending on how closely you manage your stop loss, you may have had more opportunities to trade during this stretch of the chart. Or maybe fewer if you left your stops wider than I do. Another thing I’d like to point out is that recognizing you are in a sideways market usually doesn’t happen until that sideways market is about one-third to one-half finished! Many new traders stubbornly keep trading either the previous uptrend (or in this case downtrend) during an entire sideways market – missing many potentially profitable opportunities.

The way I look at this chart, I plan on shorting near the top of the channel and going long near the bottom until price finally breaks out. In the previous hypothetical example of trades, at no time did I mention being long as price hit the supply zone or still being short when price hit the demand zone. The ideal trade would be long at the demand, still long when price hits the supply, and then price breaks to the upside starting a new upward trend which you would have been in since the beginning! Conversely, being short at the marked supply zone, price moves down to the demand zone and breaks through to the downside. Again, you would have been short from the beginning!

Until next time,

Rick Wright

P.S. Thanks for all the well-wishers and concerned students who have contacted me about the Durango, Colorado wildfire and potential flash floods! As of right now, all structures and people are safe here, if a bit frazzled after weeks of this stressful situation. Good thing trading can be done from almost anywhere!

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

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