P1: PIC/PIC c03
August 18, 2008
Printer: Yet to come
Practical Pattern Recognition for Trends and Corrections Recognize Trend Position and Reversals for Trade Position
In this chapter, you will learn simple pattern recognition that will help you to identify whether a market is in a trend or correction, and what the position of the market is within the trend or correction. To be aware in advance if a market is at or near a reversal gives the trader a huge edge and will be an important part of any trading plan.
he prior chapter explained how to use dual time frame momentum position to identify the conditions for which side of the market to trade (larger time frame momentum) and the momentum reversal condition for a trade execution setup (smaller time frame momentum reversal). The dual time frame momentum position is 100% objective. There is no decision for the trader to make. Simply identify one of the four possible momentum positions (bull, bull OB, bear, bear OS) on two momentum time frames for the trade direction and trade execution setup. As you also learned in Chapter 2, momentum trends do not always coincide with price trends. A momentum reversal may only represent the slowing down of the price trend, not necessarily a price trend reversal. Most important, a momentum reversal does not indicate where the market is within the price trend or if the trend itself is at or near a reversal. The pattern position is the second of the four technical factors you will learn that provide the four key pieces of information you will use to make a trade decision. Pattern Recognition Objectives r Help identify whether a market is in a trend or correction. r Ascertain whether the pattern conditions have been met that typically warn a trend or correction is at or near completion. r Predict what is likely to follow the completion of the trend or correction.