Price Action Reversals - Part 2 - The Preceding Trend - by Nigel Price

Price Action Reversals – The Preceding Trend – By Nigel Price

The first topic we are going to look at is the idea of a preceding trend.  As we said in the Introduction, the PAST Strategy relies on identifying potential market turning points, or reversals.

But if something is going to reverse, it must be moving in a particular direction to begin with.  Correct?

In the picture below, the ball can’t just bounce up off the ground by itself. It needs to have been moving towards the ground with some momentum first. That’s how it gets the energy to bounce away (you can tell I am an expert in the laws of physics!).

Bouncing Basket Ball Transparent

Changes in the direction of financial markets often work in much the same way. Price moves towards either support or resistance with momentum, the balance of power between buyers and sellers changes, and then the price bounces away in the opposite direction.

The other characteristic markets sometimes share with the bouncing ball is that the faster price moves into the reversal, the stronger it bounces away. Not every single time, mind you, but often enough that we should take notice.

So, how does all this affect our trading?

Well, it is far easier to trade a market that is moving swiftly and decisively rather than a market that is drifting around slowly, not doing anything much. We would like to, where possible, trade when we have a reasonable expectation that price is going to move away from our entry price nice and swiftly. That’s how we make our profit.

So when we are looking for reversals in the markets with the PAST Strategy, the first thing we look for is good movement before any possible reversal in the opposite direction. In the PAST ebook we call it a “preceding trend”.

A preceding trend is easy to identify:

Preceding Trend

Price just moves from one corner of the screen diagonally towards the other. If it is an uptrend, there should be more up candles than down candles, and they should generally be bigger too.

If you count the candles in the above uptrend, you will notice that there are 13 bullish candles and only 4 bearish candles. A healthy uptrend will always have plenty more up candles than down candles – so this is something to watch out for.

[notify_box font_size=”15px” style=”blue”]Consider looking for at least 50% of the candles in the preceding trend to be in the direction of that trend.  So, for example, if there are 10 candles in the Uptrend look for at least 5 of them to be Bullish.  Also consider the length of the trend in relation to the current ATR (Average True Range).  A move of 300% or so of the current ATR should represent a reasonable (tradable) opportunity.  Thus, if the current ATR is 150 PIPs consider looking for moves of 450 PIPs or more.  A longer period ATR of say 100, rather than a shorter period, of say 14, usually works better because it is less prone to the potential impact of unusual recent high/low volatility.[/notify_box]

Now lets look at The Strong Reversal Candle