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Trend rotations

Updated: Oct 13, 2019




There are many ways to anticipate trend rotations using different tools and methods, such as highs and lows, indicators, market phases and more. Problem with each of those method is on average the accuracy of each method is not very high.

In hindsight, every trader will find where the trend rotated, and extrapolate or over-fit the reason what exactly triggered the trend rotation. For example traders that use indicators will just point out that indicator showed reversal trend signal, and price action traders might point certain high or low that signaled the rotation, and so on. In hind sight those things are easy to define, because often traders will just find any reason to put on, even if that reason over repetition of 100 samples does not show consistent performance. That is why if trader wants to develop some decent trend following skills, the methods of reasoning have to be tested and practiced in live market, before the rotation happens, and then tracking / noting the actual results in how many cases was trader on right or wrong side. This is the only way to develop objective trend rotation reading skills and even with a lot of work placed into it at the end it is still likely that trader will be only performing with 60% of rotation recognition at best. But with decent macro and trade management skills, that might be enough. In either case trader should not be falling to anyones magic indicators that can predict 90% success rate of trend rotations, as there is no such thing.



Symmetry of behaviour and consistent behaviour

Being selective to which trends to focus on and which not to is the key



There is one method from the data i gathered and tests confronted over past 2 years, which works with better performance, it Is far from perfect, but at least when it does work, there is small draw down and solid reward. It is especially good complimentary method along with additional confirmation on trade such as price structures, tape and other orderflow data. It can be used in confluence with additional setups, for better accuracy and for larger profit targets.


The key to focus on is to be selective and disregard having an opinion on trends that are very asymmetric and unclear to trader. Being selective is very important component in trading in any aspect of this industry. The mistake that often traders do, is trying to find meaningful rotations of price, on every asset they trade, under every conditions. That is just not a good way to go. In trading it is OKAY to say I DO NOT KNOW. Having no opinion on current trend of asset, and just move on to the next opportunity where trader reads trend better.


The trends that are best to focus on for spotting potential rotational changes, are the ones that behave very symmetrically with consistent beaviour in initial trend. At those the rotations will be clearer, and more visible to more other trading participants.


Bellow examples of consistent symmetrical trend (on left) and non-consistent asymmetric trend (right), judged from the single charting Time frame (M1 for example):





Variables that define potential consistent and symmetry of trend behaviour:


-how many candles were in each bull and bear leg (how quickly price dropped from each high, and how quickly it rallied from new low)


-were highs and lows in clean HH / HL progression (up trend) and LL / LH progression (down trend) or were there clearly disconnects of HHs / LHs in between?


-how many highs / lows has current trend established since its clean symmetry of progression (the more highs / lows the better, the stronger the consistency)

......


Bellow is example that would fit very clean symmetry of behaviour, of a very clean down trend, textbook sample using the variables above as guide. Obviously most trends wont fit this, but the point is the closer trend is to this example, the better trend it might be for trader to focus on for spotting the rotation (or just to read further trends progression):




To define "clean" trend, it is not enough to just look at highs and lows or indicators. Other variables also matter, such as volatility progression trough the trend, the distances between highs and lows over whole trend, the volume in bull vs bear legs....



Dow Jones theory



Dow theory in markets generally does not perform well, simply because observing or spotting trend changes by the rules of Dow Jones is not defined well enough (too simplistic), highs and lows are only a starting point to define trends, but not the whole picture. Expecting down trend to rotate into up trend if price randomly establishes new HH (higher high), is simply not performing well since in too many cases that does not happen. The key to actually be a more accurate on potential trend shifts is to use two variables which Dow Jones did not include, first one being symmetrical consistent volatility (clean expressed trend where lows and highs have similar depths and behaviour) and when the symmetry is ruined / shifted it has to be done on momentum move, where the targeted attempt of trend change is revealed.


Two variables:

-momentum shift (strong bottom bounce in down trend for example)

- consistency of behaviour (highs / lows, strength of drops / rallies, etc...)


Adding those two improves the reading of trend rotations quite a bit. Realistic expectation is that about 70% of trends will simply not feature that because 70% of trends are very asymmetric without clean consistency, thus really it is for trader to focus on the rest 30% or less cases, where consistency of symmetry is expressed well in trend.


Example bellow with relatively consistent up trend and then strong momentum shift (variable 1), after which consistency of behaviour gets ruined, with first established lower low and no further bounce (variable 2).






The key to higher accuracy of anticipating trend rotations is the consistency of previous trend in terms of behaviour. It is self fulfilling prophecy, the cleaner the previous trend the more likely many traders will notice the shift when it comes, the more asymmetric the trend the less traders will notice shift.



Use of indicator


This method works well even if trader is using an indicator to help to define main trend direction. Combining indicator with this more detailed approach will yield better results of not getting faked out on where rotation is less likely to happen if indicator signals it.



Symmetric / asymmetric trend


Example of symmetrical consistent trend and asymmetric trend:

-symmetric trend is where highs and lows within trend have similar size in terms of pips or $ or cents, basically similar volatility size and it took similar amount of candles for each leg from high to low to develop.


-asymmetric trend is where highs and lows are very different size across the whole trend, some highs are very big, some are very small, the volatility on start of trend might be very tiny and towards end of trend all of sudden very strong. Basically it is very chaotic as opposed to symmetrical trend example.


Left symmetric trend, right asymmetric trend:








Huge subjective bias factor


Lets just put it straight-forward, that even with following the rules and variables explained above, the way how trader identifies the trend is still going to be very subjective. Two traders could be looking at slightly or very different variables and highs / lows, even if they agree on overall macro concept. How much do you zoom out at what you are looking at, how much do you zoom it, which low is really the lower low and which is just a micro low?

Things like that will eventually make trend reading of many traders very different. That is why each trader, needs to develop his / her own method and not to listen to opinions of others on trend definitions, unless the variables align with both of the traders.



Patience and selectivity


The key is to be patient and wait for such trend, because the fact is that majority of trends will not be symmetric in behaviour, that is a fact. Thus to have this additional edge trader should be patient to wait for such trend to develop, just like anything else in trading requires patience to wait for proper setup.








Example bellow also shows that focusing on how bear legs vs bull legs in trend are progressing, is also a good potential hint towards who is in control in trend, supply or demand. If bear legs are kicking with very strong washes on every leg and bulls require 10 or 20 candles to push price back up slowly it clearly shows supply in control, and thus trend is less likely to rotate to bullish side unless some major clues within trend behaviour are printed (noted on picture):






High volume climax candles / legs



Another good variable to follow is climax volume after deep extension of trend. Often in such cases the rotation might establish, especially after consistent / parabolic trends. The climax low / high should be very extended and trade on highest volume across the whole trend.








Or the example bellow of EURCAD where the trend shift starts to show itself within few variables. First the price makes deep lower low in the middle but after that no longer makes lower low in next 3 attempts, at the same time price keeps re-testing previous highs or breaking with higher price prints. Both of those initiations show change and shift from previous consistency of lower highs and also half of that lower lows. It is not very clean example, but the reason i chosed this one is due to the major deep lower low in the middle, often after those climactic deep lows down trends will rotate IF highs are retested just in short time after-wards.




Compare the legs to each other in trend, it is about fitting the current price into the context of previous behaviour within the trend. Always fit what you are looking currently into some historical context, never read price action and current variable in vacuum .


For FX traders using futures volume data is often huge plus and is something i would recommend for any FX trader. Climaxes and soaking on FX are very often not visible on ticking volume of MT4 or similar platforms, one can only spot them on real volume data from futures.


Bellow is conceptual example of above EURCAD example, and the point of that deep lower low exhaustion / climax candle:



Selective samples from successful trend rotations


As noted above the samples shown on this post are focused on successful rotations from A grade samples, by no means is that what performance should trader actually expect. A lot of practice is needed and even with that, there will sill be many un-sure moments, or wrong rotations being placed.


More examples:


Some more examples of symmetric trend shifts. Bellow example of where up trend was rotated on strong momentum shift, where first lower high was baked on very quick and strong drop. Once the price retraced back and retested underwater demand, it got rejected every time, late buyers getting out of positions and the trend eventually shifted.



What establishes the word symmetry in case of a trend? Basically the number of lows and highs in structure and how consistently they are distributed within each other in similar distance. The more highs / lows in trend that are distributed at similar distances, similar progression rate of rising (upper example) is what establishes the strenght of symmetry on trend. The stronger it is, the more noticable to majority of traders, the more likely it is once shift is baked it could deliver stronger cascade move. The longer the trend followed this consistency of behaviour, the better (from its initial starting phase).











Practice on historical charts



Developing decent price action reading skills is not something that can be done with just reading a book or asking fellow trader for opinion on subject. Trader needs to put time into researching historical charts, finding those trends that do fit the required variable of symmetrically established trends. And it should be pointed out: historical, not live charts. Why? Because traders judgment is always colored with emotions when reading live charts and subjective reasoning.

But that is not the main reason why historical charts should be where the trader should practice. The main reason is that with historical charts, trader can practice on 100s or 1000s of chart examples within span of few days, while to get that much of practice and experience on live chart, trader would need to let several months of time to pass by, before he / she would gather the same amount of research and data gathering from live setups. This is the core reason why in trading anything should always be prioritized on practice with historical data in mind, not the live samples. But often traders that are already capitalized with trading account ready to go, they are just too trigger happy and want to "learn on the fly while they make money". It is certainly required to do, but historical training should be much higher priority. Frequency of executions or practice is what develops trader the quickest.



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