It's a simple trading
technique that can be used in almost any market and is suited
for all time frames. I call it the 3-stage trend line signal.
This is a reversal signal so you will want the pattern to
develop before you decide to take action. I have found it
to be quite reliable as a stand-alone method and also just
as an additional confirmation signal.
What you are trying to do is find the reversal point of the
market you are following. Let's say you can see that there
is an uptrend and you are expecting the market to top and
want to get short when this happens. By using the 3-stage
trend signal it will get you into a position early in the
reversal.
For Short Entry : For the first stage of the set up, you draw a trend line
(T1) along the bottoms of two recently formed valleys (support
areas).
The next stage of the set up is when the market begins to
pick up momentum and you draw a second trend line (T2) along
the bottom of the last two most recently formed valley's (support
areas). You can usually tell when its time to draw a T2 as
the market will move away from T1 sharply. As the market pulls
back but doesn't reach T1 that is the time to add the next
line.
The last stage of the set up is when the market really start
to pick up speed and this is often an exhaust move and a third
trend line (T3) is drawn. This move should have the same characteristics
as T2. We are now ready for a trade.
Once T3 has been broken - enter the market short on the break
of the trend line. Your stop can be placed above the most
resent resistance high, which if we got our timing right will
be the top of the move. Now all we need is a target.
The target should be T 1. You will be amazed just how often
support forms at T1. As you exit the market at T1, continue
to monitor what happens. If the market finds support and heads
back up then you can wait for another opportunity to form.
If the market continues to break through T1 then this is a
strong indication that the whole trend might be reversing
and you may want to consider entering short again.
For The Long Entry. For the first stage of the set up you draw a trend line (T1)
along the top of the two recently formed peaks (resistance
areas).
The next stage of the set up is when the market begins to
pick up momentum and you draw a second trend line (T2) along
the top of the last two most recently formed peaks (resistance
areas). You can usually tell when its time to draw a T2 as
the market will move away from T1 sharply. As the market rallies
back but doesn't reach T1 that is the time to add the next
line.
The last stage of the set up is when the market really start
to pick up speed and this is often an exhaust move and a third
trend line (T3) is drawn. This move should have the same characteristics
as T2. We are now ready for a trade.
Once T3 has been broken - enter the market long on a break
of the trend line. Your stop can be placed below the most
resent support low, which if we got our timing right will
be the bottom of the move. Now all we need is a target.
The target should be T1. You will be amazed just how often
resistance forms at T1. As you exit the market at T1, continue
to monitor what happens. If the market finds resistance and
heads back down then you can wait for another opportunity
to form. If the market continues to break through T1 then
this is a strong indication that the whole trend might be
reversing and you may want to consider entering long again.
As you scan the market for possible set ups
you will notice that there are plenty of T1 and T2's that
can be drawn, but fewer T3's. This is what makes the set up
more reliable- the fact that there is fewer of them. There
will be lots of opportunities just keep your eye's open.
