It's no secret that some of the major stock indexes have been screaming higher lately. For example, if you look at an S&P500 daily chart, it has been on fire for more than a year, especially since the second half of 2017. It seems very easy for outsiders who are not active to do so use one-way markets, but not as quickly.
For those of us who have been to the trading block a few times, we know the feel of the deer in the spotlight during these out of control movements. You are always waiting for a pullback to come on board, but the market keeps going up and down without you. Or you keep saying to yourself: "This trend has gone too far, it will have to reverse soon, right ?!" Of course, this raises the question of how we can use these "out of control trends".
The following points will bring you up to date on how to properly tackle and use the beauty and power of a runaway trend market …
What is a runaway trend?
First, you need to be clear about what an out of control trend actually looks like. While there is no generally accepted definition of what constitutes a runaway trend, it is fairly obvious when and when there is not.
There is a concept I call the "perfect trend" in which a market respects the reversal of the mean (think of retractions to moving averages, see course for more) and nearby horizontal levels if it repels or cleanses on every attempt bounces off them during a rotation (retracement). I discuss this concept in more detail in an article I wrote about how to identify the trend in charts. Now let's take a good look, I dare say, "perfect" example of an outlier or "perfect trend" that has been in the S&P500 index for well over a year …
One concept to understand these out-of-control trends is that one of the characteristics they have is very small retreats or traces of value. For those of you who are new to this area, simply tracking the value simply means that the price will fall to a support (in the uptrend) or resistance level (in the downtrend). This can also be called an inversion of the mean mentioned above. In short, the stronger the trend, the flatter the pullbacks will be. The important consequence of this phenomenon is that if a market does not pull back much (because it is in a very strong trend) and the price shoots to new highs or lows without any obvious horizontal levels nearby (especially as in the case) again) all-time highs or lows (like the S & P500 at the moment) to slow its movement, the market can EASILY move higher or lower.
So it's kind of a positive feedback loop if you like. The price is aggressively moving in one direction with little to no setbacks because the market's underlying fundamentals are very strong and there are no technical levels that could hinder it. More and more people are stacking up and the price just keeps going in the same direction, offering you very little opportunity to trade the pullbacks, but knowing how to use this can be very (I dare say) easy Be money.
An important aspect of out of control trends that is sometimes overlooked is that closing prices are the most relevant price factor in the technical analysis of a market. What exactly do I mean by that? Well, in a strong trend, we need to pay more attention to the closing prices than any other price, as this closing price is probably an indication of what will happen next (reading the price action). Closing prices mean more than just the market. The closing price is the information that tells us whether something has been confirmed or has failed.
When trying to spot trends and look for signs of out of control / strong trends that are starting, the weekly chart takes precedence. But be careful, candlestick charts can "hide" this information or make it difficult to see at first. For this reason, I scan a line chart daily and weekly to identify a market that is trending or is already trending. It is much easier to see if there is a strong trend going on in a line chart (applied to close) because all the wicks / tails of the candles are filtered out and only the direction and the most important levels as well as the events on the levels are shown. If you don't believe me, go to a daily candle chart and then switch to a daily line chart. You'll see new information that you probably didn't see originally.
Monitor the key weekly levels in an established trend. This can protect against shocks and provide a much clearer picture for filtering all candle wicks. You can switch to a line chart for this purpose as it filters out the wicks / tails of the price bars to get a smoother view of the overall picture.
Another example of a candle / bar chart versus a line chart. It is advisable to check the line chart to get a clear picture of the trend.
How to trade out of control trends
Okay, now that we know what a runaway trend is and how we can easily identify it, let's discuss how you can use your power so that you are no longer the “deer in the spotlight”.
Perhaps the greatest understanding is that there will be no major retreats to the level in a very strong trend. Instead of just waiting for a retreat that never occurs, we want to see how we can get into a very trendy market.
The most important thing you will focus on is intraday pullbacks. I'm talking about the 4-hour and 1-hour chart timeframes with price action signals to confirm entries. You should apply the exponential moving averages (emas) of the 8 and 21 day charts as the price often falls back to this dynamic value or support / resistance area before continuing the trend. We can also mark short-term or nearby horizontal support and resistance levels to try to trade them. Another good option is breakouts, especially within a bar breakout trend that is out of control. These are fairly common and allow you to take advantage of a trend that is not retreating. Let's look at some examples.
The following graphic shows a nice example of a current and current trend in the Dow Jones Index. Pay close attention to the small retreats that have occurred in the 8 and 21 day Emas (red and blue lines) as these will be your most common retreats in such a strong trend. Note the horizontal level, as this is important in the table below.
Next, look at the 4-hour chart of the same market from above. The pullback to the 8-day Ema discussed above resulted in a 4-hour pin bar buy signal, as we can see below. This is how you can successfully identify a trend that has gotten out of control! You have the trend, then you only need a level or a signal, like in my T.L.S trading approach, here we had a strong trend and a strong signal, a boom.
In the next diagram, we look at a current example (January 24, 2018) side by side of how the 1-hour diagram can be used to search for entries with a high probability of an out of control trend. This is the same diagram as the DOW30 above. We can see a little retreat to the 8-day Ema on the left last week, which resulted in the very nice pin-bar signal on the 1-hour chart on the right. If you see a signal like this form, it should really be a breeze to enter it, put the stop below pin, and print some money. The key is waiting for a signal like this to form and will not jump to poor quality / non-obvious signals or anything under a 1 hour timeframe …
Important note: Now it is important to understand that we are not "intraday trading" but are using the 4 hour or 1 hour or day charts to confirm entries in trades that can take days or weeks. Just because you enter a trade on an intraday chart is not a day trader! Using an intraday chart to find an entry into a strong daily or weekly chart trend is simply a way to refine and find an entry into an out of control trend, but we're not constantly jumping into it Market in and out of it like a day trader would.
To use breakouts in a runaway trend, my favorite games are within bar patterns and my proprietary false trading signal. Inside bars are common on the daily chart in a very strong / out of control trend as the market will take a short break after its last move before shooting higher (uptrend) or lower (downtrend) again. Below are some examples of recent indoor bar outbreaks and a fake multi-bar pattern that led to a continuation of the trend, offering savvy and very pricey traders a low-risk and very high reward potential for retailers.
The psychology of out of control trends.
The most important thing to remember about your mentality when working in very trendy markets is not to think too much. The markets go further than we often think. So remember to trade the trend until it clearly ends!
One of the main drivers of big ongoing trends is the fact that the market continues to put people who bet against it out of the way (there is more than you think). Remember when a trader falls short and bets against a bull market. When the market rises, they have to cover this position with the purchase, which in turn leads to a further upward movement and a swarm of new orders. These out of control trends can fuel themselves for a very long time. So don't bet against it!
Just as a freight train is incredibly difficult to stop and takes a long time to slow down, let alone reverse direction, a very trendy market is a force to be reckoned with. Its dynamism and power also make it the best market condition for trading and the best opportunity for “simple money” that you can find in the trading area. Unfortunately, these out of control trends are not very common. So when we see a market in a runaway trend, we have to know what to do and we have to act decisively. The strategies discussed here today are a good place to start.
Even if we know the trend of the charts and this trend is extremely obvious (as is currently the case on the stock exchange), we still often do not have enough confidence to pull the trigger for a trade. Traders often freeze in disbelief and say to themselves: "This market cannot go on, it just has to reverse!" If you do, you will lose. Don't make up scenarios that you think need to happen in the market, but focus on what's actually happening and just use it to your advantage until it stops working.
In my more than 14 years of trading, I've found that out of control trends like the ones shown above are one of the best ways to make money because, as I have already emphasized, the strong sustained moves go (up or down) often so far beyond that seems rational or logical as greed, euphoria and people are forced to cover bad bets against the market (as well as the underlying fundamentals that support the trend). With the combination of technical analysis knowledge and psychological knowledge that we addressed here today as a dealer, we have an advantage and should use it if it is available. These things are perfected through years of screen time. If you watch how these market conditions develop, I cannot teach you this overnight, but you can definitely use the concepts that I teach in my courses and on this website in general to help you, except Recognizing trends that have come under control and recognizing trends benefit massively from them
What do you think about this lesson? Please let us know in the comments below!