HOW TO KNOW WHEN A TREND HAS ENDED AND A NEW TREND

HAS FORMED

In the previous lesson you learnt how to identify the dominant trend of the
market.
In this Part 2 I want to teach you how to know when the rend has actually
ended and a new trend is underway.
This is an area where a lot of traders struggle with, and it costs traders a lot of
money if you apply a simple set of rules, you will avoid being caught up in what
is only a retrace or a correction, thinking it is a trend reversal.
The very first thing you need to understand is where is the most money made?
The most money is made trading within the trend itself, that is after a trend
has formed.
The money is made in the middle of the trend.
I see so many times and I hear it from people who reach out to me to mentor
them, they make the common mistake of entering the market at the first sign
of a trend reversal.
They seem to think they need to catch the beginning of the trend to make the
most money.
THIS IS A MISTAKE and I will tell you why.
Markets that are trending tend to make strong moves in the direction of the
trend followed by periods of consolidation or a counter trend retrace before
the next leg in the direction of the trend.
You will notice this pattern happens over and over. Typically, what happens to
many traders is that they will make some money during the periods of strong
trending movement, (which is great).
But then they see the market is now moving in the opposite direction of the
trend and because they don’t really have any set of rules to help them
determine if this move in the opposite direction is a genuine trend reversal
they tend to jump in at the first sign of price moving in the opposite direction,
only to find it is the market taking a breather from the dominant trend,
consolidating before the market resumes the original trend It’s these periods
when traders give up all of the gains they just made when the market was
moving aggressively.
In an attempt to “get in early” all they have done is enter the market on a
counter trend retrace only to find their trade fail.
So, what do you do?
As I eluded to before the very first thing you need to do is stop thinking you
need to get in early to get the maximum amount of pips.
Forget about trying to identify the beginning or the end of a trend.
STICK TO THE MIDDLE. This is where the easiest safest money is.
In order to confirm a new trend has formed (and not just starting) here are a
few ways to know that a new trend is under way.
NOTE: In the previous lesson I said nothing is 100% accurate however if you
stick to these simple concepts, you will avoid being sucked into a simple
counter trend retracement, thinking it’s a fresh trend starting.
 LET A TRADERS BEST FRIEND HELP YOU.
What is, a trader’s best friend?
Time.
The very first thing you do is simply give the market enough time to
demonstrate to you that this reversal is more than just a retrace.
If you go back to my definition of short term, medium term, and long-term
trends. You simply do nothing until you have “time conformation”.
Has this reversal been going on for 1 month to 3 months. If it has then you
have a clue that a short-term trend has formed.
This is the first clue.
And it’s the simplest.
Even though it’s the simplest and doesn’t require you to do anything, for most
traders this first clue is the most difficult because they suffer from FOMO. Fear
of Missing Out.
So, as I said before they jump in because they are impatient.
Let me tell you a fundamental truth about trading:
THE PATIENT TRADERS ALWAYS TAKE THE MONEY FROM THE IMPATIENT
TRADERS.
So, step number one is just be patient and let the market show you if it’s a new
short-term trend.
Another fundamental truth about trading is markets move higher and lower
than you expect them to.
If you know this then there is absolutely no need to jump in before you have at
least a “time” conformation.
 A BREAK OF SWING HIGHS OR SWING LOWS
If a market is trending lower, we want to pay close attention to the recent
swing highs, and in an uptrend we will focus on the recent swing lows. We do
this because it also shows us via the price action if the trend is still intact or
not.

For instance, if you have a series of Higher Highs and Higher Lows as in an
uptrend when you see price break down past the previous swing low, it’s a
strong indication that the uptrend might be ending. Conversely, in a down
trend we see Lower Highs and Lower Lows, and when price breaks above the
previous lower high, it’s a strong indication that the down trend might be
ending.
In the above example we can see that price broke above and closed above the
most recent swing high of the downtrend.
This is another clue that a change in direction may be on its way.
By the way you want a close above the recent swing high or recent swing low,
not just a break above or below. You are wanting the price to close above or
below.
If you see this, then it puts on alert that a change in direction may be
underway, it is not a sign that using the above example you should be going
long you need more conformation.
And the next conformation is:
 HAS PRICE BROKEN THROUGH AND CLOSED ABOVE OR BELOW A
SIGNIFICANT EVENT AREA ON THE CHART?
As a professional trader I look for 3 things they are:
 Trend
 Level
 Signal
The most significant and important areas on the charts are significant “event”
areas or significant HORIZONTAL levels.
By this I mean being able to correctly identify horizontal support and resistance
areas (notice I said areas) a lot of traders get this wrong and it is a very costly
mistake.
Once you see a close above a recent swing high or a recent swing low the next
thing you want to do is wait and see if price closes higher or lower at a
previous support or resistance area on the chart.
Here is the same chart, as you can see not only did price close above the most
recent swing high it also closed above what was a significant horizontal event
area. In this case long term support.
When you have price closing below or above a significant horizontal level it
adds further weight or confluence that the trend is changing direction.
So far, we have discussed the importance of time, a close above or below the
recent swing high or swing low and a close above or below horizontal areas
(support and resistance).
The only last piece of the puzzle is for a signal to form confirming the trend has
well and truly changed.
At this point I need to leave you simply because my clients pay to learn to
identify the 3 signals that we trade, and as you appreciate it would not be fair
to share that with you.
Having said that if you do know what you are looking for, if you follow the
steps outlined above you will be well and truly on your way to being able to
identify a change in the direction of the trend.
Once again, I do hope you have found this useful. If you would like part 3 of
this series “ how to trade the trend” then just send me a message with the
words “part 3” and I will send it to you.