Trading with Turning Point and Trend
In the technical analysis, turning point and trend are two concepts in Forex trading that relate to the timing and direction of price movements. A turning point is a level where the price changes from a bullish to a bearish trend, or vice versa. A trend is a sustained movement of the price in a certain direction, either upward or downward. Both turing point and trend concepts are applicable in Forex and Stock Chart Analysis.
Day Traders use different strategies to identify and trade based on turning points and trends. Some traders look for signals near the start of a new trend, which is called a turning point strategy. Others look for signals during the continuation of an existing trend, which is called a trend strategy. Both strategies have advantages and disadvantages, depending on the market conditions and the trader’s risk appetite.
In the trend strategy, your entry will be at the strong trend movement during the growth phase. This might be good if our entry is not too late. However, if we are late, then we will encounter the loss from early enterers starting to materialize their profits. In the turning point strategy, we are trying to pick up the new trend as early as possible in their birth stage. Therefore, it gives you the opportunity to become the early enterer. Hence, the profitable range is longer than typical trend strategy. In addition, you can also quit your position much earlier than other trend strategy players can.
The longer profitable range means that we need fewer trades to achieve good profits. At the same time, there are some weaknesses of the turning point strategy too. For example, turning point strategy might signal buy or sell entry too early while the ongoing trend was not finished. Since both trend and turning point strategy have their own strength and weakness, it is possible that you can compromise between turning point strategy and trend strategy too. For example, you do not immediately trade at the turning point signal but you can wait until you observe that some price movement is following the new trend direction. Therefore, this becomes semi-turning point strategy. Many of good traders use semi-turning point strategy since they are the hybrid of turning point strategy and trend strategy. The fact is that skills to predict the turning point is important for the successful trading. Even though you are trading with trend strategy, it is still advantageous to have good skills in predicting turning point. Hence, the methodology of predicting turning point was sought after by many legendary traders in the financial market nearly 100 years. It is one clear piece of winning logic for successful trading helping “You act faster than other trader.”
Figure 1-6: Profitable range for turning point strategy, semi –turning point strategy and trend strategy
Price Patterns to identify the Potential Turning Point and Trend
To understand the technical turning point, it is important to check its connection with economics. For example, in Stock market trading, the underlying value of a company can explain the occurrence of the major turning point in the market. Likewise, in the foreign exchange market, the strength and weakness of a currency is often influenced by the fundamental value of a country. The fundamental and economic data release can cause to change the direction of the current price movement. As a result, they often become the major driving force behind the bullish and bearish turning point. Hence, to understand why an important turning point occurs in the financial market, we recommend you to look at following three cases.
• Turning point in the Stock market with “Value investing”
• Turning point in the Forex market with “Fundamental analysis”
• Pairs Trading with turning point
When you understand the driving force of the turning point in connection with economics, it helps you to follow the flow of the smart money from the investment banks and hedge funds. Besides, the price pattern can also help you to predict the turning point technically. When you apply the price pattern together with the knowledge of the fundamental driving force of the turning point, you can increase your performance marginally. Therefore, it is important to understand the price patterns used by the trading community last 100 years. We list the important price patterns for your technical analysis below.
• Horizontal support and resistance
• Diagonal support and resistance (i.e. trend lines)
• Triangles and wedge patterns
• Fibonacci analysis
• Harmonic pattern
• Elliott wave theory
• X3 Chart Pattern
To apply these price patterns better in practice, we must understand the origin of these price patterns with the scientific view. Fractal and fractal wave can explain the scientific rational behind these price patterns. Hence, we will look at how these price patterns are connected with “Fractal” and “Fractal Wave”. The scientific knowledge around these price patterns will help you to understand the flow of the financial market as said by Mark Twain “History Doesn’t Repeat, But It Often Rhymes”. In addition, you will find out that “Fractal” and “Fractal Wave” is the powerful tool to overcome the limitation of the modern trend and cycle analysis. The price patterns are in fact the practical application of “Fractal” and “Fractal Wave” in the financial market. Furthermore, we will provide the universal pattern framework to help you understand these price patterns with one unified knowledge. Therefore, we will make use of the X3 Pattern Framework while educating these price patterns.
Turning Point in Connection with Economics
One way to understand the turning point in the financial market is to study its causes. One such explanation is to look at the price dynamics in Forex and Stock market. After extensive price rise, the price must fall because many people want to sell them to materialize the profit. Likewise, after extensive price fall, the price must rise because many people think they are cheap and they will start to buy them again. This price dynamics will generate the bullish turning point and bearish turning point in the financial market.
Beside the price dynamics, we can find other causes of the turning point from the economic point of view. For example, in the Stock market, the intrinsic value of the company is one important cause of the turning point. This connects the turning point with the value investing principle created by Benjamin Graham. Similarly, the rise and fall of the currency price are often followed by the fundamental data release in the Forex market. Fundamental data release is another important cause of the turning point. At the same time, correlation and cointegration suggest the presence of a long-run equilibrium towards which the economic system converges over time. The dynamics can be observed and explained well in the pairs trading strategy.
Understanding the causes of the turning point in the economic point of view can help us to use the turning point better in our trading. At the same time, it can help us to find the flow of the smart money. Therefore, we will explain the dynamics in regards to the value investing, Fundamental analysis and pairs trading.
About this Article
This article is the part taken from the draft version of the Book: Science Of Support, Resistance, Fibonacci Analysis, Harmonic Pattern, Elliott Wave and X3 Chart Pattern. Full version of the book can be found from the link below:
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https://www.mql5.com/en/market/product/4488
https://www.mql5.com/en/market/product/4475
https://algotrading-investment.com/portfolio-item/harmonic-pattern-plus/
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https://algotrading-investment.com/2019/07/23/optimum-chart/
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