Proactive Strategies for Market Direction Changes

The Forex market is unusual in that it is always open, the equities are always trading and prices are always moving. There is no “after-market” or “pre-market” time for traders to take a breath, reset themselves and re-evaluate their positions or their approach.

Therefore, it’s important for you to make time to draw a breath, unplug and relax. Otherwise, you face the real risk of burning out. It takes a great deal of mental stamina to maintain focus and make the moves your system tells you to make. It takes a great deal of emotional stamina to maintain an even temperament when you take profits on successful trades and when you end up giving some back on losing trades.

It’s not always easy to balance your emotional responses to trade outcomes with the expenditure of mental energy required to stay focused on following your trading system. But this is what separates the successful traders from those who can’t or don’t last over time.

This is especially true when the markets change direction. These directional changes can be messy. They’re hard to predict and they often cause traders to give some of their profits back. They also can be those times when traders are tempted to tweak their system or even change to a new system entirely.

Depending on your timeframe, these changes in direction happen more or less frequently. Many traders use shorter timeframe charts (1-minute up to 1-hour charts) and so they face these changes many times a day.

Below is a 15-minute chart of the EUR/USD where a change in direction is highlighted.

In the section labeled (1), the currency is bullish with an obvious bounce up off the trend. This trend is expected to continue with the best entry points happening on every bounce…until it doesn’t bounce which in this case happened about 07:00.

In the section labeled (2), the trend changes from up to flat. We don’t know this at first, but see how it suddenly has a difficult time getting past 1.08500. Then it broke through and immediately turned around to test that area. Notice how many times it tested that support line before it broke down through it. At this stage we’d still be bullish (expecting a bounce up off the upward moving trend line (1). Which it does back up to the flat resistance line (2) before breaking bearish, this time passing through the support of (1).

In the section labeled, (3), the trend is now bearish. The expectation is that the best short entry points are when the currency bounces down off the resistance of (3).
Shorter timeframe traders face this change in direction more frequently than longer-term traders, though every successful trader has (and properly implements) strategies for handling these market moves.

The thing to remember is to follow your system, don’t be greedy and stick to your plan.

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