by Rick Ratchford
There is an old saying about not being able to see the trees from the forest. When it comes to getting a fix on medium term direction of a particular market you wish to trade, this actually can be a good thing. At the level where the trees are, the daily price chart for example, you witness the market trending in one direction or the other, or going sideways, and must determine which way you wish to go with it.
At times you may notice that a market on the daily level is moving up. So you jump in long and just then you get hammered. Why? Usually this is because the medium term direction is down and you are trying to swim up a creek. Before you decide on a direction to trade, consider looking at the larger aspect, the 'forest from the trees'. It is relatively simple to ascertain predominant daily action by noting weekly trends.
Take out your weekly charts and note whether the bars are going up or down in a trending fashion. If up, you'll want to then look for longs only when position trading on daily price charts, entering on retracement bottoms. If going downwards, you'll be looking for shorting opportunities only, selling on rally tops. If sideways, find another market to trade unless you like to trade channel swings (hopefully you are aware of channel breakouts - be prepared).
Whenever I plan a trade, I look at the larger picture. I want to get a good idea which way the market wants to go. Obviously, this puts the odds of a successful trade moving into my corner, but there are other considerations to work out. So far I've given you a more simplistic approach to a somewhat complicated technique.
Be aware that even weekly trends can change at anytime. Yes, you can go to the next level up, monthly charts, and note which way it is moving to get an idea of likely, weekly direction. But be careful not to lose your perspective.
I have found that for those who may not have a good grasp of cycles, using the law of probability is the next best thing. What do I mean by "the law of probability?" Basically, when looking at weekly charts, the odds of a weekly trend change are low at the start of a new trend direction than one that has been underway for some weeks. In other words, if you notice the weekly bars making lower lows each week, then suddenly you get a weekly bar that makes a higher low and high than the previous week, the law of probability states that you are likely to continue making weekly bars with higher lows, thus now moving upwards or sideways, and less likely to continue on its previous course. Again, this is just the probability, since it can continue if it wants to and does at times.
While this new move is just forming, the probability of it continuing its original downward course is low. But, as each bar is formed going forward in time week by week, the odds become greater that another weekly turn will occur soon. Using this law of probability, once a bar veers off course, anticipate the new direction by trading in that direction. Use your daily charts and wait for retracements to enter in this new direction. Using stops on a daily level, you can minimize any adverse moves against you in the case the weekly trend hasn't indeed changed.
Considering the material just covered, it should become quite evident that if a weekly move has been a long time running in one direction and your just looking to enter the market, that maybe, it would be prudent to look elsewhere to trade until a weekly trend change is evident. The law of probability again states that the longer a move has been progressing in one direction, the higher the probability it will reverse soon, and you don't want to enter right when that happens, do you?
If you really would like to increase your ability to anticipate weekly trend changes, it would be to your benefit to study cycles. Be advised that the study of cycles is a very difficult subject for most, especially if you are not mathematically inclined such as in Algebra, Physics and Geometry. Yet, there are simple ways to get approximations, so don't despair. Some even have found aligning to planets, such as the moon, to be somewhat useful timing weekly cycles.
In any event, make sure to consider the larger view prior to putting on a position based on daily data. You'll want to make sure that you have at least found the right "forest" before you go stumping among its "trees."