We must never trade against the trend. Whether we are trading currencies, stocks, commodities or the indices – we must always trade Long (Buy) when the chart is moving upwards and Short (Sell) when the chart is moving downwards.

To consistently reap short term profits and I mean very healthy profits that you can more than live off, we need to make sure our trade entry meets the following objectives:

1. We are trading in the same direction as the trend – ALWAYS!
2. We wait for the trade to pull back, i.e. if the stock is moving up, let it retrace to a level and bounce.
3. The bars (price bars) are small in length – not overly elongated i.e. volatility and hence risk should be small.

We look to enter the trade as the bounce is occurring…

In the following diagram, we see the trade is clearly in an uptrend. By the way, that is defined as higher-highs (higher peaks forming) and the higher-lows (the troughs are higher as we move from left to right).

As the stock pulls back (1) to the moving average line (that’s the blue line in this diagram), we see a series of red (seller) bars selling off in an uptrend. When the price approaches the moving average we would expect it to bounce off. We are therefore looking for a reversal bar (red changing back to green in this instance) and looking for trade entry around this area.

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Now the bounce is occurring – we are looking for a small (undersized) reversal bar, as we see volume increasing into the move.

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The small undersized reversal bar really sets up the strategy of the play. We use this bar alone to work out where to place both our entry and our initial stop loss.
What’s the rationale here? Firstly, there are more buyers than sellers in this particular market – hence why the stock is in an uptrend. That’s pretty obvious you say – yes it is. However, no markets move in a straight line, they move up and then they pull back.

Most novice investors enter a trade that is clearly moving strongly in a direction, only to see it reverse on them almost immediately and take their precious capital with it. Why? Generally in the height of excitement of a move – the full stretch of the accordion player if you like, must pull back to allow profit takers to realise their profits. It’s this movement that causes the market to retrace and our novice investors immediately eat a loss.

What can we do? We must wait to see the direction of the trend established and the line of the trend. Then notice the early profit taking which pulls the currency back to the line of current trend direction. Now we enter – only on small entry bars – with low risk (i.e. the price bars are small).

At Ultimate Forex, graduates learn exactly how to identify these key turning points and place low-risk managed trade around these crucial points. With a chart like this, these types of trades yield literally hundreds of pips. At a trade size of $10/pt or 1 Standard lot, you are looking at between $2500 and $3000 profit per trade.

In summary, we want to see the pull back occur and reverse back towards the direction of the trend – when this reversal of the retracement is confirmed –this is our confirmation of entry.

The rule therefore can best be remembered as:

Buy on the bounce, not on the stretch….”