Using the stock market crowd effect
Picture from life: you have analyzed the situation and expect a breakdown. You may have even recognized head and shoulders or double bottom. In any case, the final decision has been made, and you just sit back and wait.
Suppose you find a rectangle on the chart and are waiting for a breakout. You have already placed your orders at the right level and if a breakout occurs, you will automatically go long. Your conclusions are based on the hourly chart and you check it often to see if there is movement.
And all of a sudden, boom, the market starts to move up. Your purchase orderand you open a long position. You look around in the market and make sure your stop loss is in place. But then suddenly, without warning, the same bar that gave you the feeling of riches turns around and starts moving down.
Since the direction has changed, you know that will work your feet - that's what happens. That's it, you no longer have an open position. You are navigating to open your next position or looking for a new pattern: but wait - you just missed a great opportunity.
Let's break down the lesson for the trader
In this lesson I would like to tell you, How can you win when everyone else loses?. Here is this theory. Most traders in the course of trading take into account only their conclusions. Some thought gets stuck in their heads and sits there.
If they have decided that if they break down they will go to the long positionsIf it does, then so be it. This is especially true for well-protected technical levels, such as a 52-week low or high, or a trendline or chart pattern. In fact, any important technical level.
If you only work in one or two markets, you know what I mean. Even if you don't listen to other traders, you will have some idea of where the general consensus is on the resistance or support levels of the major currencies.
Remember that trading, more than anything else, provides insight into the laws of human behavior. As soon as one of these important levels is broken, everyone takes a position on the right side. Now we're getting to the heart of the matter-be careful, it's important.
When the market does something you didn't expect it to do, chances are it's worth do the opposite.
For example, let's go back to our example where a breakout made a move to long positions and, in the end, everyone was left to lose.
To make the most of it all, we need two plans. Plan A and Plan B. As you have already guessed, Plan A - Go with the crowd: if the market abruptly changes direction and you predicted it, you have no choice but to recognize the power of the crowd. You've thought through your entry point, your stop loss level, and your likely target level.
Plan B more sophisticated. If the market makes a breakthrough in the other direction, you should also have a strategy for action.
In the chart above we see downtrendThe price goes down forming support and then rises again to the upper trend line. The price goes down, forming support, and then rises again to the upper trend line.
Now very often the consolidation is replaced by a breakdown in the direction of the trend movement, so it is not so silly to assume a break-down, which is what the market does. This leads us to the conclusion to open short positionsIf you want to enter a new level, you can place the stop on the previous resistance and the target level on the lower side of the difference between support and resistance.
And here's what happened next.
Instead of continuing the decline, the next bar becomes a reversal bar.
In a two-way reversal, the first reversal bar should be at the end of a strong downward movement. The close should occur near the low of the first bar. Preferably, this low should be a new recent low. The second bar should open near the closing level of the first bar and completely offset its decline by closing near its high. There is no need for this to be a reversal bar for the pattern to work (see figure).
Well, now the market is moving in the exact opposite direction to what we thought it would. Being opportunists (which all good traders should be), we closed short and opened long with a stop below the low of the failed breakout.
Right now we have long positions with a stop lossBut we also need a target level. I would place the first target level at the previous resistance level. The reason for this is simple. There could be a long period of Consolidation and the price will begin to oscillate between support and resistance.
However, since the failed one turned out to be a two-bar reversal I can hold long positions and watch what happens at the resistance level. Depending on market conditions, I can also add an order to my long position.
So it's important to always be prepared to turn any market movements to your advantage. When you encounter a failed trendline, support/resistance line, or unconfirmed pattern, always have a backup plan. Don't just watch the market action, use it to your advantage.
I know some traders who do just that. They calculate market movements that are obvious to everyone, and then benefit from the opposite movement of the same market.