Wouldn't it be great to know in advance if a market session was going to trend or be in a trading range? Traditional technical studies are only backward looking, they do not predict.
We have all had this experience. Your favorite oscillator is getting over bought. You wait for it to turn over and give you a sell signal. You sell. Minutes later, price makes a slight new high which coincides with a pivot resistance point or a larger moving average or both. Either way, the market looks overbought and is stalling at a resistance point. You are short and holding with a very small loss. Everything is fine. Price is sure to drop from here.
You look away from your screen for just a second and when you look back, price has made another new small high. Your stop is getting closer, but there is another moving average resistance dropping into play. Price moves sideways and appears to be stalling, again. Your original oscillator is making a lower high and diverging. Excellent. You begin thinking you should add to your position.
Price makes a small spike lower. Here comes the drop. "#*&%!, I knew I should have added to my short!" Price almost gets low enough to put your original position into profit. You are pretty convinced this trade is going to work. The original oscillator has diverged, and is moving lower. The resistance points clustered together are holding.
Price goes up a little and because you are so convinced this trade will work based on everything you have seen, you add to your position.
Price moves sideways and appears to not be able to move higher. Excellent. All the shorter time frame oscillators are overbought. Everything is ready for the plunge.
Price breaks quickly to a new high. You see it, but you don't believe it. What about all that resistance clustering? What about all the overbought readings? What is going on???
Within a minute your stop is hit. I can feel the frustration through your screen. Oh no, when you added to your position you forgot to enter a stop order for the new position. Price is steadily moving higher. Everything is overbought, price has to at least come down to break even. Price moves higher, and higher. Your loss is really getting out of control now, but there are a few down ticks and the move must be over. Right? Wrong.
By the time it's over, you capitulate to the biggest loss in months. This creates a massive hole in your trading account. Not fun.
Trading against a trending move is one of the most devastating experiences a trader can have. It is draining emotionally, physically and financially. All the technical studies were telling you price was about to turn lower, and you believed them.
Imagine if there was a way to know in advance that price was very likely to trend. Wouldn't that be useful? You could have traded with the trend instead of fighting it. You could have used a trending technical study to get into the trend and ride it.
Over the last 30 years I have been looking for an objective way to predict when price will trend and when it will trade in a range. I call it Market Gravity.
Check back here for more posts about Market Gravity, how it works and how it can work for you.
Alan Gunn, M.Sc., CFA, CIM, DMS, FCSI has over 30 years experience in investment management and derivatives trading including Chief Investment Officer of an algorithmic hedge fund engaged in forex trading. Most people lose money in forex trading for 15 reasons. I am here to help. Get my Free Forex Trading Dossier at http://www.forextradingdossier.com/free-dossier.html
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.