Wednesday 18 November 2009
Yesterday, we wrote about a potential low-risk trade in Natural Gas,
outlining the reasoning for it,
Natural Gas - A Low-Risk Short-Term Trade. The trade recommendation
did not work out. Sometimes, little areas on the intra day chart can lead
to change on the higher time frames. This one did not.
Below is the chart presented as the basis for making the trade. There
were two reasons why. The 50% retracement area was being respected,
or holding, and on increased volume, and price did not decline to the
support trendline drawn off the bottom, a minor sign of strength. Price
also closed above the previous bar, and above mid-range, although not
by a lot.
Stops were used, as always, and the next chart shows today's activity
The smaller, intra day time frame gave way to the trend of the larger, daily
time frame. We should add that the weekly time frame was holding above
a recent sideways pattern, another show of some strength, but there was
not enough activity on the weekly to say that trend was beginning to turn.
Results of the higher time frame down trend prevailed. The risk/reward
potential for the intra day chart consideration was favorable, but the trend
was not finished asserting itself, as it turned out. One cannot know that in advance, otherwise no purchase would have been made, but keeping a
short risk made it a reasonable attempt.
The point is to demonstrate that knowledge of the trend is so important.
The recommendation was made from an intra day time frame, knowing that
the next higher time frame was in the other direction. What that implies is
to not attempt to overstay the smaller time frame position. This is used as
a lesson that so many traders ignore...using one time frame and not
knowing the higher time frames, or expecting the smaller time frame to be
equal in consideration to the higher time frame. Not true.
We would like to be using this as an example of how to recognize potential
turnarounds, but it did not happen that way. Instead, it is used to illustrate
proper knowledge and use of trend information.
Learn by example. It is from where improvement comes.