Distinguishing Reversals from Corrections (1)
Impulse Vs. Drift
The answer is that we watch for and act upon two separate types of event: :
1) We watch the action of the market (concentrating on the short-term price-chart) for signs of significant changes in momentum and volatility.
Trading rule: always trade in line with the impulsive move and against the direction of the drift..
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Note that "Drifting" action can take more complex forms, as on the left where two brief periods of down-drift are separated by a sharp up-period. The principle remains the same and this pattern is bullish.
(In market parlance "Bullish" = likely to go up, "Bearish" = likely to go down) |
Positions taken "against the drift" (in either direction) should be protected by stops at a level above or below the market which would represent a re-acceleration of the market in the same direction as the drift, two examples: