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Financial Markets & Financial Software The Skill-Builder for Financial Trading - Financial Training Software.

Distinguishing Reversals from Corrections (2)
Volatility Expansion

1b - 1) as evidenced by a sudden volatility expansion, against the trend:

Sharp Break A sharp break against the trend with greatly expanded single-period range. This type of action may (but will not neccessarily) follow-through with a succession of similar periods. Often caused by unexpected news which is perceived as being significant by the market.

This type of action is "tough-to-trade" because it can be followed by further volatile periods in either direction. Trading Rules:

Note: The odds that the limit price will be reached before the stop is hit are probably worse than even, but the potential recovered-profit to potential additional-loss ratio is two-to-one. This makes it the rational decision to take provided that the additional loss would not be excessive: hence the necessity to cut back immediately if the position being carried is unusually large (the basic rules on the determination of position-sizing are discussed below).

1b - 2) as evidenced by a sudden volatility expansion, with the trend:

Acceleration A sudden acceleration of the existing trend with greatly expanded single-period range. This type of action may also (but will not neccessarily) follow-through with a succession of similar periods. This is usually the final bull-market buying-panic during the course of which the "last fool" finally gets into the market. This type of move can provide spectacular profits to those who stay with it but frequently reverses as brutally as it proceeds. Generally referred to as a "blow-off or "spike" top (or bottom if the chart is reversed).

Trading rules:

Spike : Trailing Stops

Next, Major Support and Resistance. Go there
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