Identifying the most promising buy or sell entry points is a different process from defining a trend. Knowing that a trend has formed based on 1-2-3-4 or 1-2-3 patterns does not mean that we should enter the market as soon as the trend starts. In fact, in most cases, we want to wait for a pullback in prices before we enter the market. What we want to do is identify what we call the Golden Region of Entry or Sweet Spots.
Why Sweet Spot?
Why should we do this? The following chart will help you understand. Entering the market on the first breakout is normally very risky.
It is risky to enter trades at the first “breakout” of the low point “2.” On this chart prices rose to point 3, but then dropped before a good profit could be made. Good entries are normally after point 4, near point 5. One should wait for a confirmation of both the start of a trend and the “Maturation of a Trend” before entering into a trade. For the above chart, after point 4, we see higher lows and higher highs, which prevents us from making the mistake of shorting the market (we didn’t get confirmation of the downtrend).
We do not trade a market that is moving sideways, as there are no profits to be made. We only trade when the market is trending. Again, what’s a “Trend”? In simple words, for an uptrend, you must see a succession of price bars with higher highs and higher lows. This trend definition is your foundation. All other indicators are secondary, and they are always delayed due to the additional price bars needed for averaging calculations. This means you never can enter at the key turning points; you must wait for confirmation of the trend formation. AbleTrend2 can guide traders to enter the market at low risk points (near stops and key support and resistance levels). Here is a recent example of a golden region of entry.
Always ask yourself this question before entering a trade: Is the market now in an uptrend, a downtrend, or is it a choppy market? Only trade the best trending markets. We normally have 3 to 5 days each month where we see such good trending markets. If you use 2- to 5-min charts, wait for wave 4 or later to enter the market. AbleTrend2 (T2) dots can guide traders very well at that time. One way AbleTrend users can see this easily is to apply the T2 indicator and the 10-bar moving average line to the chart. It is then possible to mark the 1, 2, 3, 4 points, identifying tops and bottoms as appropriate for the market direction.
In the upcoming blog we’ll specify how to define the Sweet Spot with illustrations.