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A schoolboy error

This is a mistake perpetrated by all levels of traders but something that is best eradicated early in a trading career.

When a chart shows a sharp movement, it is tempting for the novice to jump in thinking that “I have spotted this opportunity before more conservative colleagues”.

The reality is that the more experienced traders are looking to buy the rising price and the novice has already gone short “on the decline” thus finding himself at odds with the market. This is a reminder that “the trend is your friend” and trends often last longer than an impatient novice’s capital!

When studying a historical chart, it is easy to spot the high and lows and they seem so obvious.

Reality is always different

Spotting a trend reversal is the most difficult skill to learn as it combines so many factors both market driven and leaning on experience and knowledge. Opening a trade against the trend is, by definition, very risky, especially since 90% of reversals are unsuccessful and the main trend resumes.

This chart is an example of opening a position on the Dax Index contrary to the prevailing trend but catching the peak. After breaking resistance at 10,100, the price started to rise, stopping at 11,000. The indication was a price action formation indicating a fall.

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2015-10-21_EDU_tops_bottoms_DAX-1-881x420Any shorts got severely burned as the single candle or formation will bring about a reversal in such a strong trend usually ends badly.

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THE TREND IS YOUR FRIEND!

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