At one point in time, it traded above the 200-period moving average, some might be thinking, “The breakout is real, let’s buy!”
What happened next was that within the same day, the market traded near the lows and closed near the lows of the day.
Traders who bought are now trapped and are stopped in their long positions. What you want to do is to go short this market, in anticipation of lower prices.
You know that the trend is down and you know that it's at an area of value, which is the 200-period moving average. So you’ll sell on the next candle open.
In this case, this candle opens, you can sell it over here. Remember I said that you want to target the major swing points.
Major swing points are these levels over here and this level over here. These are two possible targets, that you can use to exit your winners.
If the market is going against you again, there will be winners, there will be losers. I have no idea how this trade will turn out.
But one thing to share with you is that I usually set my stops 1ATR above the highs.
The reason I do this is because there will be retracement against me and I might get stopped on the retracement. So I give the trade more breathing room.
I don't want to set my stop loss just above this high because the market could come up higher and then reverse lower from there. If my stop losses are just above the highs, I'll get stopped out of the trade.
For traders who short at this area, the market came down but reversed to above these highs. Traders who are short and haven’t exited their positions, with their stop losses above these highs, they would have gotten stopped out on this pullback over here.
This is why I like to set my stop loss away from the highs and lows in the market.
I have another example to share with you. Let's just zoom out a little bit to this portion over here.
The long-term trend here is up. This particular market condition is in a healthy trend, it respects the 50MA. How do I know that?
Let's do the two tests technique:
The market tested the 50MA once, traded higher, then broke out above this high, retested the second time.
It didn’t test the moving average to the exact peak. But since we’re dealing with an area of value, not a specific line on the chart, I still consider it a second test.
The market went up higher and did a test. This is where we want to time our entry to go long and we have an entry trigger which is a bullish price rejection.
The market was at one-point trading near the lows at the 50MA before the buyers stepped in and the price closed near the highs of the day.
This is a valid entry trigger to go long, to buy in anticipation of higher prices. For targets, you can target the major swing points, which is possible at this swing high over here: