Turning Point and Trend

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If you want to become profitable trader, the first thing you need to understand is turning point and trend in the financial market. If you read many trading articles and books, you will find the diverse opinion over turning point and trend. Many people view turning point and trend as two separate subjects. However, it might be better to understand turning point and trend as two parts inside one body. Let us try to understand the trend. To do so, let us take human as an analogical example. We are born, we grow up, we become mature, and then we die. During this process, we can observe that there are four main stages. These four stages are universal across many creatures and objects observable in the earth.

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1 www.algotrading-investment.com Turning Point and Trend Written on 6 July 2019 Article Source: www.algotrading-investment.com If you want to become profitable trader the first thing you need to understand is turning point and trend in the financial market. If you read many trading articles and books you will find the diverse opinion over turning point and trend. Many people view turning point and trend as two separate subjects. However it might be better to understand turning point and trend as two parts inside one body. Let us try to understand the trend. To do so let us take human as an analogical example. We are born we grow up we become mature and then we die. During this process we can observe that there are four main stages. These four stages are universal across many creatures and objects observable in the earth. Birth – Growth – Maturity – Death Trend also goes through these four stages. Let us take an example in the financial market. For example if we hear that Apple has some temporary problem in their smartphone supply line this could stir up the Samsung’s Stock price because the demand for Samsung’s smart phone will be increased. Once this news is spread on the financial market the upward trend will be born for

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2 www.algotrading-investment.com Samsung’s stock price. At the beginning this news could be known by few people. Later more and more people could hear this news. Hence Samsung’s stock price can build up upward momentum. However this momentum will not last forever. Once people start to recognize that price rallied too high and some people start taking the profit by selling the stocks the upward momentum can slow down. Especially if we hear that Apple recovered the temporary problem in their smartphone supply line the trend could die completely. As shown in this example Birth Growth Maturity and Death are the life cycle of trend. Now let us revisit the definition of turning point and trend. Turning point is the beginning of new trend after the old trend died off. Hence turning point strategy refers to the strategy that tries to pick up this new trend as early as possible. This sometimes involves picking up the turning point at the birth stage of the trend. In financial trading trend strategy typically refers to the strategy

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3 www.algotrading-investment.com that tries to pick up established trend during the growth stage. Most of trend strategy is in fact momentum strategy. When the growth of trend is strong many technical indicators are designed to react on this strong growth. For example if you trade on the buy signal when 20 moving average line crosses over the 50 moving average line you do need strong upwards movement to lift the 20 moving average line over the 50 moving average line. In contrast to this in turning point strategy like Fibonacci price patterns Harmonic patterns and Elliott wave patterns we are looking for the newly born trend instead of the trend in growth stage. Hence the main difference in turning point and trend strategy is when to enter during the life cycle of trend. Typically

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4 www.algotrading-investment.com we are seeking to enter near the birth of trend in the turning point strategy. In trend strategy we are seeking to enter at the growth strategy of trend. In our example we considered only one trend. In practice situation is tougher because we will have many financial economical and political news released in 24/7 days. Hence we will deal with the collection of trends instead of one trend. Some trends will be cancelled off each other and some trends will be adding up to form bigger trend. As a result sometimes this collective trend can have a clear direction. However sometimes we may not see clear direction from this collective trend but just ranging movement. At the same time we could have many short-lived trends confusing our entries. Therefore our trading strategy is subjective to probability of success rate regardless of you are using turning point strategy or trend strategy.

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5 www.algotrading-investment.com In trend strategy your entry will be at the strong trend movement during the growth phase. This might be good if our entry is not too late. However if we are late then we will encounter the loss from early enterers starting to materialize their profits. In turning point strategy we are trying to pick up the new trend as early as possible in their birth stage. Therefore it gives you the opportunity to become early enterer. Hence the profitable range is longer than typical trend strategy. This longer profitable range means that we need fewer trades to achieve good profits. At the same time there are some weaknesses of the turning point strategy too. For example turning point strategy might signal buy or sell entry too early while the ongoing trend was not finished. Since both trend and turning point strategy have their own strength and weakness it is possible that you can compromise between turning point strategy and trend strategy too. For example you do not immediately trade at the turning point signal but you can wait until you observe that some price movement is following the new trend direction. Therefore this becomes semi-turning point strategy. Many of good traders use semi-turning point strategy since they are the hybrid of turning point strategy and trend strategy. The fact is that skills to predict the turning point is necessary for successful trading regardless of you are trading with turning point strategy or semi-turning point strategy. Even though you are trading with trend strategy it is still advantageous to have good skills of predicting turning point. Hence the methodology of predicting turning point was sought after by many legendary traders in the financial market nearly 100 years.

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