Friday, May 4, 2012

Identifying a Low

Extracts from Alan Farley's book - The Swing Traders Toolkit

In a downtrend, the sequence of lower lows will finally end when price forms a higher low. The higher low could also be a double bottom.

Downtrends oftern accelerate as a series of lower lows prints on a bar chart. The trading crowd notices and  expects the fall to continue unabated. Then suddenly the last low appers to hold. The crowd takes notice and bottom fishers slowly enter new positions. Apparent price stability triggers more players to recognize the potentatial pattern and jump in. 

Being right at a bottom can produce the highest profit for any trade. But picking bottoms can be a very dangerous game. Swing traders must weigh all evidence at their desposal before taking the leap annd exercise strict risk discipline to ensure a safe exit if proven wrong. Losses must be taken immediately upon violation of the prior low.

Manage risk defensively - bottoms occur in downtrends.