Using projections to read the wind behind a trend
When the greatest golfer in the world steps to the tee with a major title on the line, you can bet that he or she has a handle on what direction the wind is blowing. It’s the classic shot as they stand with their caddy tossing blades of finely cut grass in the air as they stare at tree tops.
With a million or so bucks riding on a single hole – or even a single shot – understanding exactly what the prevailing wind will do is more than a passing detail. The great ones have always been able to play the wind with an almost supernatural ability.
When sizing up a trend, understanding the prevailing force can be the difference between an entry that’s on target – or one that’s an ugly shank off into the rough. You can quickly predict the direction and strength of a trend by projecting it – an advantage retail traders don’t have in their bag.
What most retail traders can’t see in trends
It’s reported that 90% of golfers who hit the links will never break 100. Only 5% of the remaining 10% ever break 80. Talk about daunting odds. Yet every Saturday morning somewhere in the world, a golfer is teeing it up, firmly believing it will happen that day.
The same is true with retail traders, except it’s even worse. 95% of retail traders fail to get their trading business off the ground. Like golf, there are a multitude of reasons why – many of which remain completely unknown forever.
Among the biggies – the ability to accurately read a trend. Specifically the ability to know if a trend is gaining or losing steam. Like a golf swing that’s homegrown, many retail traders simply try to size up the trend by eyeballing candle formations.
Fortunately, there’s a tool that helps take the guesswork out of reading a trend.
A dynamic way to evaluate a trend
Club selection, based on yardage and wind, often takes years for a golfer to master. Watch any major on Sunday afternoon and you’ll see the contenders agonizing with their caddy as to which club they should choose. The biggest factor in selecting a club for the pros? Wind conditions.
Watch the pro traders at any institutional trading desk, and you’ll see that they have an eye on their ‘wind’ equivalent when monitoring a market. It comes in the form of volume – a critical element to factor when evaluating a trend. Instead of tossing grass into the air to see which way the prevailing wind is blowing, they can visualize the volume that’s driving a trend – in real time.
Using Dynamic Volume Profiles, you can do the same. Simply select the tool from among the NOFT suite and keep it ready on your chart. When a driving swing ensues, use the tool and drag from the high and/or low extreme to its counterpart on the other side.
In an instant you’ll see much of what you need to know about a trend:
- Volume Profile: The price levels where the most volume took place – and where volume backed away – producing an intra-trend value zone.
- Volume: Total volume that took place during that swing.
- Range: The spread that the swing covered, measured in ticks.
Revealing the prevailing wind driving a trend
Tossing grass into the air will only tell you what the wind is doing where you’re standing. Watch pro golfers closely and you’ll see them studying treetops, flags – anything that will give them an indication of what the wind is doing near their target.
Similarly, understanding the wind that’s driving a trend at the moment is helpful, but alone it doesn’t do much to tell you about where price is headed. Comparing successive trends will give you a sense of where price is headed based on the prevailing volume.
With the ES example here, taking a look at volume from one swing to the next tells us quite a lot about the prevailing trend. Simply glancing at the chart with Dynamic Volume Profiles added tells us that the volume and range is increasing from the first swing to the second.
When the third swing ensues, it shouldn’t be a surprise that this going wind turns into an all-out tsunami.
Trading with the trend vs. pullbacks for more consistency
Many traders choose to focus on the pullbacks within the trend for reliable trading consistency. While there are always intra-trend reversals that take place, falling for those can simply amount to time-consuming distractions that limit your results in the long run.
If you’re looking for a comparison, simply apply the Dynamic Volume Profile to the counter-trend movement and compare the ranges. If the range spreads are comparable – then plot your short-term entry when they’re retested. If they’re comparatively smaller – as with our ES example – then simply consider these retracements as bargain opportunities to get in on the overall trend.
More often than not, trading with the continuing trend for long positions will yield more ticks relative to the time that you’re exposing your trade to the market.
Bring intra-volume to your chart for a go-to ‘stinger’ trade
Tiger Woods’ famous ‘go-to’ shot over the years has been known as the ‘stinger’. Many times, he would step to the tee box, grab a fairway wood and hit this low trajectory shot with ease. Why did he like it? It could be hit with great accuracy in all kinds of conditions – including strong winds.
Like Tiger’s stinger (in its prime), you can use the Wave Projection tool to determine the strength and direction of any given trend – in all market conditions. Simply add it to your chart and drag from a price swing’s high (or low) point to its counterpart on the other side. Take note of the volume and number of bars contained within – including the nature of the volume profile.
Tapering volume and bars will tell you that the wind is dying down. If you wait just a bit longer, you may be able to swing for a reversal. Increased numbers will tell you that the trend’s prevailing winds are picking up and you should be prepared to trade with it – or face a headwind.
Always know where the trend is headed before hitting your ‘go-to’ shot.