In today's volatile and manipulated markets a limited risk trading strategy is essential. Computer program trading accounts for a very large percentage of market volume. Hedge funds, trading syndicates, market makers, and central banks are some of the players involved in price manipulation.
Stocks, commodities, and currencies are all subject to these overwhelming market forces. Many price movements make no practical sense at all. Program trading is out of control. All participants are not on the same page, resulting in erratic price movements.
According to HL Camp & Co more than 60% of volume on an average day is program trading. This kind of computer based buying and selling can account for 90% of the volume on some days. It is difficult to determine the directional bias of the program traders. All computer programs must adhere to a set of rules.
Technical analysis is the only way to discover the intentions of these programs, when the market will move and in what direction. Fundamental analysis, news, and reports can be deceiving, unreliable, and manipulative.
The only reliable source of information is provided by charting applications. We can believe what we see on the chart. The price chart is history. We can determine the probability of future events through the analysis of historical charts.
Reversal trading has been considered risky and unreliable by many traders. My research concludes that trading market reversals results in high probability trades.
Risk aversion tactics are easily employed due to the very nature of the expected pivot point.
Reversal trading offers better entry and exit signals. Upon entering a reversal position, the trader will quickly find out if he is right or wrong in his analysis. If wrong, the trade can be exited with a small loss. If right, the trade is in the direction of the trend with a very early entry.
Market reversals occur in all markets and in all time frames for a variety or reasons. Overbought and oversold conditions are a result of supply and demand. Fundamental economic conditions may account for the general market sentiment. Weather and political events can affect commodities.
Many of these factors can be anticipated and factored into the trading system. All of these factors must be considered when developing a low risk approach to trading the markets. Your money is at risk at all times during a trade.
Computer programs adhere to a set of rules developed by humans. Since unknown future events can not be programmed into a computer, historical events must be used as a guide. The historical events are recorded on the price chart and can provide insight toward probable future price moves.