Quote from athlonmank8:
lol couldn't be more true. But at the same time, what's a trend and how do you extract a profit from it. NoDoji took the easy way out and said always expect continuation. That advice is good but you don't learn too much from it and it's going to be real hard to stick to it after you first string of losses. I have several ways to answer this question, however the best is a strategy that few people have ever thought of. What does make a trend?? 
what goes into those MAs?
Bighog pounded me over the head with "always expect continuation" for over a year, and I didn't even have a clue about trend-following because I was strictly counter-trend. It was as if he were speaking a foreign language to me. I didn't understand breakouts and the psychology behind them, nor could I figure out why people would buy when price was so high or sell when price was so low. I pretty much thought a breakout was a measure of how many insane people had just entered a position.
In a given time frame, a trend is defined as a series of higher lows/higher highs or lower highs/lower lows. A trend in one time frame can be a counter-trend pullback or a move within a range in a larger time frame, so it's important to define a trend in the time frame you're trading, though it can be useful to know levels on larger time frames to help with targeting profits.
The first higher low/higher high that occurs following a significant move (3 or more pushes) down is a possible reversal signal, though if the range of that reversal is narrow and volume remains subdued, it can be nothing more than the start of a channel/flag formation that will set up a continuation breakout for a measured move down. (Normally channels/flags that result in continuation remain within the range of the last trending push, so as long as the previous pivot high isn't breached, expect continuation). Vice versa for uptrends.
The second higher low/higher high is usually considered a confirmed reversal and attracts buyers who define this as a 1-2-3 or A-B-C reversal (I think that's the term, correct me if I'm wrong).
So, in a given time frame, the common definition of a trend is higher lows/higher highs or lower highs/lower lows. The 20-period moving average (which is a mobile S/R indicator in a trend) will be rising or falling to reflect the upward or downward price movement, and in most cases the deepest pullbacks in the trend find support or resistance near the 20-period MA. In other words, if price is trending up and pulls back below the 20-period MA and then closes below it, that's a warning sign that the trend may reverse or at least stall for a while.
A trend can be very strong (pullbacks don't even break a previous price bar's high or low before price continues in the direction of the trend); strong (pullbacks break the high/low of one or more previous bars, but resume in the direction of the trend without touching the 20-period MA); or gradual (pullbacks to/through the 20-period MA, and new highs/lows being rather shallow).
The gradual trends are the ones that try our trend-following souls. The deep pullbacks look like reversals and it feels "wrong" to enter the trend there, breakout plays usually result in break-even stop outs, and by the end of it all, you're scratching your head and thinking, "If I'd simply left on my initial position, stop and target, I'd be up so much right now!"
A fellow trader PM'd me last night about a 6E setup. He was looking to go long if price broke the resistance level of a narrow range consolidation on low volume. The move into the range was 3 pushes down, so playing a 1-2-3 type reversal was not a bad idea. However, the first rule of trend-following is to expect continuation. You want to be prepared to sell a break through the previous pivot low before the consolidation, because the chance of a measured move down is high following consolidation.
5-min chart at 9:35pm ET, 6E pivots off a new low at 1.3326 (3rd push down), eventually establishes resistance at a lower high (1.3340), pulls back and pivots off a higher low of 1.3328. The 1-2-3 reversal traders (such as the one who PM'd me) are now looking to go long above 1.3340. The trend followers are looking to short (or add to their existing short) below 1.3326. The price action traders with no bias have bracketed their orders outside the range in both directions.
During the 12:15am ET bar, price breaks 1.3326, and the shorts can place their stop loss somewhere between 1.3335 (previous R) and 1.3341 (high of range).
Since the move from Sunday's opening high through the pivot low leading into consolidation was 52 ticks, your profit target for the next push down would be 1.3288, which is 52 ticks below the consolidation range high of 1.3340, because measured moves are common out of flags/consolidation ranges. Price found support @ 1.3284.
Scaling trend-followers would likely take off part of their position around 1.3288 and then recharge their position on a pullback that left behind a lower high as long as previous support (1.3322 pivot low at 12:15pm ET) held as resistance (which it did).
You may think that I just picked a perfect setup after the fact. However, last Sunday I posted a live trade CL (crude oil) call with entry, stop and target in CL Redux based on a trend following measured move setup and achieved profit target just a few ticks from the pivot high of the move.
The reason this stuff works is because traders (and trading bots) are programmed to trade these setups. Self-fulfilling prophecies.
And if they fail, that's what stops are for
