Wednesday 18 November 2009
Yesterday, we wrote about a potential low-risk trade in Natural Gas, outlining
the reasoning for it, Natural Gas – A Low-Risk Short-Term Trade. The trade
recommendation did not work out. Sometimes, little areas on the intra day
chart can lead to change on the higher time frames. This one did not.
Below is the chart presented as the basis for making the trade. There were
two reasons why. The 50% retracement area was being respected, or holding,
and on increased volume, and price did not decline to the support trendline
drawn off the bottom, a minor sign of strength. Price also closed above
the previous bar, and above mid-range, although not by a lot.
Stops were used, as always, and the next chart shows today’s activity and
results.
The smaller, intra day time frame gave way to the trend of the larger, daily
time frame. We should add that the weekly time frame was holding above a
recent sideways pattern, another show of some strength, but there was not
enough activity on the weekly to say that trend was beginning to turn.
Results of the higher time frame down trend prevailed. The risk/reward
potential for the intra day chart consideration was favorable, but the trend was
not finished asserting itself, as it turned out. One cannot know that in advance,
otherwise no purchase would have been made, but keeping a short risk made
it a reasonable attempt.
The point is to demonstrate that knowledge of the trend is so important. The
recommendation was made from an intra day time frame, knowing that the
next higher time frame was in the other direction. What that implies is to not
attempt to overstay the smaller time frame position. This is used as a lesson
that so many traders ignore…using one time frame and not knowing the higher
time frames, or expecting the smaller time frame to be equal in consideration
to the higher time frame. Not true.
We would like to be using this as an example of how to recognize potential
turnarounds, but it did not happen that way. Instead, it is used to illustrate
proper knowledge and use of trend information.
Learn by example. It is from where improvement comes.
