Every day during our Futures Group Coaching, class we search for patterns that put odds in our favor to make trades that have trend potential with risk levels that are far less than the profit potential. Good trade location and timing are a trader’s holy grail.

Markets move from balance to imbalance. A balance phase typically occurs after a trend, and an imbalance phase is the onset of one. The trick is to recognize which phase a market is in.

In our class we refer to a “toolbox.” It comprises many axioms that help us identify patterns that may give early clues as to the onset of a trend or the end of one. Such indicators are typically available with most charting services. I often introduce graphs that reveal my personal style, but in this article I want to focus on a few indicators that are available to you.

We need an indicator that tells us when a trend is nearing an end and when it is about to start. There is one that may help with both: MACD, or Moving Average Convergence Divergence. This technical signal helps time a breakout when the spread or difference of two moving averages (one short term and one longer term) converge or narrow for too long. Conversely, this same indicator may signal the end of a trend when the spread of the moving averages increases to historically wide levels.

ATR, or Average True Range, can be used in a similar way. A benchmark or historical true range is needed to compare with near-term (implied) movement. ATRs should be surveyed in a few time frames...day, week and month, for example. When the short-term average is well below the historical, odds for a breakout or trend increase. And when the near-term ranges surpass the longer-term ATR, probability shifts to favor a reversal or end of a trend.

RSI, or Relative Strength Index, and Stochastics are often used to time the end of a trend. A reading over 80 for either indicator is meant to signal the end of a rally, and a reading under 20 often indicates the end of a decline.

If you are new to trading, research the seemingly endless list of indicators, but focus on ones that are designed to enhance the timing of a breakout and those that reveal when a trend has run its course.

John Seguin
Market Taker Mentoring