Timing the inception of a trend early in the cycle is on the wish list of every trader. Good trade location not only increases profit potential, it also reduces risk. The first step is to recognize when trend potential is high. Violent moves higher or lower frequently occur after long periods of price contraction. During such periods price action is erratic with small up and down moves that last two to three days before reversing. Trend traders get frustrated and lose money during these phases, while counter traders cash in. I try to view markets as simply as possible. Thus, I categorize markets using just two labels: trend and non-trend. My goal is to catch trends quickly and survive non-trend stages.

There are two very popular patterns that precede breakouts. Simply, they take the shape of flags or pennants. When these structures are taking shape, volume levels typically taper off near the end of the non-trend phase. Daily ranges tend to dip below average for three to five sessions just before a trend commences. Another common clue that a trend is about to begin is when there are three to five consecutive sessions with extreme overlapping prices and where the opens and closes are similar. This is illustrated as small bodied candlesticks.

If the factors above take hold, odds increase for an acute vertical move or trend phase. There are a few frequent signs that a trend higher has begun. One, the low for the day is often made in the first 30 minutes of the session. Two, a new high is made after the first 60 minutes of the day. And the third sign that a trend higher has started is when the market never dips below the first-hour high. Of course, the opposite is true when a bear market begins. In this case, the high is made early, there is an extension lower after 60 minutes, and the market stays below the first-hour low. When these instances occur, chances are the market will continue to move in that direction for days to come.

The ratio of profit potential versus risk improves by early detection. And early detection comes from identifying patterns where probabilities are high for sharp vertical breakouts.

John Seguin, Market Taker Mentoring