Change Of Direction And Exhaustion Spikes

We constantly face the question, what ingredients make up a good trade? Entry; the closer that we buy off the bottoms, and sell off the tops, the greater amount of profit we can enjoy, while taking on a smaller amount of risk. Assuming the market establishes a 100-pip trading range between 1.2100 and 1.2200, it clearly makes sense that buying at 1.2110 is a better trade than buying at 1.2150, or 1.2170. However the dilemma we face is as follows: If we continue to buy market bottoms, we run the risk of buying a seemingly never ending downtrend, a practice also known as 'catching a falling knife'. So the $10,000 (demo dollar) question remains how can we buy the bottoms and sell the tops, only when the trend is in the midst of a change in direction? The following chart may help add some light to this predicament.

The following (1-hour) chart shows the GBPUSD breakdown, below it's established up trending channel. We may interpret this as a sign of a change in trend, as the market now shows a greater likelihood to now reverse back to the downside. With this in mind, it clearly makes sense that as we should only look to sell-short as a broken up-trending channel tells us we have a better chance to see lower prices in our near future.

As a general rule of thumb, while buyers try to go long at the lowest possible price, those who wish to sell-short should look to do so at the highest possible level. We can see that after the up-trending trading channel failed to contain the market's price action, a long-candlestick wick popped up above the upper Bollinger Band. In this application, I prefer to set the Bollinger Bands to a 3rd standard deviation as this will help isolate only the extreme market spikes.

To summarize, our goal is to enter the market as it takes its last exhausted attempt at a failing trend. Putting this together, this trade set-up allows us to identify short-term changes in trend, and then enter the market at its relatively extreme price levels. Although this scenario may not 'play-out' as cleanly every single time, it provides us with the criteria to wait for the right trade, and wait for the right price. Best of luck in trading!!!