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The Traders Wheel
  by Alan Farley


First Rise/First Failure

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First Rise – Retracement zones can be successfully traded through all time frames. Just last week, WinStar Communications announced a major deal with Lucent and broke through 62% of its last low thrust, ending a long bear cycle. First Failure – A sharp break at the 62% retracement signaled the end of Applied Materials 1997 rally. Note how this key point became major resistance on subsequent tests. Traders capitalized on this hidden support/resistance through predictable swing moves in excess of 30%.

 

What hidden patterns can you use to identify and trade reversals before your competition sees them? Successful short-term traders get in the reversal door early and allow the herd to trigger sharp price movement. Familiar trend-change formations, such as the Head and Shoulders and Double Bottoms, take so long to develop that many profitable entries pass before they finally signal an impending break to the waiting crowd.

First Rise/First Failure provides traders with an early method to identify reversals following new highs or lows in any time frame. FR/FF is the first 100% retracement of a dynamic trend move within your time frame of interest. In order for any trend to continue, price movement must hold (at least) a 62% retracement, measured from the starting point of the last thrust that pushed price to the new high or low. From this pullback, trend must base and test its extension (high or low extreme) before it can break out to further continuation highs or lows.

100% retracement violates the major price direction and terminates the trend it corrects. Its completion also provides significant bounce reversal support/resistance, where swing trades can be initiated with low risk. >From this point, the continuation trend may reestablish itself in the next larger time frame by a new break through the 38% (prior 62%) support/resistance and continued push past the (now) 62% retracement, toward a test at the high/low extension.

FR/FF bounce reversals represent superb entry points when the 100% violation coincides with a 38% or 62% retracement of the next higher dynamic time frame. However, risk:reward requires careful measurement here, as the trade may develop more slowly than expected. In other words, a successful position must be held through expected congestion at the 38%-62% zone before it can access a profitable retest at the double top/double bottom extreme.

Allow minor testing violations for all major Fibonacci retracement points before taking positions. Specialists and Market Makers are well aware of these hidden turning points and conduct stop-gunning exercises to take out volume just beyond the breaks. And watch out for trend relativity errors. Bull and bear markets exist simultaneously through different time frames, from 1-min to monthly price charts. First Rise/First Failure can only be traded in the time frame in which the retracement occurs unless cross-verification supports positions through other trends.

_____________________________

 

Article contributed by The HARD Right Edge, which presents highly original tutorials, strategies and resources on multi-trend technical analysis and and short term trading. Article reprinted here with permission, which presents highly original tutorials, strategies and resources on multi-trend technical analysis and and short term trading. Article reprinted here with permission.
 
 

 

 
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Last modified: April 02, 2001

Published By Tulips and Bears LLC