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How To Spot Fake U-Turn Points

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We’ll have to learn several terminologies if we want to thrive when trading stocks, and one of these terms is u-turn. The signal that reflects a 180-degree change in the sentiment of the market, signaling us to buy, is called a u-turn.

Now, remember we’re not experts, so we cannot tell when to enter the market; we can only make sound decisions based on probability. 

So the market entered into the buy zone, came to the backside of the old downtrend line, and now we’re kind of hesitating to trade. So the question is, “why is it not going up?” There’s a new up trend line here, and the question is — is this the u-turn or this is a false u-turn? Let’s talk about that.

Higher Highs & Lower Lows

One of the things that you’ve got to understand when it comes to trading is that the markets move away from what we traditionally think. So if the market is going up, the market normally will make higher highs and higher lows on the way up, and the market will traditionally use the same angle. If the market were to fall, it would usually break the trend line, come to the backside and then make lower lows and lower highs on the way down, and then we draw down the trend line.

That’s how the market moves in a nutshell. According to the research, the bear trend is a short-term trend, and we’re actually going to expect the market to u-turn a rally towards the north. What will end up happening is that the market ends up creating the bullish wave movement, making higher highs and higher lows.

Once the market breaks the downtrend line, we start making higher highs and higher lows, and therefore, the market creates a new uptrend angle across these lows. What that normally means is that the people who bought during this time and took the rally towards the north caused the market to create a wave down, similar to a false reversal.

We’re going to anticipate the market to fall down, and then it’s going to look like a bearish reversal. It’s going to look like structure breaks, but it’s going to rally back up, according to research.

Manage Risks

More than likely this market may fall and then rally towards the north. This means that in trading, our job is to manage risk. 

According to the research, in the longer time frame, we are anticipating the market to change long term. We will expect that the market continues to rally, especially with the stimulus being introduced in the marketplace. There is going to be a cash injection, wherein we expect the stimulus to do its job and cause some growth.

However, how often we enter into a trade and the trade goes against us first and then eventually goes our way is uncertain. We might think that we’ve invested too much money or that there is too much risk on the table.

So how do we know when a trade is against us? Well, at the end of the day, we don’t have crystal ball or the ability to predict the future. What we can do is we can lean on probability and formulas, which suggest if we buy in the buy zone, at an uptrend, by default, we should win more than half our trades.

Takeaway Points

If we buy now, we have to be aware that we’re above the uptrend line and the fact that it could come down before going up. If we decide to take this trade, we should decide for ourselves and determine if we can manage the risks involved in our decision.

At the end of the day, regardless of what our decision is, we should never be caught off guard by the movements in the market. When we risk too much, we’ll lose too much. This will prevent us from making the most out of our stocks.

Josh Martinez
About the author

Joshua Martinez is an elite Analyst who's been actively trading the financial markets since 2011. He’s known as one the leading innovative traders in this industry due to his his cutting-edge strategies. Josh first burst into the scene when he took an initial deposit investment of $500 and turned into over $39,000 in just under 2 years. Joshua’s trading articles have been featured in Your Trading Edge, The FX Street, Trader Planet, Forex Crunch, Trading Pub, and Equities.com. In addition to trading, Joshua has also trained thousands of traders worldwide. His strategies and systems have helped others find success in the market

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