Copyright 2006 Peter Woodhead
There are two questions that are continually asked:
1. What do I do when I see signs of weakness?
2. What do I do when I see signs of strength?
Before these two critical questions can be answered, ALWAYS remember that true weakness comes in on an UP bar and ….
True strength ALWAYS comes in on DOWN bars.
On true signs of weakness you should:
a) initiate new short position(s)
b) reverse old long positions to short
c) close out any long positions
On signs of strength you should:
a) initiate new long position(s)
b) reverse old short positions to long
c) close out any short positions
Why is your reaction to a strong sign of strength (or weakness) so important?
Because whenever a true sign of strength (or weakness) is seen the market makers and professionals will notice it straight away and act accordingly.
So what is meant by a “true” sign of strength (or weakness)?
You should observe a strong volume bar straight away to support your position.
If no such bar is present, that indicates that the professional money is not interested in the move because they know the market is still weak (or strong) and you can expect a move in the opposite direction to what you may have thought. Probably resulting in another period of accumulation or distribution before the next indicator.
The Golden Rule:
Understand where the professional money is and follow them. If they aren’t interested, neither should you be. If they are interested (shown by buying/selling), then back your judgement.
Most traders don’t have a clue as to what’s going on in the markets. But you will, if you take the time to understand how the professionals operate and what causes the moves in the market. You will get to time your entry and exit points to near perfection.
For example: After a sharp move up you should expect a down move. After a strong bar up, sellers are tempted by the new high prices. This can be seen by any lack of follow through and the appearance of a strong down bar. Those who matter (the professionals) would see this, enter their positions, and force the market down.
Conversely, after a sharp down move, you can expect weakness. Look for a classic “test” Look for the professionals entering the market and go with them.
It is essential that you really understand how the markets work before you start trading. So many people ignore this fact. That’s why they never really “get it.”
The master at how to trade like the professionals is a guy called Tom Williams. His “The Undeclared Secrets That Drive the Stock Market” is a classic. And is required reading.