Anticipating a reversal in price and entering on the resumption of an existing trend is a great way to capture large swings in the market or add to current positions, anticipating these moves and actually capturing them are two completely different things. The count back entry method will allow you to get in near the start of these moves when other signals may not be present.
There are many ways that you can get into the market when it is having a correction or pulling back from the main move. Some of these are to look for candlestick reversal patterns or the cross of an indicator or 2 moving averages or the break of a minor trend line. There are unlimited ways you could enter this type of situation but these signals are not always there and thus you can miss a large part of the move before you realize that you need to get aboard now.
I want you to think about when you are already in a move and you are looking to protect profits, how do you manage this situation. One way is to utilize a trailing stop and all this does is trail price at a specific distance of your choice and if price reverses by whatever amount you have chosen the order is automatically filled and you are out of the market. This entry technique is quite similar in function to a trailing stop but works the opposite in that it is a trailing entry instead. It trails price buy a number of price bars, this can be any number of your choice but i prefer a three count.
Now this is where it is a little bit different than a trailing stop as the count only counts a bar that has made a new high or low depending on the direction of price, if a price bar is inside the high/low of the last candle then it does not count. Here is a series of charts to demonstrate the count back in action, for this example we are assuming that an uptrend is already in play and we are looking to buy.
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By using the three bar count the entry also allows for price volatility where as if you used a fixed amount to trail price you could be exposed to much more whipsaw. What I like the most about this method though is its absolute simplicity and ease of implementation, for these are the foundation of robust trading methods.
As with all things trading the simpler it is the easier it is to replicate and ultimately much less chance of things going wrong, the more complex a method is just means a lot more variables to allow for and thus more risk.
Perry
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February 27th, 2012 at 1:47 PM
First-class Forex write-up. I remember we’ve read a similar post to this on the FX Fatcat Forex trading forum.