Markets often provide valuable clues for traders wanting to anticipate the next move

Too many traders spend their time trying to perfect the art of trading or looking for the perfect indicator. On the other hand, Professional traders are waiting patiently for the right trading opportunity that offers low risk and higher reward trade setups. More importantly they are looking at how to manage risk and minimise risk once a trade has been initiated.

In a Bull Market, it is easy to get carried away trying to pick a top as markets often have extended rallies. As each leg or swing gets started, some traders will get into a mode that a market high is at hand only to find that after a pullback another move higher has proved them wrong.

Since the low of August 2011, the FTSE 100 index had rallied into March 2012 gaining +25% along the way before reversing to the downside. The index also posted similar gains from the July 2010 low to the February 2011 high for a gain of + 27.38%.

The question here is how would a trader know that a Market Top is at hand?

In one answer it is impossible to “know” that a market has made a High or a Low. However there are certain patterns and key techniques that traders can learn to utilise that offer low risk trade setups.

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Historically when markets have made Major Key Reversals, we have found that there are certain signals that have warned of a Potential Reversal.

1. Divergence between price and indicators
2. Reversal chart patterns
3. Trend continuation 

Quite often as a Market continues to move higher Technical Indicators such as the RSI, Momentum and Stochastics fail to make new highs suggesting that there is no strength in the move. This creates what is known as Divergence between Price and Technical Indicators.

The other tool a trader can utilise is to see if there is one of several Reversal Chart Patterns developing as the market is in a Reversal stage. There are several patterns which a trader can learn. Some popular ones are Double Top, Trip Top patterns along with Head and Shoulder reversals. A technique of using Candlestick Reversal Patterns can also be used to find out when a market is indicating a turn.

It’s important that a trader uses Multiple Time Frame Analysis to confirm that the market is providing clear warning signals. I will discuss this in a separate article but for now a trader should look at the longer term charts such as the Weekly and Monthly charts to see if there are certain Candlestick Patterns evident to provide low risk trade setups and use a lower timeframe such as the Daily Chart for Entry and Exits.

Once the market has confirmed that a reversal has started the next observation is to see if a Trend Continuation takes place. This is quite simply when a market starts its anticipated move, hesitates or pauses before continuing in its original direction.

If all three stages are present then this can provide a good trading opportunity for a potential market decline.

In the current situation we had seen the FTSE 100 provide clear signals on the weekly chart where it warned of a potential decline of which we have seen the index fall by -7% so far.

Traders who had attended our popular Upcoming Trading Opportunities programme at City Index witnessed firsthand how the market was providing signals warning of a key bearish reversal pattern. Here at City Index we provide exclusive training programs to help develop skills to assist traders in making both educated and calculated informed decisions. Have a safe trading day.