How to Get on Board with the First Thrust Pattern
In the previous articles, we discussed that only short-term market forecasts are viable. However, through proper money and position management positions can be held for weeks, months, and even years should the trend continue. This proper money management involved the use of stops, taking partial profits, and the slowly widening of trailing stops as the positions became more and more profitable. In the last two articles we looked at how to get onboard established trends with Trend Knockouts and Persistent Pullbacks. In this article we will look at how to get onboard emerging trends with the First Thrust Pattern.
When the Trend Ends a New One Often Begins
Trends do not last forever. Eventually they exhaust themselves and quite often, a new trend in the opposite direction emerges. However, established trends can often last much longer and go much further than most anticipate. Trying to buy a stock because it is low or sell short a stock because it is high is a loser’s game. The good news is that the stock will leave clues that a trend is turning and will usually have a minor correction before resuming its new trend. Looking to enter after that minor correction and only if the new trend shows signs of resuming is the goal of the author’s transitional patterns. This is illustrated in Figure 1.
Sometimes the New Trend Begins with a Bang-An Event, Not a Process
Markets in major trend transitions often begin with a sharp thrust in the new direction. This tends to catch participants off guard. Trapped on the wrong side of the market, they find themselves waiting for the market to reverse so they can get off the hook. Bottom pickers and top pickers who missed the top or bottom and do not want to pay up are also waiting for some sort of meaningful correction.
Unfortunately for these traders, the meaningful correction may never come. Often, markets making a sharp thrust in a new direction only pull back very briefly before resuming their new trend. The old market participants will soon be forced out at adverse prices and the bottom/top pickers must pay up or risk being left behind. By waiting for the market to have a sharp thrust in the new direction, you avoid the pitfalls associated with picking tops/bottoms. By looking to enter at the first signs of a correction rather than waiting for something more substantial, there is the potential for your position to be helped along by the predicament of the aforementioned traders.
The goal of the First Thrust is to get on a new trend early. You wait for the market to make a strong thrust opposite the direction of its longer-term trend and then enter on the slightest correction. Entering new trends is risky, but the payoff can be tremendous when you catch a new trend early.
The Trading Rules
1. The stock (or other market) must make a major new low. The more significant the low the better. Multi-year lows or ideally all-time lows (or highs for shorts) are the best. This helps to ensure the maximum numbers of traders are on the wrong side of the market when the trend begins to change (rule 2).
2. The stock must then rally sharply (or sell off sharply for shorts).
3. The stock needs to make a lower high and a lower low. In other words, it must make at least a one-bar pullback – the first signs of a correction. If wide range bars higher dominated the first thrust it may only make a lower high. This can make for riskier trades since the stock has had very little correction. However, in trading, risk often comes with reward. These brief corrections give players very little time to get in. Most are waiting for a more meaningful pullback. Should the thrust resume after this brief pause, these traders must either jump in or risk being left behind. For shorts, the stock should make a higher high and a higher low (i.e. also at least a 1-bar pullback).
4. Go long above the high of (3) or below the low of (3) for shorts.
Example
GameStop (NYSE:GME) makes an all-time high (1). Everyone who owns the stock is at a profit. The momentum has slowed as evidenced by the fact that the stock hasn’t made much forward progress on a “net net” basis in months. Nevertheless, those who are long are likely feeling some comfort since their profits are at their highest levels since their purchase. The stock then sells off hard (2). The profits of previous buyers are quickly eroding. The stock makes a higher low and then a higher low and a higher high (3) – in other words, a two bar pullback. The stock triggers an entry (4) when the low of (3) is taken out decisively. After one last retrace, the stock then implodes.
Gold or Arrows?
Keep in mind when trading emerging trends that there is a chance that what appears to be an emerging new trend might just be a correction in the longer-term trend. You’re a bit of a “pioneer.” And, like the American Pioneers, you’re either going to get the gold or arrows in your back. The good news is that all major tops or major bottoms will have a First Thrust or other emerging trend patterns. Therefore, the chance of the gold makes it all worthwhile.
Closing Thoughts: Is Everyone Spoiled Again?
The bull markets of the late 80s and 90s had tremendous trends. Trends that had those believing that it would last forever. Who has to wonder if we could be entering into one of those phases yet again. Since 2009, the US stock market hasn’t had any major selloffs. True, there have been a few corrections which were signalled by First Thrusts (and other transition patterns) but have not materialised greatly.
Markets are markets and human nature never changes. As soon as most begin to become comfortable with longer-term trends, assuming that “It’s different this time” the trend will end. Therefore, it’s vitally important to learn emerging trend patterns that help to identify when the old trend may be coming to an end and a new one beginning.
Looking ahead
Sometimes a new trend begins as a process and not an event. Therefore, in the next article we’ll continue the discussion on getting on board emerging trends by using the Bowtie pattern – a pattern that using multiple moving averages combined with price action. After that, we’ll look at how to get on accelerated trends. Then, we will then discuss how to pick the best stocks and other markets to trade. Without a plan and money management the best setups in the world are useless. Therefore, we will discuss money and position management in more detail. Without the discipline to follow a plan, your trading results will be random at best. So last, but certainly not least, we will discuss trading psychology.