Trend rotations

There are many ways to anticipate trend rotations using different tools and methods, such as highs and lows, indicators, market phases, and more. The problem with each of those methods is, on average, the accuracy of each method is not very high, and finding or developing an accurate method might be a lot more challenging than it seems on surface.

In hindsight, often trader will find where the trend rotated and extrapolate or over-fit the reason that triggered the trend rotation. For example, traders that use indicators will point out that indicator showed reversal trend signal, and price action traders might point to certain high or low that signaled the rotation, and so on. In hindsight, those are easy to define because often traders will find any reason to justify rotation, even if that reason over repetition of 100 samples does not show consistent performance. That is why if a trader wants to develop some decent trend following skills, the methods of reasoning have to be tested and practiced in the live market before the rotation happens, and then tracking/noting the actual results in how many cases a trader was on right or wrong side (however backtesting and hindsight analysis is as well important, as that is where ideas are formed). The only way to develop objective trend rotation reading skills is to include both failing and successful rotations as determined by trader, before the market shows the result. Even with a lot of work placed into it, it is still likely that the trader will be only performing with 60% of rotation recognition at best. But with decent macro and trade management skills, that might be enough to extract edge. In either case, traders should not be falling to anyone's magic indicators that can predict a 90% success rate of trend rotations, as there is no such thing.

No matter which method trader decides to use for determining the trend rotations, it is of the highest importance that trader includes in his calibration both successful and failing indications/examples as only this way one can build realistic expectation on how good the traders method actually is to spot the rotations in the making.

It is not about identifying in hindsight or looking good in public, pointing to a single example where the trader was successful, for traders performance what actually matters is his/her ability and success rate over 100 samples, which has to include both successful and failing rotation indications. It is very common within the industry that traders only point to their magic tools or hindsight analysis where the asset successfully performed rotation. But that is only for show. For the actual performance, what matters is how accurate traders' skills or method, in reality, is over large sample base, so that one knows exactly how close or how to lose one should follow it with a specific trading approach adjusted to it.

To summarize:

-make sure to use backtesting and research historical charts, as this is where ideas for your potential trend rotation tools or methods might form, idea formation should be done on historical and not live markets

-make sure that you forward test your method in a live environment (not hindsight), and do not only look at successful attempts, but also collect both failed and successful samples to build realistic statistical performance

Regardless of the method, you choose to use for trend rotation definitions, the above two steps are critical to take. Failing to implement either one will result in the skewed non-realistic perception of your method and trading performance will suffer as result. Traders want a 90% reliable trend rotation method, but that is not a reality as no method will come close to this most likely, if your perception is anywhere close to that you have failed on implementation of either of the two steps above.

The symmetry of behavior and consistent behavior

Being selective to which trends to focus on and which not to is the key

The key to focus on is to be selective and disregard opinions on trends that are very asymmetric and unclear to traders. Being selective is an essential component in trading in any aspect of this industry. The mistake that traders often make is finding meaningful rotations of price on every asset they trade under every condition. That is just not a good way to go. In trading, it is OKAY to say I DO NOT KNOW. Having no opinion on the current asset trend, and move on to the next opportunity where the trader reads the trend better.

In some cases the trend will be very clean on the asset, whether you use indicators such as moving averages and the asset will follow the line very cleanly. Or perhaps you use highs and lows as defining of trend progression and certain trends just flow very evenly with consistent step-downs or step-ups. But there are those trends that are a lot noisier, a lot more chaotic with constant whipsaws. Finding a good balance on being selective and only forming opinions on clean trends is a first major step to avoid being opinionated in situations where the trader is just more likely than not to be stepping into a noisy situation.

The trends that are best to focus on for spotting potential rotational changes are the ones that behave very symmetrically with consistent behavior in the initial trend. At those, the rotations will be clearer and more visible to more other trading participants.

Below are examples of consistent symmetrical trend (on the left) and non-consistent asymmetric trend (right), judging from the same charting Time frame (1 minute, for example):

Variables that define consistent and symmetrical trend behavior:

-how many candles were in each bull and bear leg (how quickly price dropped from each high, and how quickly it rallied from a new low). Ideally for symmetrical progression the number of candles in each leg should be as close to even as possible, or at least bull legs should have similar counts to their nearby bull legs and vice versa for bear legs.

-were highs and lows in clean HH / HL progression (uptrend) and LL / LH progression (downtrend), or were there clearly disconnects of HHs / LHs in between? The cleaner that lows and highs are following specific trend without interruption the better it is.

-how many highs/lows has the current trend established since its clean symmetry of progression (the more highs/lows, the better, the stronger the consistency). Often traders make mistake of observing too "young" trends with just 2 highs or lows inside their formation, avoid such observations. Let the trend mature as much as possible and only follow rotations on such trends (for example 10 consecutive lower highs in bear trend).

Below is an example that would fit an immaculate symmetry of behavior, a very clean downtrend, textbook sample using the variables above as a guide. Obviously, most trends won't fit this, but the point is the closer trend is to this example, the better trend it might be for the trader to focus on for spotting the rotation (or just to read further trends progression):

It is not enough to define a "clean" trend just by looking at highs and lows or indicators. Other variables also matter, such as volatility progression through the trend, the distances between highs and lows over the whole trend, the volume in a bull vs. bare legs...At the end it is all about behavior, and there are many micro rules on what defines specific behavior.

Dow Jones theory

Dow theory in markets is a great starting point to learn about trend rotations using just naked price action, however, it generally does not perform well, mostly because observing or spotting trend changes by the rules of Dow Jones is not defined well enough (too simplistic).

Highs and lows are only a starting point to define trends (a rough outline), but not the whole picture. Expecting a downtrend to rotate into the bull trend if the price randomly establishes new HH (higher high), is simply not performing well (if backtested) as in too many cases this method will yield fakeouts.

The key to actually be more accurate on potential trend shifts is to use two variables which Dow Jones did not include, the first one being symmetrical consistent volatility (clean expressed trend where lows and highs have similar depths and behavior) and when the symmetry is ruined/shifted it has to be done on momentum move (strong leg), where the targeted attempt of a trend change is revealed and is very clean in standing out.

Two variables:

-momentum shift at which trend rotates (strong bottom bounce in a downtrend, for example)

- consistency of behavior in current trend (highs/lows, the strength of drops/rallies, etc...)

Adding those two improves the reading of trend rotations quite a bit. A realistic expectation is that about 70% of trends will not featureit because 70% of trends are very asymmetric without clean consistency. It is really beneficial for traders to focus on the rest 30% or fewer cases, where symmetry consistency is expressed well in trend. This statistical data should not be under-estimated. If typical trader is trying to pick trend rotation from every single chart (very common practice) but reality is that many trends are very asymmetric and just not suitable to do that (as one is likely to get faked out), then that should be pointing clearly that many traders are not selective enough.

The example below with the relatively consistent uptrend and then strong momentum shift (variable 1), after which consistency of behavior gets ruined, with first established lower low and no further bounce (variable 2).

The key to higher accuracy of anticipating trend rotations is the consistency of the previous trend in behavior. It is a self-fulfilling prophecy, the cleaner the previous trend, the more likely many traders will notice the shift when it comes, the more asymmetric the trend the fewer traders will notice a shift. And if the trader is trading on trend rotation as entry or exit trigger, then it should be a positive variable that many traders are seeing what you are seeing, rather than opposite, since as reversal trader one is looking for cascade effect to fuel the fire.

Use of indicators

This method works well even if a trader uses an indicator to help define the main trend direction. Combining indicators with this more detailed approach will yield better results of not getting faked out on where rotation is less likely to happen if the indicator signals it. My personal preference is to only use price itself since the price will always provide all the information you need, however for beginner traders it is often a better idea to start with indicators and slowly deconstruct the reasoning and shift towards naked price trading over time.

Symmetric / asymmetric trend

Example of symmetrical consistent trend and asymmetric trend:

-symmetric trend is where highs and lows within the trend have similar sizes in terms of pips or $ or cents, basically similar volatility size in X units, and it took a similar amount of candles for each leg from high to low in developing.

-asymmetric trend is where highs and lows are very different in size across the whole trend, some highs are huge, some are very small, the volatility at the start of the trend might be very tiny, and towards the end of the trend, all of a sudden very strong. Basically, it is very chaotic as opposed to asymmetrical trend example.

Left symmetric trend, right asymmetric trend:

Subjective bias factor

Let's just put it straightforwardly that even with following the rules and variables explained above, how the trader identifies the trend will be very subjective. Two traders could be looking at slightly different variables and highs/lows, even if they agree on the overall macro concept. How much do you zoom out at what you are looking at, how much do you zoom it in, which low is really the lower low and which is just a micro low?

Things like that will make the trend reading of many traders very different. That is why each trader needs to develop his / her own method and not listen to opinions of others on-trend definitions unless the variables align with both of the traders. Defining good trend rotation methods for naked price traders might just be one of the most difficult subjects, especially if one is looking for high-performance method.

Patience and selectivity

The key is to be patient and wait for such a trend because the fact is that majority of trends will not be symmetric in behavior, that is a fact. To have this additional edge, traders should be patient to wait for such trends to develop.

Example of the progressive symmetrical downtrend on ticker ZION, followed by soft tightening into supply at around 12:15 time and a bullish rotation followed soon after it. The trend is progressing with even lower highs and has at least 10 consecutive lower highs within the structure.

Example of the progressive symmetrical downtrend on very thin volatility and small range on ticker SNAP below. Tickers with a very small range will usually have more "robotic" price action and will be harder to read on-trend rotations because there will not be enough range to build and smoothen out the moves.

The example on ticker WFC below shows that focusing on how bear legs vs. bull legs in trend are progressing is also a good potential hint towards the rotation of trend. If bear legs are kicking with powerful washes on every leg and bulls require 10 or 20 candles to push price back up slowly to the same price level, it clearly shows supply in control, and this trend is less likely to rotate to the bullish side unless some major the clues within trend behavior are printed. Counting the number of candles is always a good idea to see how much time bulls need to retest the same levels that bears washed the price down from, to indicate how strong they are relative to bears. One doesn't have to go in-depth math on it, just a rough count and comparison will do the trick.

High volume climax candles / legs

Another good variable to follow is climax volume after the deep extension of the trend. Often in such cases, the rotation might establish, especially after consistent/parabolic trends. The climax low/high should be extended and trade on the highest volume across the whole trend. In ideal world, every major trend should bottom or top out with heavy climax absorption, but obviously this goes back to selectivity, it will only happen in certain cases, it is traders task to be selective and patiently wait for such opportunity.

Or the example below of EURCAD where the trend shift starts to show itself within few variables. First, the price makes deep lower low in the middle but no longer makes lower low in next 3 attempts (flat blue line), at the same time price keeps re-testing previous highs. Both of those initiations show change and shift from the previous consistency of lower highs into more upwards pressure on ticker (demand trying to establish control).

It is not a very clean example, but I chose this one because the major deep lower low in the middle, often after those climactic deep lows, downtrends will rotate if highs are retested just in a short time afterward. To learn more about this concept also check the article "deep lower low - higher high reclaim".

Compare the legs to each other in trend, fit the current price into the context of previous behavior. Always fit what you are looking at currently into some historical context, never read price action in a vacuum. Efficient price action analysis always requires context, fitting current behavior and comparing it to previous behavior on left, or behavior that happened within similar situation in some past a while ago over many samples.

For FX traders using futures volume data is an often huge plus since by default Forex brokers do not report accurate volume data, as there is no centralized exchange. Climaxes and soaking on FX are often not visible on ticking volume of MT4 or similar platforms, one can only spot them on real volume data from futures.

Below is a conceptual example of the above EURCAD example, and the point of that deep lower low exhaustion/climax candle:

Selective samples from successful trend rotations

The samples shown in this post are focused on successful rotations from A grade samples, by no means is that what trader should expect to happen on a frequent basis. A lot of practice is needed, and even with that, there will still be many un-sure moments or wrong opinions being formed. That is normal since there is no high accuracy trend rotation method, but it is as well important to keep in mind that the article has a certain rate of the cherry-picking present, due to the learning aspect (as the article would be too extended providing the failed examples as well).

Examples of trend rotations:

Below is example of where the uptrend was rotated on strong momentum shift, where first lower high was based on the rapid and strong drop. Once the price retraced back and retested underwater demand, it got rejected every time, late buyers getting out of positions, and the trend eventually shifted.

What establishes the word symmetry in the case of a trend? Basically, the number of lows and highs in structure and how consistently they are distributed within each other at a similar distance. The more highs/lows in a trend distributed at similar distances, the similar progression rate of rising (upper example) establish the strength of symmetry on-trend. The stronger it is, the more noticeable to most traders, the more likely it is once the shift is baked, it could deliver a stronger cascade move. The longer the trend followed this consistency of behavior, the better (from its initial starting phase).

Example of bullish trend rotation with a strong lower low at the red circle, however, the price quickly reclaims last low, and the whole trend rotation is invalidated. It is important to listen to quick reclaims of rotations as usually those are invalidated if done quickly, such as the example on AUDCAD below.

Example of bearish trend change on the first major lower low where the red line is breached and demand fails to hold/bounce the price for the first time.

Example of trend rotation on ticker SAEX below. The ticker was very low liquid, which is not ideal for spotting trend rotations, notice the micro gaps between the candles from 12:15 to 1:00 PM time. Those low liquid conditions are not ideal as they make rotations less reliable. However, with that said, the behavior on the ticker was still very symmetric and is good enough to point to the example.

Conclusion: Practice on historical charts

Developing decent price action reading skills cannot be done with just reading a book or asking fellow traders for opinions on the subject. A trader needs to research historical charts, finding those trends that fit the required conditions and place the required hours into studying such charts, since a lot can be learned from observations in trading industry. And it should be pointed out to develop good price reading skills, or trend rotation skills one should focus on historical and not live charts. Why? Because traders judgment is always colored with emotions when reading live charts and subjective reasoning, while historical charts leave a much calmer footprint and let traders to collect thoughts more rotationally.

But that is not the main reason why historical charts should be where the trader should practice. The main reason is that with historical charts, a trader can practice on 100s or 1000s of chart examples within the span of few days, while to get that much practice and experience on a live chat, the trader would need to let several months pass by before he/she would gather the same amount of research and data gathering from live setups. This is the core reason why in trading, anything should always be prioritized on practice with historical data in mind, not the live samples. Often, traders that are already capitalized with trading account ready to go are too trigger happy and want to "learn on the fly while they make money". It is certainly required to do, but historical training should be a much higher priority. The frequency of practice and examples is what develops traders the quickest.