The trend is your friend

If you have been trading in the market for a period of time, most likely you have heard of the axiom above.

If the trend is up, buy on pullbacks, or short-sell on bounce up if the trend is down. Generally, this is a very effective and sound plan for trading trends.

However, extremely strong price moves (especially parabolic move) can be an indication of a climax. Most of the time, this will end the current trend and lead to a trend reversal. Thus, it is important that you are aware of this price pattern, so that you are not caught on the wrong side of the market.

The chart below shows a classic example of a selling climax that ended the downtrend (at least for the short-term) on Gold.

Price fell heavily on 20th and 26th June, on a two-legged downside move which had ...