Trend-following is the bread and butter of CMTs worldwide. Identifying primary trends during the nascent stage of said trend can be difficult but the real p/l is generally made during the meaty part of the move, for what is known by Ellioticians as the 3rd Wave.
One way in which technicians can identify throwbacks/pullbacks in a primary trend for re-entry is by using moving averages of different time frames. For example, it is a bear primary trend for EURUSD this year (and bull trend for DXY), so if one is looking for re-entry into short EURUSD, they could wait for price to trade back to the area of the 14-week exponential moving average and use the 30-week exponential moving average as a S/L. Why? 14 weeks is a decent sample set of data, but 30 weeks of price data, encompasses even more data. If all moving averages are sloping lower, which indicates at least a short-term trend, then re-entering the short EURUSD trade or adding to pre-existing risk at the 14 EMA provides a solid risk/reward setup. One could add an additional layer of confirmation by waiting for daily RSI to correct back to 50/60 (hat tip Connie Brown) to increase position.
All in all, we are trying to play the trend as trend-followers and not top tick or bottom pick the security, so this strategy enables one to stay in the risk and add to it within the trend.
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