Trading the Wiggle of the Trend
Market movement becomes less mysterious and more understandable when you realize one simple fact: People move the markets. Therefore, the nature of the markets is the nature of people, or human nature. The markets don’t move based on some magical, unknown principles, nor do they move randomly without any rhyme or reason.
The markets are an enormous auction place, and people’s actions — their buying and selling — moves the markets. These actions are based on research but also on their feelings, beliefs, fears, and greed.
Most people with even a small amount of trading experience can look at a chart and determine whether the market plotted on that chart is generally moving up or down. The problem is that stocks, futures, commodities, and currencies don’t move in a straight line up or down. They wiggle up or wiggle down.
Again, this reflects the nature of people who get excited then cautious, optimistic then fearful. It also mirrors the human experience of “three steps forward and two steps back.”
One of the problems with this wiggling is that it can create confusion as to the best time to enter the market. For example, if you buy a retrace in an uptrend and put your stop-loss order below that low of the retrace, you risk being stopped out as the market wiggles against you, making a temporary lower low before the market resumes its move in the direction of the uptrend.
Conversely, if you short a retrace in an uptrend and put your stop-loss order below the high of the retrace, you risk being stopped out if the market makes a higher high before continuing its downtrend.