I have a friend who’s consistently profitable critique some of my trades. He said that I have a tendency to enter into trades when the trend is overextended.
Depends if you mean over-extended short-term, medium term or permanently.
I look at on-going trends in terms of HL bars only. To me, in an uptrend, any bar that has a higher high and higher low than the prior bar is short-term over-extended. I look to enter at the breach of the high of the next bar which is lower than the prior bar’s high. Short-term over-extended is just a signal an entry opportunity is approaching.
Medium-term and permanent over-extended I am unable to distinguish until after they have happened. I avoid taking buy opportunities immediately after price acceleration. I do not take into account the steepness of the trend-line or channel unless it is increasing dramatically, nor how many bars the trend has continued.
After looking at the charts and zoomed out more for context, I do agree with the friend’s comments if you’re looking to stay in as long as your targets are projecting.
Brent Crude for example:
It just ended a -24% run from January 7th and hit a double bottom on your chart and the %R was showing divergence on that “W” bottom.
Most trends are going to move in 3 or 5 swings. That’s why people talk about tracking higher-highs and higher-lows for an up trend, and the opposite for a down trend. Ideally you want to check the daily chart 1st and look at the overall trend from the past month or so. Look to see if the major swings are in the HH & HL or LL & LH pattern. That will determine your setup on the 1hr. If you see price putting in a double bottom or laying flat in a small zone, that means it’s most likely to reverse for a while or permanently.
Back to the 3 or 5 swings… you want in when the 3rd swing is set or breaks the end of the 1st swing. If the 3rd swing is longer than the 1st swing, move on and put the chart on your watch list. Hope this image helps explain the price action I’m talking about. Divergence or a 50-cross is the only valuable information the RSI offers crypto & forex.
