Whenever a pair collapses - as so many of the dollar crosses did last week and some of the Yen crosses this week - any trade idea that involves taking a position in the opposite direction should be treated with a principled skepticism. Even when moves aren’t as spectacular, this is just as important: Any breakout or momentum trade (trend followers take notice!) will experience hesitations, intermediary congestion zones, pullbacks and, at some point, a genuine reversal.
Play a simple game of devil’s advocate with your idea for a preliminary test of its feasibility.
Why shouldn’t the market continue in the direction it is moving? Can you give empirical detail, avoiding verbs that are tentative and intangible like “think” and “feel”? The market is no respecter of persons and completely dispassionate.
Can you enumerate concrete, objectively verifiable reasons the market should reverse? There’s no room for vague generalizations or presumptuous statements here.
Where will the market go if it does reverse? More specifically, what level will it at least attain? Is your money management strategy aligned with your entry and your targets?
What is the source of your directional bias? Is your pending trade decision influenced by some external source (e.g. individual, website, etc.)? What is the basis for their credibility?
When you consider this trade, do any other trades come to mind? If it was a winning trade, check your pride. If it was a losing trade, check your pride. Winning engenders a lax attitude, while losing incites vengefulness or a need to find immediate reassurance.
Those questions and others like them not only litmus test your psychological state, but answered completely can provide a pretty good indication of the validity of the rationale underlying your prospective trade. If you do pass through them (cut corners and it’s to your detriment and yours alone), you probably also have a serviceable map for your trade.
The most important immediate “proof” we derive from the market is with this question:
“Can you enumerate concrete, objectively verifiable reasons the market should reverse?”
In my own case as a discretionary trader, price itself presages when it will turn: candlestick patterns, chart patterns, line studies, S/R, etc. Whatever your method, “Proof” is always situational and never really [I]proof[/I] except in hindsight - we simply speculate in the present about whether the probability of the setup we are trading off of will become genuine “proof”, i.e. a probability of 1. Recognizing it when the market tells you a trend is over or merely consolidating - i.e. getting “proof” or a reversal, or a window for entry into a continuation - is the real knack of a good technician and a consistently successful trader.