Weekly Insights: The Significance of Follow-Through in Market Position
The Significance of Follow-Through in Market Position
Patience is a virtue in most endeavors in life, and It is certainly an asset in futures and stock trading. I often use the important term, “follow-through,” when discussing significant market moves such as price breakouts or trend changes.
Follow-through trading activity is really just a confirmation of the previous trading session’s bigger price move. If one day’s (or one price bar’s) move is really that technically significant, then prices should be able to show some follow-through in the same direction the next trading session (or next trading bar on the chart).
Many times, that all-important follow-through price action does not occur. But what does occur is the market retracing much of the previous trading session’s bigger gains or losses, and at the end of the day, prices are not that far from where they were two sessions (or two price bars) ago.
I am not a perfect trader and I, too, am continually learning (or trying to learn!) from past trading missteps. I want to provide you with a specific example of when I did not wait for a market to show me that important follow-through strength on what I thought to be an upside breakout–but instead was a false breakout.
I had the corn market on my radar screen for several weeks a while back. I was waiting for the market to break above and negate a longer-term downtrend line. On a Wednesday, corn did show a strong up-move and prices pushed just slightly above a longer-term downtrend line — but did not come close to negating it. Well, I had to be out of the office for the next two days (Thursday and Friday), and would not have any access to my broker or price data. So, I called my broker that Wednesday afternoon and put in a buy-stop order for corn at a price level far enough above the downtrend line so that if the buy stop was it, I thought it would be a strong enough price move to negate the downtrend line and signify an upside breakout on the daily bar chart.
So, I took off out of town that night, with a little gremlin in the back of my brain that was saying, “You are still not waiting for follow-through price strength the next trading day to confirm the upside breakout in corn!” Sure enough, corn futures moved high enough to touch my stop and get me into the market on the long side — only to have that price level be the high for the month. Prices then reversed lower and I was stopped out of the corn market about a week later.
Of course, hindsight is always 20/20. However, this trade confirmed to me the importance of having the patience to wait for a market to show follow-through price action to confirm a potential trading set-up. In waiting for follow-through strength or weakness, a trader does run the risk of missing out on some of a price move. But more times than not, it is prudent to make a market confirm a bigger price move with follow-through activity the next session — or the next price bar for intra-day charts.
By the way, a market sometimes can exhibit a small-trading-range rest day after a bigger price move, and then confirm that bigger move the next trading session. But usually, if follow-through strength or weakness is going to occur, it is the very next trading session after the bigger move.
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