"Follow-Through" -- It's Significance for Your Market Position
Patience is a virtue in most endeavors in life, and it's certainly a
valuable asset in futures and stock trading. You will many times hear
me use the important term, "follow-through," when I discuss 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. What many times does occur is the market retraces much of the
previous trading session's bigger gains or losses, and when all is said
and done 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 opened up on
Thursday morning and 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 particular trade
reconfirmed 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's the very next trading session after
the bigger move.