It sounds like a kid’s joke doesn’t it? Yet recognizing which “Leg” of a move the market is on can be very helpful in gauging how much “life” is left in the move. We all want to maximize the profitability of our trades, and counting legs can be one way of doing this.
Legs are a trading term used to describe the progression the market makes from rally to rally. Some traders refer to them as “waves”, “swings” or “pushes”. The more Legs a market has made in one direction the more likely it is that the trend is running out of steam. Conversely when a market begins making new Legs it is likely that there is a lot of strength behind the market and price will likely continue in its new direction.
The Leg count begins when the market violates a previous support or resistance area. Identifying these support and resistance areas are easier if you use a range style bar such as the Mean Renko Bars which come standard with their Diversified Trading System. The beauty of the Mean Renko Bars is that they make it very easy to see where the market has formed support and resistance and when the area has been breached.
The breach of a prior support/resistance area is the first Leg of the move in the new direction. Finding the first leg is important because there is a very high probability that there will be at least two “pushes” in the direction of the breakout, with the first and second Leg being the strongest part of the move (most of the time).
Therefore once you have identified the first Leg of the new move you can be ready to take advantage of the powerful and profitable second Leg. And knowing that the second Leg is likely the largest part of the move enables you to plan for a trade that might yield a bigger move.
After the run of the second Leg is over, it is still possible to get a third, fourth or even fifth Leg in the direction of the trend; however each subsequent Leg is likely to be shorter, suggesting that the momentum behind the trend is waning and the trend getting weaker and closer to ending.
This allows you to be more conservative with your entries and perhaps more aggressive with your Profit and Stop Loss targets as it becomes less likely the market will make a substantial move at this point.
Of course once the current trend ends the whole process begins again in the opposite direction with the violation of a previous swing high/low. And even though the new move might not be as strong as the prior move higher/lower, you can still count on at least two Legs in the direction of the next breakout and plan your trades accordingly.
So while knowing how many “Legs” the market has might sound like a child’s riddle, it can be a useful tool to adding profit to your bottom line, and that’s no joke.
Join us in our Trade Room. Click HERE to Register.
TESTIMONIAL DISCLOSURE: Testimonials appearing on www.IndicatorWarehouse.com may not be representative of the experience of other clients or customers and is not a guarantee of future performance or success.
LIVE TRADE ROOM DISCLOSURE: All presentations, videos, and information are for educational purposes only and the opinions expressed are those of the presenter only. All trades presented should be considered hypothetical and should not be expected to be replicated in a live trading account.
Commodity Futures Trading Commission Futures and Options trading has substantial potential rewards, but also significant potential risk. You must be aware of the risks and be willing to accept them to invest in the futures and options markets. Don’t trade with money you can’t afford to lose. This website is neither a solicitation nor an offer to Buy/Sell futures or options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this website. The past performance of any trading system or methodology is not necessarily indicative of future results.
CFTC RULE 4.41 – HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS, IN GENERAL, ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.
Use of any of this information is entirely at your own risk, for which Indicator Warehouse will not be liable. Neither we nor any third parties provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or suitability of the information and content found or offered in the material for any particular purpose. You acknowledge that such information and materials may contain inaccuracies or errors and we expressly exclude liability for any such inaccuracies or errors to the fullest extent permitted by law. All information exists for nothing other than entertainment and general educational purposes. We are not registered trading advisors.