I enjoyed reading this blog post that talks about the four guiding principles of market behavior which have their roots in the early pioneers of technical analysis.
Principle 1 : A trend is more likely to continue its direction than reverse. Everyone by now has heard the phrase, "the trend is your friend." Fading a trend may also be a losing proposition.
Principle 2 : Trends end in climax. When they do end, the trend rarely changes overnight but consolidates instead.
Principle 3 : Momentum precedes price. Look for divergences in indicators. Expect a new price high following a new momentum high.
Principle 4 : Price alternates between range expansion and range contraction. Price consolidates or contracts much more than it expands.
The goal is to determine which principle your current trade is based on. If it isn't part of any of these principles, it may be time to rethink it.
