My Favorite Aphorism

I was asked recently to contribute to our Newsletters.  Not having published anything in over a decade the first question I asked myself was “What shall I write about?”  I have nearly 25 years of market experience, having worked as a licensed Stockbroker, a Financial Consultant, I am a Chartered Market Technician, an independent trader of stocks, stock options, and futures for the last 16 years, and an instructor for the Trading Academy for the last nearly 15 years.  There is much that I can write about.  Then it hit me, my favorite aphorism: “Trends continue until they reverse.” 

An aphorism is defined as a “concise statement of principle” and when it comes to the market there are plenty.  Yet “Trends continue until they reverse” is by far my favorite.  Its origin come from one of the six tenets of Dow Theory, the first theory that I had to study as a Chartered Market Technician (CMT).  It’s such an obvious but simple statement and one that rings true today just as much as when Charles Dow shared his wisdom in what was the predecessor to the Wall Street Journal over a century ago.

Why is this my favorite?  Simple, it tells the market participant (investor or trader) that they must understand that recognizing the direction of the current trend is just as important as recognizing the termination and reversal of the trend.  This impacts the strategy they choose to use and when to change.  For instance, when the trend is up Dow Theory would state that one should look for long entries, and when the trend is down look for opportunities to sell or sell short.  Equally important is to recognize when the prevailing trend terminates.  There termination of the trend tells the market participant when to stop buying long, or to stop selling short, and get ready to go in the opposite direction, or even sit in cash if that is what the current environment dictates. 

Over my years this has become one of my core guiding principles when looking for opportunities in the markets.  As many things do, it has evolved for me.  When studying to become a CMT I found that the concept of buying support levels, and shorting resistance levels was appealing yet the challenge was that there would be multiple support and resistance levels to choose from, and often they would fail.  This observation led me to utilize support and resistance differently, and with more success and consistency than what was published in all the books on Technical Analysis I was required to read.  The real evolution came from learning the Core Strategy.  The principle of Supply and Demand was not new to me, but what was unique about it was the process for identifying key price levels where price had a higher probability of turning.  Eventually my favorite aphorism evolved into “Trends continue until they reverse… and they are most likely to reverse at supply and demand.”

                There are several implications in this evolved statement.  A market participant should not only be aware of the current trend direction to help determine which strategy (long or short) should be used but also be aware of Higher Time Frame Supply or Demand zones.  It is these higher time frame Supply and Demand Zones where a market participant should expect to see one of several events.  First, a decrease in momentum of the previous direction.  Second, possibility of trend termination.  Third, there is the possibility of a trend reversal.  Fourth, failure of the zone and continuation of the previous trend.  In addition to the previously mentioned possibilities, one can also use the higher time frame supply and demand zones to assess the profit potential and therefore reward to risk ratio of a potential trade. 

When a trend is underway, we expect the continuation of the trend, as the aphorism states.  This statement possesses an element of certainty, i.e. If the trend is up, it will keep moving up.  However, financial markets are not environments known for their certainty, and a market participant should remain flexible in their thinking.  It is for that reason that they should continually observe trends and recognize various warning signs that things may be changing, even if not at Higher Time Frame Supply and Demand Zones.  As a matter of adhering to the aphorism I will always be alert to the following:

• What is the current direction of the trend? Up, Down, or Sideways? 
• Where are the current swing highs/swing lows where the trend will continue? 
• What is the current phase of the trend (impulse or correction)? 
• How far did the previous impulse or correction phase go in price, and what are the current measured move objectives to anticipate how far the next impulse or correction may go? 
• Are there any signs of the trend slowing down or losing momentum such as impulse phases not going as far as forecasted, or corrections deeper than forecasted? 
• Where are the previous key swing lows/key swing highs where the current trend would terminate? 
• If the trend termination has occurred, is there a trend reversal pattern such as a double top/bottom, or Head & Shoulder/Inverse Head & Shoulder that I can use to confirm the reversal of the previous trend and future price forecast? 
• Is there a higher time frame Supply or Demand Zone? 

If not, I expect the trend to continue until it reverses; if so then I will look for the trend reversal and either hedge my long/short exposure or trail my stops in the even that the trend does continue.

In the ever-changing landscape of the financial markets, having a solid plan and continuous education is essential for long-term success. Trends may persist until they reverse, but it is the trader’s ability to recognize these shifts and adapt accordingly that separates the experienced from the unprepared. By developing a structured approach—one that includes understanding trend direction, key reversal signals, and supply and demand dynamics—market participants can make more informed decisions and navigate uncertainty with confidence. Ultimately, trading is not just about spotting opportunities; it’s about having the discipline to follow a well-thought-out strategy and the willingness to keep learning. Whether you're a seasoned professional or just starting out, investing in your market education will always be the best trade you can make.