Rayner Teo is one of the best traders in all of Asia. He is certainly the most widely-read trader in Singapore, a country traditionally dedicated to the art of investing, almost on par with Hong Kong. Officially an independent trader, a few years ago he began sharing his knowledge and experiences in a
blog, culminating in the writing of an ebook that literally sold like hotcakes.
Among his most interesting content, however, is an article that is actually a compendium of the different, unusual, and disruptive things he has learned during his trading career.
Below, we list some of his "discoveries".
The duration of congestion determines the strength of its breakout
This is one of the first truths that Rayner Teo presents. A truth that, to be honest, appears logical from the start. In short, it sounds plausible. Obviously, Teo introduces this dynamic as a result of direct observation. Simply put, in all these years of trading, he noticed that long congestion always ended with "memorable" breakouts, or even with the start of opposite and almost equally long-lasting trends.
In any case, Teo does not limit himself to justifying everything with empirical observation, but rather gives a more or less technical explanation, or one that at least concerns sentiment.
The author explains it like this: when congestion lasts for a long time but at the same time prices approach
very slowly to a point of a probable breakout (perhaps a nearby support or resistance), trend followers come into action, responding en masse to this solicitation, that is, selling if the position was long and buying if the position was short. This movement generates a certain pressure and therefore a series of counter-trend positions in a chain. From here to the "strong" breakout, the step is short.
A sideways phase is always followed by a phase of volatility
This may seem trivial, and in fact it is. After all, it is an absolutely well-established fact, even by beginners, that
volatility in the markets is never constant, not even in the absence of external pressures or determined by a particularly stressful economic calendar.
In reality, Rayner Teo starts from this assumption to offer a very useful tip, a tip that allows you to exploit exactly this phenomenon.
The author proposes to enter when volatility is almost nil, but still able to signal a minimum of direction. This allows for tighter stop losses and
being in a trend when laterality degenerates into volatility.
The breakout often coincides with a consolidation point
Rayner Teo does not refer to classic consolidation points, that is, those located far from pivot points, namely resistance and support. Rather, he refers to situations where the price has moved and, at a certain point, has entered a sideways phase, or at least a phase of volatility contraction. For example, a price is about to consume its positive trend by approaching at a rather rapid pace, and then stopping or at least producing very small highs and lows, at the very limit of volatility.
According to Rayner Teo's experience, often supported by technical analysis,
the breakout does not occur around the resistance, but near the consolidation points just described. The author specifies, however, that these points - to the surprise of technical analysts - can also form beyond the pivot point, revealing that, in reality, these were positioned at a slightly different point than previously calculated.
The way a price approaches resistance says a lot...
Generally speaking, when a price bounces off a pivot point, it produces or at least suggests a trend reversal. This is a well-studied dynamic that fortunately corresponds to reality... In most cases. Rayner Teo investigates precisely these exceptions, which in a trader's economy can mean a lot and lead to substantial gains.
According to the author, in fact, if the price does not break and go beyond the resistance, but remains in the area, there is a probability that this may represent a signal of the strength of the trend, and not the anteroom of a reversal. It depends, in fact, on how the price "lives" that interregnum situation.
Rayner Teo advises looking at the highs. If the price stays near the resistance without breaking it immediately, but still produces some highs, however small, then this is a continuation signal. Specifically, it is an indication that the price is resisting attempts at reversal, and is therefore destined (or at least strongly oriented)
to break the resistance in the very short term and continue, strengthened, its own trend.
And the same goes for supports
The discourse is the same in a specular situation, that is, when the trend is negative and the price does not approach the resistance but the support. Only in this case, obviously, we are not talking about highs but lows.
Rayner Teo declares the validity of this advice by legitimizing it with his experience, although technical analysis, to tell the truth, does not offer solid guarantees in this regard.
The secret is to enter when the price is close to the pivot points
Many traders, in fact most of them, enter the market when the price is far from the pivot points, that is, when the market is in a phase that is all in all "moderate", perhaps in a trend but without volatility shocks such as to cause fear or fear for the soundness of one's analysis. A method that in any case proves to be wise, also because it actually leads to low risk. The other side of the coin, however generally accepted by most as a fair price to pay, consists of generally low returns. Makes sense, right? Low risks and low gains.
Rayner Teo, however, invites you to consider another way of acting. That is,
entering at a pivot point, and trading in the opposite direction. In this case, the potential return increases a lot. Risk also increases, but not as much as one might expect. Obviously, it is necessary to verify, through technical analysis, that the price is going exactly in the desired direction.
Positioning the stop loss in an unusual way is not always a bad idea
The schools regarding the positioning of stop losses are numerous. Beginners, however, are advised to follow, at least initially, the simplest way. That is, placing stop losses near, or just beyond, the pivot points (resistance and support). Alternatively, you can do the same with short/medium-term highs and lows. What's wrong with this technique? Apparently nothing, in fact it is very reliable although it contracts returns a bit.
Rayner Teo advises, however, under certain conditions, to use
lateral thinking. That is, to behave differently from all other traders, thus positioning the stop loss differently, in a
less obvious point. If a good portion of traders focus on the same stop loss, it is likely that this will influence the actual price dynamics, invalidating the same calculation.
Rayner Teo's advice is to
put the stop loss a little beyond the pivot points. In the worst case scenario, even if the traditional path turns out to be the right one, you would lose a handful of pips.
Trend following is the safest choice
With this "secret", which is not really a secret but one of the most consolidated convictions among experienced traders, Rayner Teo simply wants to declare his aversion to all "disruptive" approaches, which evidently tend to go against the logic of things. In reality, the author even struggles to understand why a trader should trade against the trend, hypothesizing motivations that have nothing to do with trading, but with feelings such as narcissism and a sense of protagonism, or worse, bravado.
Rayner Teo, however, argues his preference for trend following in a firm manner. Specifically, he reveals that when the market is trending, the price essentially does two things: it continues the trend and retraces. When it retraces, it moves for a limited period of time "against the trend". This is where those who move against the trend should insert themselves. Too bad, however, that it is really
difficult and extremely stressful to be able to understand exactly when the price retraces, how deeply and for how long. Therefore, it is absolutely not worth it; the risk of making a mistake is too high.
Some breakouts are false
It is an unpleasant truth that many traders learn the hard way: some breakouts are false. It can happen, in fact, that the price breaks a support or resistance, even in depth, and then retrace sharply and retrace its steps, behaving definitively as if instead of a breakout there had been a bounce. The reason for this is simple: the "real" pivot point did not coincide with the calculated one, but was beyond the latter.
Rayner Teo asserts that it is possible to survive false breakouts, in fact to exploit them to make substantial gains on them. He suggests following these steps.
- Identify the support or resistance that according to traders will give rise to the breakout
- Wait for the false breakout to occur
- Open a position in the direction of the false breakout
Obviously, it is better if you can identify the actual bounce point.
It is not easy to trade with the false breakout: timing is needed. After all, it is a "controlled" form of trading against the trend. If you are a beginner, simply exit the position.
The first pullback is the best pullback
The pullback is that retracement that occurs after a pivot point, i.e., a resistance or support, has been broken. As much as it is "countertrend", it is actually a continuation signal, and a fairly reliable one at that.
Some traders, however, tend to seek further confirmation, i.e., to consider valid not the first pullback but the second or third. It's obvious: if the price has retraced and returned to the trend two or three times in a row, it means that the trend is really solid.
This method, however solid and unexceptionable from a logical or technical point of view, has a serious flaw: it consumes pips and thus erodes profits.
Rayner Teo advises to break the deadlock and behave, for once, in a "less prudent" way, that is, without falling into over-thinking.
Quite simply,
the first pullback is already a reliable continuation signal. Therefore, it can be trusted. In any case, when trading, the calculation of risk, or rather of probabilities, is fundamental. In this case it is obvious: the pullback is a good continuation signal, so the game (entering in trend following) is worth the candle.
