Throughout your trading career you will hear many times the important term, "follow-through," when discussing significant market moves such as price breakouts or trend changes.  "Follow-through" trading is really just a confirmation of the previous trading session's bigger price move.

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 at the end of the day, prices are not that far from where they were two sessions (or two price bars) ago.

In this lesson 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.

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.

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.

Jim Wyckoff
TradingEducation.com