One of the more common questions I get from traders is actually this…
“Hey, Rayner, how do I recognize the direction of the trend?”
Nevertheless, it is not as easy as it seems – even in case you use trend indicators.
For example:
The Daily chart is actually in an uptrend.
But when you go down to the hourly chart, it’s a downtrend.
And in case you go down to the 5-minute chart, it’s chopping all over the place.
So the trend is actually an illusion.
Yup.
You read me right. I said the trend is actually an illusion.
Why?
As you can manipulate the trend and see what you wish to believe in.
You may be wondering:
“How do you manipulate a trend?”
Here is the thing:
You can have 2 traders looking at the same market, and one says it’s an uptrend, and the other, a downtrend – since they’re looking at different timeframes.
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Trend Indicators #1:
You can use Price Action and identify the direction of the trend Price action refers to reading market structure, momentum, and sentiment to identify trading opportunities.
It has among the most important things you can find out since it provides you with an invaluable insight into the market you are trading (that might not be found on trading indicators).
For example:
Where will lose traders puke?
Where are traders placing their stops?
Where will new traders enter the market?
If you would like to read more, read The Price Action Trading Strategy Guide.
Now you have understood the value of price action, let us learn how you can read it and identify the direction of the pattern.
Allow me to share three things to remember:
An uptrend consists of higher highs and lows
A downtrend consists of lower highs and lows
A range is found between the highs and lows
Trend indicators #2:
How you can tell the direction of the trend without making use of a candlestick chart
Here is the thing:
Candlestick charts can get messy if the wicks are long, which makes it hard to determine the trend (especially for new traders).
And an easy answer to it is…
Line chart.
You are most likely wondering:
“What is a line chart?”
It shows the cost on your chart by taking the cost at the close and then hooks up the closing prices together via a line.
So, you will see a squiggly line on your chart, which makes it easier to determine the trend.
Trend indicators #3:
You can use the moving average to determine the direction of the power and the trend it. The moving average is actually an indicator that “summarizes” past prices and is actually plotted as a line on your chart.
Indeed, it is a lagging indicator, but…
…it does not mean it is useless because the moving average indicator can enable you to recognize the direction of the trend – as well as the power.
How you can use moving average to determine the direction of the trend
Here is a basic method that works:
When the price is actually above the 200MA, then it is a long term uptrend
When the price is actually below the 200MA, then it is a long term downtrend
Trend indicators #4:
Trendlines
A Trendline is actually a tool you draw on the charts of yours. It can enable you to recognize the power and also the path of a pattern.
But before I get to it, you have to find out how to draw trendlines properly.
How you can draw trendlines like a pro
Here is my 3 step technique:
Please search for a minimum of two swing points (it might be a higher low or perhaps lower high)
Connect the swing points using a trendline
Get as many “touches” as possible on the trendline
Trend indicators #5:
How to trade with Channels and find a “sweet spot” for your exits and entries
If you are wondering:
“What’s a Channel?”
A Channel is actually a variation of the Trendline.
How you draw and interpret it’s the same as Trendline.
The only difference is… Channel has an additional line that is parallel to the Trendline.
Not sure what the trend is, actually? This little-known technique is going to give you clarity.
Here is the thing:
In case you look just at the water, you will miss the ocean.
In case you look just at the trees, you will miss the forest.
In case you look just at the current price, you will miss the long-term trend.
So what is my point?
Stop being fixated on what the industry is actually doing every single moment.
Instead, zoom out the charts of yours.
Yes.
My personal method: How to identify and trade with the trend
As I have shared with you earlier…
You will find ways to determine the trend, and there is no right or perhaps best or wrong approach.
But in case you ask me, these’re the two things I ask myself:
What is the long-term trend?
What kind of trend is this?
Allow me to explain…
1. What is the long-term trend?
I will use the 200 period MA to define the long-term trend.
When the price is actually above it, the industry is actually more likely to have a long-term uptrend, and I want to have a long bias.
When the price is actually below it, the market is perhaps in a long-term downtrend, and I want to have a short bias.
Next…
2. What type of trend is actually this?
Here is the deal:
Only some trends are created equal.
After years of trading, I have realized most trends can be broken down into one of three categories…
Strong trend
Good trend
Weak trend
Strong trend
A strong trend is when the cost has little to no pullback and remains above the 20MA.
In such a scenario, the pullback may not come as the cost keeps breaking higher. Consequently, in strong trending markets, probably the best entry is usually breakout trades.
Frequently asked questions
#1: Which timeframe should I use to determine the trend?
The timeframe should apply to your trading:
If you are a one-day trader, you will determine the pattern on the lower timeframe, like the 1 hour or perhaps 30 minutes timeframe.
If you are a swing or perhaps position trader, you will determine the pattern daily or perhaps the weekly timeframe.
#2: Do I’ve to adjust the moving average settings to suit different timeframes?
You will probably find no best settings out there since it depends upon the kind of trend that the industry is in.
When the market is in a:
Strong trend, it is going to tend to respect the twenty MA
Good trend, it is going to tend to respect the fifty MA
Weak trend, it is going to tend to respect the 200 MA. Personally, I will use whichever of these three moving averages that the market is actually respecting more for the timeframe I am trading on.