Through more than 15 years of trading experience, I have found that there is no magic tool, indicator, or rules that always work when it comes to recognizing the trend of a market. As a trader, despite our efforts to analyze the charts and carefully determine a trend in the charts and act in accordance with the market trend, the direction of the market can ultimately change quickly at any time. If things don't go according to plan, we should take advantage of the retrospective analysis to break down the chart and find out what we initially missed and what went wrong. Keep in mind that this is not an exact science, and sometimes, despite our efforts to understand the charts, the market simply moves in the opposite direction. Do not put yourself down.
The trend analysis is only part of the overall trading strategy with which I enter and exit trades. It is never a good idea to make a trade based on just one factor, so I am looking for as much evidence as possible to confirm a trade. In my own trading plan, I use a concept known as T L S Confluence, an analytical technique that brings together; Trend analysis, level analysis and signal analysis.
As you read today's lesson, keep in mind that I'm not talking about “doing the trend,” but merely providing a set of filters and observations to help you determine the most obvious direction the market is likely to move. In addition, the market may look like it is going in one direction, although it is actually going in the other direction. This is because many markets experience short-term retracements that tend to fool traders. For this reason, always shrink the overall picture in the diagrams and then zoom in and drill down from there.
We'll start with the simpler techniques and work through to the more advanced techniques.
1. Visual observation is the key.
The first thing to understand about trend identification is that it is not a perfect science. I try to keep it as simple as possible and start by just looking at a bare price action chart without indicators.
When you ask different traders, you hear different versions of a market's current trend. Some give you the short term trend, some the long term and some the medium term. However, the most important trend to identify is the most obvious current dominant Daily chart trend. We can identify this from both short-term and long-term analysis, which begins with simple observation of the diagrams.
I wonder what the chart looks like in the past year or two, six months, and three months. That shows me the long-term, medium-term and short-term views. This gives me a very clear idea of how the entire diagram direction moves from left to right. If all else fails, shrink a daily or weekly chart and take a step back. Just ask yourself: "Is this chart falling or rising?" Don't make it too complicated!
If we look at the general direction of price movement in a market in the past 3 months to 1 year, we can easily see whether it is generally up, down or even sideways.
2nd Identify the most obvious ups and downs.
In the trend of the markets, they leave swing points on a chart. By paying attention to these pivot points, we can quickly see in which direction a market is developing.
Notice in the graph below that we see a clear upward trend in the S & P500 that we have been talking about in our recent market comments on the S & P500 for months. Note the highlighted areas. These are swing lows within the uptrend. If you only focus on these highlighted areas, you will find that they are "steps" and rise higher as the market moves in the direction of the trend.
Note that in a downtrend market, you need to focus more on swing highs and see if they create a step pattern down.
3. Higher highs, higher lows, lower highs and lower lows
Once you've plotted the obvious swing points on the chart, you can determine whether the market is making HH and HL or LH and LL: HHHL – higher highs and higher lows, LHLL – lower highs and lower lows.
In general, you will see a fairly obvious pattern of HH and HL from the swing points of the market in an uptrend, and in a downward trend you will see a fairly obvious pattern of LH and LL from the market swing points. We can see that the graph below showed an upward trend, as you can see from the clear pattern of higher highs and higher lows …
4. Does the market seem to be recovering from its value?
Check the behavior of the price action after tracings and check if it approaches long-term moving averages such as 21-day ema (exponential moving average) or an important horizontal resistance level. Is the price movement repelling as in a downward trend or is it recovering as in an upward trend? This type of price behavior is a good indicator to confirm the underlying trend / trend of the market.
In the graph above, we can see that all backtracks that were higher both at horizontal resistance levels and at the 21-day EMA encountered selling pressure as the dominant downtrend remained intact.
Add a 200 and 50 day Ema to your chart and check the long term slope of these Emas. This is a good quick way to identify the overall dominant trend of a market. You should look at how prices react near the moving averages (value zone). If the price adheres to these EMA levels and repels / bounces them multiple times, you have good evidence that the market is trending (a concept I call a) & # 39; perfect trend & # 39; and more detailed in my courses for price promotions). The following table is a good example for theoretical purposes. Don't expect to see this every day.
Notice in the chart above that the EMAs for 50 and 200 periods give us a good overview of the prevailing trend direction of the daily charts.
5. Do price action signals form?
If you see price action signals that are causing significant movement in line with the trend, this is another confirming factor for your directional orientation in a market. Also keep in mind that repetitive failed price action signals indicate that the market is going the other way (and may change the trend).
Notice in the table above how the bullish pin header triggered the uptrend that was "confirmed" by the bearish pin header failure.
6. Change in trend direction
If a market is trending down, we want to watch the recent swing highs closely, and in an uptrend, we will focus on the recent swing lows. We do this because it not only shows us the overall trend, but also shows us via the price campaign whether the trend is still intact or not.
For example, if you have a series of higher highs and higher lows like in an uptrend and the price drops after the previous low, this is a strong indication that the uptrend may end. Conversely, we see lower highs and lower lows in a downtrend. If the price is above the previous lower high, this is a strong indication that the downtrend may end.
Once you are sure that you have identified the trend / directionality of a market, look for a signal or area / level of the chart you want to enter. We call this confluence and it is a concept that would require another lesson to explain. Read a lesson on trading in confluence here.
It is difficult to find the market bias or trend, especially for beginners, and most traders will find that this is a sticking point in their trade development. It's okay to understand different entry triggers and settings. However, if you trade against the prevailing market bias, your chances of making money decrease dramatically. There is always a trend, and especially for beginners, it would be good if you stick to it.
In my professional trading courses, I will go into more detail on how we identify and act on different types of trends using price action signals as confirmation.
I would love to hear your thoughts, please leave a comment below 🙂
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