The very first thing that beginning and aspiring traders hear from other more experienced traders is probably: focus on trading with the trend. Determining the trend sounds simple and easy but requires more attention than many traders expect beforehand.
The trading philosophy “the trend is your friend until it bends” is well-known to traders. Buy on dips and sell on rallies is not a fancy message, however traders face real life issues when applying it on real charts:
Traders often encounter a winning streak when they start out trading. Their success is mostly possible due to the presence of a very strong trend. They trade along with it but are unaware that trends do eventually stop. They are not able to recognize that the market structure has changed, which means that they lose their profits as price reverses or falls into a ranging environment.
The solution is this: it is absolute vital that traders understand the market structure and are able to assess the presence of a trend and chance of trend continuation. The first part is recognizing the trend, but first of all we need to know which time frame.
The trend can in fact be defined on all time frames depending on the time frames you prefer to enter. I recommend using 1 and/or 2 time frames higher than your entry chart. Here is an overview:
There are multiple tools that make good sense for understanding the trend. One of my favorites is the classical sequence of lows and highs. This classical approach is still a very solid approach when analyzing the markets. For a trend to take place traders are looking for:
The trend ends when the market is unable to post a new extreme (high/low), which means a lower higher in an uptrend or a higher low in a downtrend. Of course, the trend could continue later on but this is a first warning. When this happens 2 times in a row, the market is showing a range.
The Fractal indicator is a tremendous help in spotting the sequences of lows and highs with great ease. The fractals are visually appealing and make the trend analysis much faster. I therefore always use fractals on my charts.
Earlier this week in the Admiral Markets live trading webinars I identified uptrends on EURAUD and GBPCAD and traded parts of the upside for +76 and +90 pips. Check out the recordings of the live Tuesday webinar with the live trades call.
Here is a screenshot of 1 setup:
Next week our series on trends continue…. We will dive into candle highs&lows, moving averages, fractals versus MSs and trend channels!
Then later on we will discuss how to use trend lines properly. This will allow us to trade with the trend at the appropriate times, not just out of sheer luck.