If there is one piece of the trading puzzle that remains a bit unclear
for traders it is that of the ‘trend’. Depending on whom you speak to,
each will have a different answer. Regardless, of their answer however,
it is critical that you arrive at the correct answer in the context of
how that person trades. Failure to correctly identify the trend will
greatly reduce the odds of success. The first place to start is
identifying which time frame you plan to make your trade off of. For me,
I only have three choices, 60-minute, 240-minute or the daily chart, as
these are the only three time frames I follow for trade set-ups. The
vast majority of the trades are based on the 60-minute chart however.
So, for the time being, let’s keep it simple, I will not factor in the
other time frames as it can get a bit confusing.
What is the trend on the following chart?
What is the trend on the following chart?
In
all fairness, it is a bit of a trick question. The answer, based on my
approach, is that there is simply not enough information to make that
call. Sure, the last several bars have been moving up, but overall
prices are still trending lower.
Let’s add one more piece of information to the chart.
Let’s add one more piece of information to the chart.
By
adding a moving average, one can much better analyze the ‘current’
trend. Remember, I am not terribly interested about what happened
several hours ago, but I am interested in what has happened in the last
4-6 hours.
Without the moving average, it is nearly impossible to correctly identify what the current trend is.
Let’s look at another example.
Without the moving average, it is nearly impossible to correctly identify what the current trend is.
Let’s look at another example.
I
suspect there were some readers who said; “The trend is up, I will look
to buy into this pull-back.” But again, there is simply not enough
information to draw that conclusion presently. Let’s add in the moving
average.
If
you did not correctly identify the trend, many will succumb to buying
the pullback into support, or in this case fib support – this losing
trade could easily have been avoided if you correctly identified the
trend.
Needless to say, this trade would have flamed out badly
Needless to say, this trade would have flamed out badly
