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How To Trade Price Action Trends In Forex – What You’ve Been Missing
Verified Profitable Trader
Today’s forex strategy article is not going to be your typical ‘ how to do trend trading ‘ article, where you see the perfect pullback setups, hear about ‘ trading from value ‘ , or ‘ 1, 2, 3 reversal patterns ‘, or about ‘ naturally occurring swing points ‘. These “How to Trade Trends” articles paint a one sided picture on how trends work, but really fails to give you the underlying models and mechanics to trade trends profitably.
I’m guessing many of you have tried utilizing trend trading strategies, but either;
a) got stopped out trading the breakout, or
b) waited for a pullback that never came as the pair falls 100’s of pips flying to your target & no profits
c) maybe you got into the trend, only to find it to all of a sudden reverse on you
Has this happened to you before?
I’m guessing it has, so I’m going to share with you what you’ve been missing regarding trend trading, how to understand it, and when to know what strategies to trade and what to avoid.
The Most Critical Point to Know When Trading Trends: Learn to Identify the Type of Trend You Are In
Before you can decide what forex trend trading strategy to use, you have to understand the type of trend you are in. If you don’t understand the trend and price action underlying it, you’ll be looking to ‘trade from value‘ in a pullback when a breakout strategy is what you need to get in and profit.
On the flip side of this, you may be looking to trade a breakout, only to find yourself getting stopped out when you should have been looking for a pullback setup.
How do you avoid this?
Identify the price action and order flow underlying the trend correctly. A simple way to do this is to look at the number of counter trend players in the market, or “ level of imbalance “. For example, a trend that is highly “ imbalanced “, is either heavily bullish or bearish, and this will reflect in the price action. I like to look at it as either strong participation from the counter-trend players, or very little at all. Two charts below will give you a good idea what the two look like.
A Highly Imbalanced Trend With Few Counter-Trend Players Gold 4hr Chart
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Looking at the chart above, we can see from the consolidation breakdout at the top left, the selling was quite impulsive and highly imbalanced in favor of the bears. 10 out of 11 candles closed bearish, or 40 out of 44hrs. This kind of price action trend shows very little presence of the bulls – so little they can only muster a single 4hr bull candle.
Looking for pullbacks in this type of trend trading will leave you missing the majority of the trend, while watching thousands of pips go by and no profits in your account.
Thus, in these types of trends, you want to be trading breakout strategies which will be highly effective since the momentum and order flow is behind you. Strong trends like these tend to support your breakout trade, and push the price action heavily in your favor.
Now take a look at a different example below, using the AUDUSD on the 4hr chart. You will notice in this chart, there is a much greater presence of counter-trend players, thus a less “ imbalanced ” trend. Although the bulls have control of this trend, there are a fair amount of sellers present as they are able to a) take control of an almost even mix of candles and b) push back much further on the price action.
AUDUSD 4hr Chart with Stronger Counter-Trend Players
During trends like these, breakout strategies will likely fail, and you’ll find yourself getting stopped out, only to find the trend resume shortly after.
Has this happened to any of you before?
It has to me, and I’m guessing you as well.
Along those lines, this would be an ideal order flow and price action trend structure to take a with trend pullback. This is same as trading from a ‘swing point’ or ‘value area’. Here is where this strategy flourishes, usually offering a clear pullback to either a) role reversal level, b) dynamic support/resistance 20ema, or c) a price action signal.
Does this make sense why your trend trades have not worked out before?
Can you see why you missed out on so many trends that kept on running like Forest without you?
Now you know why.
Understanding ‘value areas’, ‘1, 2, 3 patterns’, or ‘naturally occurring swing points’ is not going to give you the tools needed to understand how to trade trends in forex, or any market for that matter.
All of those are are “reactive” models – and essentially fail to give you the most important tool – that of understanding why type of trend you are in , and what is the order flow behind it . When you can understand what type of trend you are in, then you can correctly apply the strategy, price action setup, or proper tool trade that trend. Otherwise, you may be using a hammer when you need a saw, and thus either stopped out, or missing most of the trend.
It should be noted, that although trends are ‘relatively’ the same between markets, they are not the same between bullish and bearish moves. Bearish trends as a whole (across all markets) are generally much more impulsive and imbalanced then bullish trends.
This is mostly due to the emotions behind bull and bear trends
Generally bullish markets are much more euphoric and take more time to form or bottom, while bearish trends are typically characterized by fear, and are much more rapid and forceful. Take a look at any major sell-off on the daily/weekly chart on any pair or instrument, and you will see this clearly in the price action.
There is more to this, such as the order flow behind bear/bull trends, but the volatility, impulsiveness and level of imbalance is usually far greater in bear trends than in bull trends. A great example of this is in the weekly chart below on Gold.
While your at it, look at any weekly chart on the Dow, and major Index, or currency pair, and you will see bull and bear trends are completely different from an order flow perspective.
Another thing to point out is trading pullback setups, or from ‘ value areas ‘ (also trading from key levels) really only offers you one tool to trade trends, which by itself is very limited. Thus, beware of people painting a rosy picture when it comes to trends, as often times the clear pullbacks to role reversals aren’t there. Yet while you are waiting for one, you are missing out on a highly profitable trend right in front of you.
Thus, learn how to trade and read the order flow behind the price action, so you can understand what type of trend you are in, and what kind of participation is happening from both sides. When you have this information, then decide if you need to use missiles or guns. When you do, you’ll find yourself missing less of the moves, having more winners, and profiting heavily from these great trending plays.
About Trend Trading Strategy
Chuck Hughes trend trading strategy (investing with the trend) focuses on purchasing stocks that have hit their bottom value with a potential to move upwards in price. A trend trading system is essential to profitable stock selection, risk reduction, and knowledgeable buy and sell decision making.
What is Trend Trading?
Trend trading is a well-known stock investing strategy in the stock trading market. Trend trading theory operates based upon the current position of stock. There are many different strategies that have been built based upon trend trading theory. ‘Trading with the trend’ and ‘trading against the trend’ are two of the most common trend trading strategies.
Trend trading theory can be used for any period of time; days, weeks, months and years. Many people trend trade for a living.
If you’re considering trend trading for a living, Chuck Hughes can help! Call Chuck today at (866) 661-5664 to start trend trading for a living.
Chuck Hughes’ Trend Trading System
Chuck Hughes’ trend trading strategy is dependent upon purchasing stock when it is rising and selling stock when it is falling. This trend trading strategy has many names: investing with the trend, following the trend and trading with the trend.
In the stock trading system, if stock is moving upwards, trading with the trend theory assumes that stock will continue upward. Conversely, if stock is moving downwards, trading with the trend theory will assumes that stock will continue moving downward.
Chuck’s strategy focuses on purchasing stocks that have hit their bottom value with a potential to move upwards in price.
Although this stock trading strategy seems simple, it’s effective. This stock investing strategy creates profitable stock selection, risk reduction, and knowledgeable purchasing and selling decision making.
Anyone can start trend trading for a living. You don’t have to have a lot of money to start trading in the stock market. All you need are successful stock trading strategies. Use Chuck Hughes as your resource for gaining stock investing strategies.
When you become a member of Chuck Hughes’ Investment Trading Strategy, you’ll get actual stock market trade recommendations. So start today by calling (866) 661-5664, or click below to get more information about stock investing.
Chuck Hughes’ Strategy for Investing with the Trend is:
- Lower risk
- Based upon reliable financial data and historical trends
Chuck Hughes’ trend trading system is successful because it is reliable on financial data and historical trends. Evidence-based data is accrued from reputable companies in order to make knowledgeable and informed investment decisions.
Rather than look for negative trends, investing with the trend looks for positive growth in company financials. This simple stock investment strategy is opposed to the “buy when you HOPE the bottom has been reached” theory that many people use.
It is a common mistake for beginning stock market traders to utilize trend trading strategies like ‘trading against the trend’ because they think they will make a higher profit. By using Chuck’s ‘following the trend strategy’, you’ll be able to make trades with lower risks in the stock trading system.
Trend trading strategy does not promote buying stock at the very bottom or selling stock at the very top. Instead, the trader is a buyer when prices are going up and the trader is a seller if prices are going down. It urges against stock market predictions. This calculated stock trading strategy provides lower risk to the trader.
‘Trading with the trend’ involves reacting after a market trend occurs. Trend trading entry strategy involves entering after a trend has started and trend trading exit strategy involves exiting a market after the trend has ended. This tactical trend trading system reduces risk.
You can start trend trading for a living today! Become a member of Chuck Hughes’ Investment Trading Strategy and you’ll receive lower-risk trend trading strategies; stock investing strategies that are based upon reliable financial data and historical trends.
Your chance for profit in the stock trading system can be increased and your risk of loss decreased when you start using Chuck Hughes’ stock investing strategies. Email Chuck below or call him today at (866) 661-5664 to start receiving trend trading strategies
Trend Trading System Terminology
Successful trend trading strategists rely heavily upon strict methodology, triggers and tactical guidelines. Although the basic principles of the trend trading system are easy to understand, many complicated trend trading strategies have evolved out of it.
Chuck Hughes is an expert in the trend trading system.
When you start trading as a member of Chuck’s investment trading strategy, you’ll start to understand trend trading system terminology, such as whipsaws, shakeouts and stop law orders. You’ll also learn trend trading strategies, such as trend trading entry strategies and trend trading exit strategies.
A long trade, or long position, is a stock or security that is owned by its holder. If the price of the stock goes up, the holder and owner makes a profit. If the price of the stock goes down, the holder loses money. A long position stock trading example would be a person who owns 50 shares of stock. They would be said to be 50 shares long.
Long and short positions are sometimes used together in order to create leverage within one’s stock market portfolio. A long position should be used in a bullish market because it anticipates on the market increasing, whereas a short position should be used in a bearish market because it anticipates on the market decreasing.
Chuck suggests to trade long if the current price is lower than the price one year ago and to trade short if the current price is higher than one year ago.
Trading long is indicative of the more traditional form of trading in the stock market.
A short position is a stock that someone sells, but does not own, in the hopes that the price of stock will drop and they will make a profit from the difference. The investor who has sold the stock must eventually return it to its owner by buying it back from the stock market.
A trader who takes a short position borrows stock from a firm for a fee and sells the stock to a third party, in hopes that the stock price will fall. When the stock’s price falls, the trader buys back the stock for a lower price, makes a profit, and gives the stock back to the firm that it borrowed it from.
Short trades, or short positions, are a more contemporary form of trading. This stock investing strategy can give your portfolio added value.
Most stock market strategists only make long trades because of the high risk associated with short trades. However, Chuck Hughes’ trending trading system includes short trade stock investing strategies that have been extremely successful.
Chuck recommends taking short positions when the major trend issues a sell signal and taking long positions when major trends issue buy signals. Short positions should be taken with the major trend, not against it. If a short position is taken against the major trend, it could possibly end up as a whipsaw.
A short position stock trading example would be a person who borrows 50 shares of stock. They would be said to be 50 shares short.
Chuck found a way to initiate short positions with limited risk. If you’re ready to receive highly profitable stock trading strategies, email Chuck Hughes, or call him today at (866) 661-5664
An entry point is the price at which a trader decides to enter into the market. This is the purchase point of a stock or security. Trend trading entry strategies are highly sought after and valued in the trend trading system.
Chuck recommends buying breakouts and closing trades when prices start consolidating or reversing. He insists that any time frame can be used for the entry signal, but in order to maximize your trade, the exit signal needs to be significantly shorter.
An exit point is the price at which a trader decides to exit the market, by selling a stock or security. This is the closing point of the trade.
It is critical to understand trend trading exit strategies when a trader is involved in the trend trading system. Entry and exit points are a large part of determining the success or failure of a trade that happens in the stock market.
Many stock market traders do not take time to determine their trend trading exit strategy. Instead of taking chances on your own, you can learn trend trading strategies based on Chuck Hughes’ recommendations.
An exit point can only end in one of two ways: by making a gain or by taking a loss. A worry about the trend trading system is the slow exit a trader can suffer when the trend reverses and goes against you.
Take Profit Orders
A take profit order, also known as a T/P or limit order, is an automatic exit point. This is made at the point of trade when a certain point or price is reached. The two rules of exit points are as follows:
- Whereas the exit point is below the current market price in a stop loss order, the exit point is higher than the market price in a take profit order.
- A trailing point does not exist within a take profit order.
Stop Loss Orders
The first discipline that any trader should master is to always limit your losses by exiting if the market goes against you.
A stop loss order, also known as an S/L or stop, is set to limit a trader’s potential loss. The stop loss is placed somewhere above the current price on a buy or somewhere below the current bid price to sell. Stops are helpful in that they can minimize large losses if the market is moving quickly against your position.
Trend Trading Exit Strategy Example:
If you purchase 1,000 IBM at $90.00 you may decide to place a stop loss as follows:
SELL 1,000 IBM IF price is less than or equal to $87.00
If price falls to $87.00 your order will be activated.
Your loss is limited to $3.00 per share (plus brokerage).
Chuck suggests avoiding markets with low liquidity where extreme price fluctuations are possible.
There are Two Types of Stop Loss Orders
1. Market Stop Orders
This is a conventional stop loss order; the stop activates a market order to sell (or buy) at the prevailing market price. Market stop orders are recommended to use as trend trading exit strategies to give the trade the highest chance of happening.
2. Limit Stop Orders
The limit stop activates an order to sell at the prevailing market price but not below a specified limit (or buy at the prevailing price up to a specified limit). Limit stop orders are best to use as trend trading entry strategies because they are more successful than fixed price orders.
False starts are known as whipsaws. Whipsaws occur when the market indicates a positive signal, immediately followed by a reversal, then another buy signal. Whipsaws can be frustrating and expensive.
Chuck Hughes has set the following guidelines in order to avoid whipsaw (false-start) trades:
- The 1-month/20-month EMA can be used as a filter that only allows trades in the direction of the major trend.
- EMA stands for Exponential Moving Average.
- EMA is an options trading strategy that provides signals for buying and selling options.
- EMA is different than the simple moving average (SMA), in that a greater amount of weight is assigned to the most recent data points and less weight is assigned to the most historical data points.
- This helps prevent ‘whipsaw’ trades, when a counter-brand or sell offs occur.
- Preventing whipsaw trades can increase profits, reduce losses and increase the percentage of winning trades
Shakeouts, also known as false breaks, happen when there is a sudden change in the market. During shakeouts, traders are forced to sell their stock, often for a loss. Shakeouts are worrisome for the trend trading system. Trend trading strategies often incur a large number of shakeouts.
Limit Trend Trading Risk with Chuck Hughes’ Trend Trading System
Even in 2008 and 2009, when the stock market crashed, Chuck Hughes was able to maintain a highly monthly percent return by being able to take full advantage of price downturns in most global markets using trend trading strategies.
Due to increased market volatility during these years, Chuck Hughes used option spreads.
Spread trades are a complex type of options trading strategy. An option spread can involve multiple time periods and contracts, different strike prices, and various put and call dates.
Option spreads provide flexibility and power. They have the potential to deliver high returns during any type of market condition.
If you’re considering trend trading for a living, Chuck Hughes can help! Call Chuck today at (866) 661-5664 to start trend trading for a living, or get more information by contacting us.
Why use Chuck Hughes’ Trend Trading Strategy?
Chuck recommends trend trading in companies with growth in stockholder’s equity. Stock trading strategy involves creating an awareness of stock violability and risk levels. It is imperative for a trader to have an understanding of historic trends in the stock trading system. One must be able to comprehend wise stock investing strategies.
By becoming a member of Chuck’s investment trading strategy, you’ll receive access to exclusive stock trading tips. You’ll be provided with trading recommendations and strategies, such as investing with the trend.
Investing with the trend, when tied in with the EMA system, is an options investing strategy that unleashes profit opportunities. By utilizing Chuck Hughes’ trend trading system, you can achieve a 4 to 1 reward to risk ratio.
When you use Chuck Hughes as your trend trading strategy service, you’ll get:
- Peace of Mind
- Proven Strategy
- Lower Risk
- Trend trading recommendations based upon reliable financial data and historical trends
Invest with Chuck Hughes and you’ll get his exclusive trading with the trend strategies. His stock market strategy has been used successfully to make monetary gains from thousands of people. Read success stories of members who have used Chuck Hughes’ stock investing services.
Your chance for profit can be increased and your risk of loss decreased when you start using Chuck Hughes’ trend trading system. Call Chuck Hughes today at (866) 661-5664 to start receiving trend trading strategies, or email him below.
WATTS TRADING GROUP. A Smarter Way To Trade. A Simple Way to Trade the 2-minute S&P
Whitney Ellis 4 years ago Views:
1 WATTS TRADING GROUP A Smarter Way To Trade A Simple Way to Trade the 2-minute S&P
2 Copyright 2004, Watts Investment Company, LLC All rights reserved. No part of this work may be reproduced or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher and author. Printed in the United States of America. Published by Watts Investment Company LLC, The charts used in this book were created using 1
3 Disclaimer The methods described in this article are for educational purposes only. Past results are not necessarily indicative of future results. The author and the publisher assume no responsibility for your trading results. Trading involves a high degree of risk. No recommendation is being made to buy any stock, commodity, option or other financial instrument. Consult your financial advisor before starting any investment system. 2
4 A Simple Way to Trade the 2- minute S&P This is a technique I use to regularly scalp the S&P e-mini contract. It is a very simple technique with a high probability of success. It works best in range bound markets but it will also work well on trend days as long as you are not fighting the trend. In this report I will outline the method and provide examples of both types of trading as well as a couple alternative methods for using the system.. I think you will find the system easy to implement and potentially a valuable part of your trading arsenal. Indicators There are only two indicators used with this set-up. A moving average to determine trendiness and a MACD to determine trade entry. The exact settings are listed below. 89 period moving average. MACD-Histogram with a setting of 50/88/9. Optional: 1 & 5 period moving averages applied to the MACD-Histogram. Below is an example of the chart layout. My chart includes the optional MACD moving averages. 3
5 Trading Rules The rules are very simple. If the S&P e-mini (ES) is in an obvious trend on the 2-minute chart then only trade in the direction of the trend. A trend can be identified by the ES making higher highs or lower lows and/or an easily identifiable slope on the 89 period moving average. The slope of the 89 period moving average on the 10-minute chart will identify the intermediate term trend. 4
6 Note: For increased system reliability you could isolate your trades to the times when the 2-minute and 10-minute trends are in sync but for the basic system that is not a requirement and trade success should still be high.. The one time you wont want to trade in the direction of the trend is after a clear divergence between price and the MACD in the opposite direction. The trend may not end in this case but it is not a high probability trade to fight these divergences. The best bet is to wait for the trend to change or for a range to develop. A range will be defined as a lack of all the things that make up a trend, i.e.: higher-highs, lower-lows or a clearly sloped 89-period moving average. This brings us to the heart of the system. The ideal market condition for this system is an intra-day trading range with good volume. Trading in a range allows you to catch swings in the MACD with little risk and a high probability for success. So here is how to enter trades with this method. 1. Determine trading environment as outline above 2. In trends enter Long or Short accordingly as the MACD Histogram crosses above or below the zero line. Target one and a half to two points with a two point stop. The risk to reward is slightly unfavorable on a per trade basis but wins should far outnumber losers. 3. In range markets wait until a divergence has formed between the MACD Histogram and price. 4. Enter Long or Short accordingly once the MACD Histogram crosses the zero line. Target up to three points and risk two points. The higher the market swings the higher the target should be. 5. For trends and range markets if MACD Histogram starts getting bouncy around the zero line causing whipsaws, step aside and let the market sort it out while you wait for a new cycle of wide swings to produce. That is how simple it is. The chart is clean and the trades are too. The best trades with this method follow sizable dips or spikes in the MACD 5
7 Histogram. For us this is definitely a scalping system and are best results have come from this mindset. MACD crosses zero after a divergence leading to a 2-pt gain on the ES. The momentum embedded in the S&P when the 50/88/9 MACD crosses zero is almost always strong enough to propel you to the target objective. The best part is that even if the trade gets busted and reverses direction 6
8 before your target is hit, a counter signal will usually be triggered before your stop is hit and the counter signal can often be quite strong. In fact if a counter signal is signaled you might be inclined to raise your target if the market structure is supportive of a move in the other direction. For instance if an initial Long signal comes as the price is testing the 89-sma from below and after a few minutes its reverses and the MACD crosses zero in the other direction then that move can be a meaningful decline since price failed to overtake the 89-sma. This comes as smart money fades the testing of the 89-sma and the cross of the 50 and 88 period moving averages represented in the MACD. The best trades will occur during the first and last two hours of trading but smaller scalps of half a point to one and a quarter points are available during the middle day lulls, they just sometimes take longer to play out. Where a typical trade in the first and last two hours will last just a few minutes, a midday trade could last up to twenty minutes and during that time the MACD may become non-responsive. Given that, I recommend sticking with the higher volume periods. I typically use this system during range periods. Those times when my homework tells me the market may be flat or where no trend is present on the PIVOT tables. I stick with the E-mini Scalping System on trend days or on trending parts of more range bound days. It has been quite successful for me and others who have a mindset for scalping. It is key to have the proper mindset for scalping since the S&P will quickly develop into a trend immediately following a scalp and it is easy to fall into a shoulda, coulda, woulda mentality as you watch a two point scalp turn into a ten point run. It is important to avoid this trap and be willing to step back and re-evaluate the new information the market is giving you. Practice the art of slowing your mind to the point where things look clear. I find it helpful to regularly get up from my trading station and switch my focus to something other than the market for a few moments. All the while breathing deep breaths and practicing positive self-talk. After doing this and returning to my station I feel ready to hit the next trade as the market activity takes on a new clarity. While no mechanical system is infallible this system has had a terrific track record for me. There are of course nuances that can be developed into the system and I am sure that half of us will see the market in a different light but as far as a quick entry quick exit scalping system, this is a good start and a potentially profitable addition to your trading toolbox. Good luck in your trading! 7
9 Alternate Methods of Using this System The following two variations to the above system could improve your results even further. You will need to test them out to see which best fits your market and personality. Alt. 1 First apply a one and five period moving average to the MACD Histogram indicator. This is an indicator on an indicator. Not all programs will allow this so check your software. Now, instead of waiting for the MACD to cross the zero line enter trades following a divergence once the one and five minute moving averages of the MACD cross each other in the direction of the trade. This variation I have found works its best after large swings in the MACD Histogram. It is not advised to follow crosses in a choppy MACD that is not making good swings. Alt. 2 In certain markets such as those that are range bound on a larger time scale like the daily or weekly, using this variation will work very well and allow more trading opportunities. Instead of waiting for a divergence prior to entering a trade, enter trades based on the MACD Histogram crossing zero. The same rules apply as in Alt 1 or for that matter the main system the best and safest trades occur after large swings in the MACD Histogram. This method is prone to more whipsaws but it also offers more trading opportunities and if the market is right it will provide great returns. 8
10 Trade Examples MACD crosses zero following a negative divergence and leads to a quick 1-pt scalp. 9
11 Another divergence and subsequent MACD cross of zero leading to a quick scalp. This is also a good example of how Alt method one would lead to greater gains with entering the trade on the MA of MACD cross instead of the cross of zero. 10
12 Negative divergence and a short trade leads to a good quick scalp. Divergences on this time frame and MACD settings are very good indicators of at least a short-term trend change. 11
13 Please feel welcome to visit our website, and use the valuable articles and resources we offer there. For a more complete and multi-market trading system check out the E-mini Scalping System. Trading Resources Trading Systems These are trading systems or method for reading the market that compliment mine very well. I have great respect for these traders and their methods. by Frank Butera FOREX Trading Strategy by Quantum Globe, Inc. Trading Books There are too many books to name but I will just name a few that I will always have and refer to. Trading for a Living by Dr. Alexander Elder Trading Chaos by Dr. Bill Williams The Book of Five Rings by Miyamoto Mushashi Trading in the Zone By Mark Douglas The Holy Bible Any question you may have can be answered in here somewhere. Trading Music There is a direct connection between the tempo of music and your state of mind. Music with beats per minute will help you stay in a relaxed mindset which is optimal for trading. I will list four CD s that I use for that purpose and a mind programming product that could change your life if used regularly. Mozart Adagios The Ultimate Four Seasons-Vivaldi s Greatest Hit Simply Baroque Yo-Yo Ma Music for Zen Meditation by Riley Lee 12
3 Ways To Identify A Trend With A Moving Average
Experienced traders can pick up a trend with their honed trading instincts. But for new traders, having an objective method to find and confirm trends is critical. A robust framework offers new traders the ability to learn first and improvise later. For this, the moving average is one the best tools you can use.
Aspiring system traders can use these methods to kick-start for their strategy code. As you progress, you can refine them your market understanding.
Even for experienced traders, an objective method to determine the trend is helpful. Seasoned discretionary traders can judge their subjective evaluation against a fixed framework. This is the only way to check your trading instinct. If your intuition is no better than a rigid trading system, then there’s no reason to use your discretion.
If you want to learn more about trading with moving averages, take a quick look at our moving average guide.
Conventional Method – Moving Average Price Crossover
The bare basic method of using a moving average to determine the trend is the price crossover.
- When price cuts from below the moving average to above it, it implies a bullish trend.
- When price crosses from above the moving average to below it, it suggests a bearish trend.
Whipsaws pose a problem with this method. Whipsaws are false signals of trend changes. They happen as the market crosses over the moving average in quick succession. Due to this phenomenon, you might get confused during a sideways market.
Luckily, there are more reliable ways to check if a trend is emerging. Here, you will learn three ways to do so.
#1: Slope of Moving Average
This method is simple but useful. Just focus on the slope of the moving average.
- Sloping upwards – Bull trend
- Sloping downwards – Bear trend
In the chart below, the background color corresponds to the direction of the moving average.
The advantage of this method is its responsiveness and simplicity. However, it relies on the moving average alone. Thus, it’s easy to forget about price action itself.
Trading Tip: When the price falls below the SMA, but the slope stays bullish, consider a long setup.
Conversely, when the price rises above the SMA but the slope remains pointing down, look for a short setup. (Works better with an SMA and not as well with an EMA.)
#2: Swing Pivot Confirmation With Moving Average
Unlike the first approach, this method forces you to pay attention to price action. It helps you to avoid the common pitfall of relying too much on the indicator.
The price swings in the examples below are marked according to the rules taught in Day Trading With Price Action.
Bullish Example – 6J Futures (JPY/USD) 30-Minute
How To Confirm Bullish Trend With Swing Pivots:
- Swing low forms above the moving average
- Price pushes to a new trend high without touching the moving average
Take a look at the example below.
- This swing low formed above the moving average.
- Then, without pulling back to the moving average, the market made a new high. This push confirmed the bullish trend.
Bearish Example – 6E Futures (EUR/USD) 30-Minute
How To Confirm Bearish Trend With Swing Pivots:
- Swing high forms below the moving average
- Price falls to a new trend low without touching the moving average
See the example below.
- This swing high formed below the moving average.
- However, the market continued to rise and hit the moving average before pushing to a new low. This development forestalled a bearish trend confirmation at this point.
- Again, we observed a swing low below the moving average.
- Then, without pulling back to the moving average, the market fell to a new low. This fall confirmed a bearish trend.
#3: X Bars Above/Below X-Period Moving Average
This method identifies a strong trend. At this stage, the trend is already firmly established.
If you are looking to enter a new trend, this method is not suitable. But if you want to confirm that the most recent trend is a strong trend with momentum, this is the way to do it.
Example: 20 Bars Below The 20 SMA – Bearish
The same logic applies to moving averages with different lookback periods. For instance, 50 bars above the 50 SMA imply a bullish trend. With 50 bars, it indicates a more stable trend than its 20 bar counterpart.
This approach is not the agilest, but it offers an objective formula to find market trends.
Moreover, in the hands of a master trader, this method can become a dominant market guide. Try paying attention to price action shown by the X number of price bars. Often, it yields useful hints for traders.
For instance, you see 20 price bars far above the 20-period moving average. If the 20 bars form a steep rise, the market is likely exhausted. Reversal or consolidation might follow.
On the other hand, you might observe 20 price bars drifting sideways, just slightly above the moving average. In this case, these 20 bars above the moving average are more likely to be subtle bullish hints. A trend play is sensible.
How To Determine The Trend With A Moving Average – Trading Notes
As mentioned earlier, these methods are more reliable than the moving average crossover. But this added reliability comes at a cost. It takes the form of a delay. You can only confirm the trend later.
Such trade-offs of one advantage for another is a constant theme in trading. The key is to find the right trade-offs in the context of your trading plan. Even among the three methods above, you can see differences in reliability and timing.
Bonus method: Use price envelopes to define trends. See how it works in this day trading strategy.
In the three chart examples above, each one used a different method to determine the trend. Try applying the other two approaches to each chart for practice. This exercise will help you appreciate their differences and uncover more insights.
You might be thinking: why do I need to understand these methods in detail? I already know how to interpret them. Must I really get into the nitty-gritty?
You should because these trend determination methods are not trading strategies. You must integrate them into a trading strategy. And to do that effectively, you must learn the underlying price action of each method.
Only then, you can wield the moving average as a powerful weapon.
If you prefer to work without a moving average and focus just on price action, take a look at my price action trading course. It shows you how to judge the market bias with swing pivots and trend lines.
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