INTRODUCTION TO TRENDS
The main goal for a trader is to master the trend trade, that is trade in the direction of the price action.
So what is a trend?
This section will provide the answer in detail from a number of perspectives but if you wanted it summarized in a few words, a trend is the direction of the price action for a certain time frame.
To understand the trend requires you to look at it in the context of a specific time period and a good trader will know the direction of that trend and therefore make decisions favoring the trend direction. Trading with the trend is trading with the flow or majority. You don’t want to go against the trend or majority for the majority in terms of buying and selling dictate the market. You therefore trade in the indirection until you have more information that states the trend has changed or is going to change (finding the top or bottom of a wave)
Therefore when the prevailing trend is up, you would long, meaning you will buy low prices and sell at higher prices and if the trend is down, you will look to short, meaning you will borrow to sell high and buy back when its lower. You can short in a bull market as there is always going to be a corrective waves in the cycle (refer to the Elliot wave theory).
Many amateur traders, when facing a very obvious trend can’t stop trying to predict reversals and usually they will get burnt andor rekt trying to do so. Hence finding a reversal or change in trend is difficult and requires other sources of information and strategy to help determine where that is likely to take place
THIS MODULE DOESN’T COVER THIS HERE AS ITS NOT A 1 PIECE OF INFORMATION TO FULFILL THE STRATEGY. YES, ITS A STRATEGY WHERE YOU TAKE IN A NUMBER OF CHART ELEMENTS TO WORK OUT A CHANGE IN TREND OR PIVOT POINT WITH ACCURACY.
Big moves generally give a sign as to when the trend is changing. Today we can use additional information such as OnChain data for crypto to help us understand market sentiments besides what the the price action is doing. This is another topic altogether and is not discussed here.
THE 3 EXAMPLES BELOW WILL HELP YOU UNDERSTAND HOW TO DETERMINE THE TREND, NO MATTER WHAT TIME FRAME YOUR LOOKING AT. UNDERSTAND THIS AND IT WILL BECOME THE FOUNDATIONS TO BECOMING A GOOD TRADER.
NOTE: WE USE ELLIOT WAVE THEORY, IN CONJUNCTION WITH FIBONACCI, INDICATORS, CANDLE STICKS AND HISTORICAL DATA TO DETERMINE LIKELY AREAS OF REVERSAL TO THE TREND.(THAT INFORMATION IS RESERVED IN MORE ADVANCED MODULES WHICH ARE SUBSCRIPTION BASED)
Trendlines are easily recognizable lines that traders draw on charts to connect a series of prices together. The resulting line is then used to give the trader a good idea of the direction in which an investment’s value might move.
We can use moving averages, lines or curves to denote a support line and in that context a trend.
> Trends are discussed in terms of time frames:
For example (scenario): We can have a uptrend in the 4 hourly time frame of a chart but from a weekly perspective, that uptrend in the context of the overall picture is part of MACROBIG PICTURE downtrend (on the weekly chart).
Therefore price and trend is based on “context” and the language we use for trends always has to include time frames.
This example on the right, click on the chart to zoom in, is an example of BTC bull run, which demonstrates an uptrend but in that uptrend, we have corrective waves and they tend to be down-trending.
More specifically, we have high highs (HH) and higher lows (HL) on the 4 hr chart. These HH and HL are pivot points. If price was to go below the previous HH or HL, we then have a change in trend for that time frame.
This is a method, 1 of a few, to work out the trend and to understand what levels are important.
Go to the next section below, where we use moving averages to find what the trend is and when its changed.
Using Moving Averages to understand the TREND
To understand this section, you must know what moving averages are andor know how to place them on a chart.
If you don’t, go to the Moving Average module and review that content and come back here for continue understanding the trend topic.
The first thing a trader must do is find the most suitable time frame and the moving averages combination to that represent the trend. We can only demonstrate this visually with the following BTC chart below.
Key points on the chart:
We have selected the 4 HOUR chart using the 10, 20, and 50 MA on the daily. What is important on this chart is that you can see in the uptrend, bitcoin price action is well represented with the 10 MA on the daily time frame, then followed by occasions with the 20 MA and in blue, the 50 MA on the daily (green).
Now note when the 10 MA (white) crosses over the 20 MA (orange), we see now that the macro trend is also downwards orientated.
We can therefore use this in conjunction with the pivot points on the previous example charts, to confirm that there is a change in trend. After that point, if you look at the price action in 2018, the 10, 20 MA became consistent as resistance, not support, which is another confirmation that we are a) in a down trend and b) a bear market or correction phase of the price cycle.
Now look at the bottom of the chart where we highlighted in blue the cross over of the Moving Averages. First the 10 and 20 MA cross over, which is the initial bullish sign and eventually both the 10 & 20 MA cross over the 50 Daily MA (green) and eventually the 200 daily MA (blue) which is known to be a key number for resumption of an uptrend and bull market.
The 3rd method: Using supporting and resistance TREND LINES (TL)
To recap, our main goal is to trade in the direction of the trend and hence identifying the trend is the key item. Trading with the trend is trading with the flow. Don’t go against the flow until you have information to state the trend has changed or is going to change (top or bottom). The 2 examples above do that. Here is the 3rd.
In this example, we have macro uptrend but at some point, the trend changes.
Here we see the bottom support lines, called trend lines increase IN THE ANGLE. This lets us know we are having an uptrend with more momentum to becoming an accelerated uptrend, which is usual for an impulse from wave 2 to 3.
By observing the bottom support TL, even if it goes parabolic, when price breaks that supporting TL, we then see a change in Trend.
You can apply this method to many charts and it works. But knowing the strategy as to how and why you place those TL is important for the decision making. That is also a strategy which is not covered in this module but you can visually do this and in most cases you will be correct. Its therefore in conjunction with the other 2, make you more equipped to understand the change in trends scenario.
Understanding the overall structure from a elliot wave perspective helps understand the overall trend in the macro picture, a useful tool.
This video below is also included in the moving averages module if you haven’t seen it but it does touch on how MA help use understand how the trend works and what we look for in a change in trend.