SECTION 1 – 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 favouring the trend direction. Trading with
the trend is trading with the flow or with the majority or whale. You don’t want to go against the trend or majority in terms of buying and selling dictate the market. You therefore trade in the direction 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 and/or 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. Such strategies are worth paying for and hence we offer such strategies here. Note a strategy requires more than 1 piece of information on
the chart, it requires 2 or 3 elements coming together.
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 examples below will help you to understand on how to look for trends and therefore provide few tools or methodology, no matter what the time frame your looking at. To understand this topic, it will be a major part of your risk management (part of your trading toolsetskills) and therefore you will be on your way to becoming a competent trader.
NOTE: We use ELLIOT WAVE THEORY in conjunction with FIBONACCI, INDICATORS, CANDLE STICKS AND HISTORICAL DATA to help determine likely areas of reversal (pivot) areas to the trend. The trading strategy for these likely pivot points are in more advanced modules for subscribing members.
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.
Here we use moving averages to assist us for the trend.
Different timeframes – Trend within a Trend.
When talking about trends it is important to consider the timeframe. A value investor, whose time horizon is long term, might say the market is still in an uptrend, while a swing or day trader already identified a downward trend.
Have a look at the next picture and you will see, that there are trends within trends. A correction which takes several days or weeks often has nice impulsive phases, which can give good trading opportunities. Or you can have a nice
1 hour trend which persist over several session, but only representing the correction of the larger trend. The trader who is open minded to the market can read these signs and make profit in both situations.
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 starting with Moving Averages will help to find what the trend is and when its changed.
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 MACRO/BIG 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.
SECTION 2 – EXAMPLES WITH TRENDS
Using Moving Averages to understand the TREND
The pre-requisite: 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.
Using supporting and resistance we find TRENDLINES (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.
Note:
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.
KEY TAKEAWAYS :
– Trendline/s indicate the best fit of some data using a single line or curve;
– A single trendline can be applied to a chart to give a clearer picture of the trend;
– Trendline/s can be applied to the highs and the lows to create a channel;
– The time period being analysed and the exact points used to create a trendline vary from trader to trader;
