Trouble with the Trend
|Online Trading Academy’s Patented Core Strategy focuses on two major chart components: identifying the trend of the security we are trading and finding the supply or demand zones where we will trade. The trend tells us when we should be a buyer or a seller of the stock while the supply and demand zones tell us at what price we should take action.
These concepts seem simple when explained by a professional trader in a classroom setting but can be difficult to master for new traders, especially if they try to trade on their own. You need to make sure you fully understand the definition of a trend and also be able to know the difference between a trend change and a correction. The former will signal a shift in trading tactics while the latter means that you are looking to re-engage the current trend direction.
A bullish or uptrend is a series of higher highs and higher lows. The key is that you are not officially in an uptrend until you have a higher high after your first higher low. In the uptrend, the lows control. You are in the uptrend until a lower low has been made in price. The lower low by itself only breaks the uptrend, it does not signal a downtrend in price.
A bearish or downtrend is when price makes lower highs and lower lows. The official bearish trend is the first lower low after a lower high. The lower highs define the downtrends. The downtrend continues until it is broken by a higher high. Again, this only breaks the current trend and does not signal a reversal of the trend. Prices can also trend sideways with relatively equal highs and lows.
Many traders struggle with identifying the current trend for the securities they are trading and will often buy in downtrends or sell in uptrends which leads to losses. A reason they sometimes struggle is that they are not able to see the correct highs and lows to determine the trend. They ignore critical points or worse, look too closely at every candle and see too many highs and lows.
There is a simple technique that can possibly ease your search for the trend. You may be familiar with moving averages. Moving averages are normally used to summarize the previous trend of a security. They average the closing prices over a period of time to show traders what the trend has been.
The traditional moving average is based on closing prices. We can change the parameters of the moving average on our chart in order to view highs and lows instead. This can help us blur our vision so that we are focusing on major changes in highs and lows when defining the trend of our securities.
By drawing moving averages on the highs and lows and deleting or hiding the candles on our chart, we can readily see the trend that price is in and may be able to see when that trend is changing much sooner.
This technique is to be used as an odds enhancer. The trends will typically reverse at strong supply and demand zones from larger timeframes. Corrections occur at supply and demand from the smaller timeframes.
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