How To Quickly Identify The Trend

Traders, like anyone pursuing a profession, you must evolve in order to improve and keep an edge.  Back in 2006, a mere 2 years after I transitioned from day trading equities into swing trading forex, I wrote an article for TradingMarkets.com where I was a contributor. The article addressed an age old question:

“How do I know what the trend is?”

Here is a link to that article.  What is really interesting is looking back and critiquing my approach at that time.  While the content remains relevant, it was heavily steeped in my day trading techniques and time frames.  With the benefit of hindsight, it was not a complete strategy at least from a swing trading perspective.

With that said, allow me to pen the revised edition of that article, and while this version will fill in some gaps, I am sure that in another 8 years there will be yet another update!

I Learned A Lot in 8 Years

Trading sure is one of those endeavors where you never reach an endpoint – you continue to evolve and learn. Certain things never change of course, mainly human behavior, and that can provide a very nice edge at times.

But back to the trend.  Let’s first update some terminology:

Primary Trend: the trend that dominates the time frames you analyze

Counter-Trend: the corrections/moves that deviate from the primary trend but only briefly

In the article I wrote for TradingMarkets.com, I was using shorter-term charts (<15-min on average) and thus would consider any change in trend adequate to switch from bearish to bullish and vice versa.  However, over the years I have continuously pushed my time frames out so that my trades last 1+ days.  Therefore it is really important to always be in line with the primary trend.

Since counter-trends tend to be far shorter in duration and exhibit price action that is far less fluid than what is seen in the primary trend, I want to avoid those periods as my odds of success are greatly reduced.

You might ask:

How can you distinguish between the start of a new trend versus just a counter-trend?

Enter Mr. Elliott

Yes, Elliott Wave analysis.  Now before you slam shut your laptop or turn off your tablet, let me reassure you that Elliott Wave (EW) is not as daunting and complicated as you may think it is.  In fact, I would argue that even if you do not use EW on the most basic level, you are likely at a disadvantage to some degree in knowing what the trend is and navigating within it.

Consider the current position of EUR/AUD.

The primary trend is down (bearish), I can also confirm that in the fact that the price action is unfolding in an impulsive manner to the downside.  However, the moving average has turned higher.

Now what?  

Do you switch your bias to now looking for long positions?

It depends – luckily even a basic understanding of EW will provide a solid framework to answer this question.

Make Sure You Know What You Don’t Know

Based on what has been discussed here thus far it is impossible to know for certain if the trend is changed or if this will merely be a pause in the action before the primary trend resumes.

However, there are a few simple techniques you can use to begin answering that question.

In next week’s installment I will illustrate further how you can make a more accurate assessment of the trend and whether or not you should continue to trade in that direction or begin considering positioning for a change in trend.