Pivot Trade with the Direction of the Trend + Considering Set-ups Past a Given Predetermined

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Trading with the Trend – 6 Ways To Identify The Direction Of The Trend

Trading with the Trend – 6 Ways To Identify The Direction Of The Trend

Trading with the trend is trading with the flow.

When the prevailing trend is up, why would you want to look for short entries when buying might result in much smoother trades?

Many amateur traders, even when facing a very obvious trend can’t stop trying to predict reversals and burn their fingers going counter-trend, whereas they could have made so much more money by simply joining the trend.

But even if you are not a trend-following trader, you can combine the concept of trading with the trend and with momentum with your regular trading approach. Knowing where the price is going and which side of the market is stronger is an important trading skill.

To be able to correctly read price action, trends and trend direction, we will now introduce the most effective ways to analyze a chart.

Intro: The different market phases

Before we learn how to identify the trend, we should first be clear what we are looking for.

It may sound too simplistic first, but stick with me for now and you will soon see the power of this analysis approach.

Markets can do one of three things: go up, go down, or move sideways.

Of course, how fast (or how slow) and how long the individual periods last changes all the time, but the price can only do one of those three things.

The picture below shows you the three possible scenarios and how the market keeps alternating between the phases. We will shortly see how all price patterns and chart formations are also made up of those moves.

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1. Trading with the trend: The Line Graph

Most tradersВ only use bars and candlesВ when it comes to observing charts, but they completely forget about a very effective and simple tool that allows them to look through all the clutter and noise:В the line graph.

The purpose of bars and candles is to provide detailedВ information about what is happening on your charts, but is this really necessary when it comes to identifying the overall trend? Probably not.

A trader should zoom out from time to time (at least once a week) and also switch to the line graph to get a better and clearer picture of what is currently happening. And since our only goal here is to identify the trend direction and become aware of the overall situation, the line graph is a perfect starting point.

2. Trading with the trend: Highs and lows

This is my personal favorite way of analyzing charts and although it sounds very simple, it is usually everything you need to understand any price chart.

Conventional technical analysis says that during an uptrend you have higher highs, because buyers are in the majority and push the price higher, and lows are also higher because buyers keep buying the dips earlier and earlier.

It works the same during a downtrend: lows are lower when the seller surplus moves price lower and highs are lower becauseВ sellers sellВ earlier and buyers are not as interested.

Chart example: Head and shoulders vs highs and lows

Highs and lows define all market patterns and chart formations. Below we see a Head and Shoulders pattern and this pattern is, of course, also made up of highs and lows. This pattern beautifully shows how transitioning highs and lows describe the shifting power between buyers and sellers.

We just need to follow the highs and lows to understand what the market is telling us.

Try it out and you will be able to describe all market patterns and conventional chart formations using highs and lows.

3. Trading with the trend: Moving averages

Moving averages areВ undoubtedlyВ among the most popular trading toolsВ and they are great to identify the market direction as well. However, there are a few things to be aware of when it comes to analyzing trend direction with moving averages.

  • The length of the moving average highly impacts when you get a signal when markets turn.
  • A small (fast) moving average might give a lot of early and false signals because it reacts too soon to minor price movements. On the other hand, a fast moving average can get you out early when the trend is about to change.
  • AВ slow moving average might provide signals too late. Or, it can help you ride trends longer when it filters out the noise.

In the screenshot below we used the 50 EMA which is a mid-term moving average. В You can see that during an uptrend, price always stayed well above the moving average and once price has crossed the moving average, it entered a range. In a range, price does not pay too much attention to moving averages because they fall in the middle of the range, hence average.

If you want to use moving averages as a filter, you can apply the 50 MA to the daily timeframe and then only look for trades in the direction of the daily MA on the lower timeframes.

4. Trading with the trend: Channels and trend lines

Channels and trend lines are another way of identifying the direction of a trend and they can also help you understand range markets much better.

Whereas moving averages and the analysis of highs and lows can also be used during early trend stages, trendlines are better suited for later trend stages because you need at least 2 touch-points (better 3) to draw a trendline.

I mainly use trendlines to identify changes of established trends; when you have a strong trend and suddenly the trendline breaks, it can signal the transition into a new trend. Trendlines during ranges are ideal when it comes to finding breakout scenarios when price enters the trending mode again. Also, trendlines can be combined with moving averages nicely because of the complementary characteristics.

If you want to learn more about trendlines, take a few minutes and watch our video here:В learn how to draw trendlines.

5. Trading with the trend: How to use the ADX indicator

The ADX is an indicator that you could use to determine the direction of the trend and for the strength as well. The ADX indicator comes with three lines: the ADX line that tells you the strength of the trend (we deleted this line in our example, since we only want to analyze the direction of the trend), the +DI line which shows the bullish strength (green line) and the -DI line which shows the bearish strength (red line).

As you can see in the screenshot below, the ADX signals an uptrend when the green line is on top of the red line, and it signals a downtrend when the red line is higher than the green line. When price is ranging, the two DI lines are very close together and hover around the middle.

The ADX can be combined with moving averages nicely and you can see that once the DI lines cross, price also crosses the moving average. In the video below we explain how to use the ADX in more detail with the other concepts.

6. Trading with the trend: The Trend Rider

The Trend Rider is our own proprietary indicator, developed by Tradeciety.com

The Trend Rider is based on momentum and price action studies with the goal to provide the most reliable trend signals and also to help with staying in trades.

The Trend Rider has 2 main components: The background colors in the chart section turn first and provide a heads up. When you see that the background color suddenly turns red, you should start looking for selling opportunities. The bars at the bottom are the confirmation that the momentum is truly turning. When the background and the bars turn red, you can often find great bearish trends.В The reason behind this two-step process is to provide a more robust approach and help traders understand the gradual trend change.

Especially if you combine the Trend Rider with conventional technical analysis, breakouts and pattern trading, you will be able to analyze the market very effectively.

What are some of the good pivot point strategies for intraday trading?

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I will try to share most precise and effective way to use pivot level strategy on intraday charts. Before going further i would like to mention two important things in relation to pivot strategy:

  1. Do not rely on ready-made pivot levels(providing 3 support and 3 resistance levels). These pivot levels are neither reliable nor powerful. Instead you need to plot pivot levels on your own.
  2. Instead of using pivot points make use of pivot areas i.e. support and resistance zones.

We will be using two time frames in this strategy. Daily time-frame to draw pivot levels and a intraday 5 min time.

Trading with the Trend

Financial markets can move in two distinct trends: up or down. One of the most basic – and often underrated – rules of trading is to trade in the direction of the prevailing trend. Learn how to identify trends, and what to do when a market is moving sideways.

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In this lesson you can learn:

  • Why the trend is the friend of every trader
  • How to identify whether the market is in a downtrend, uptrend or sideways trend
  • How to draw a trendline on the chart

One of the most popular quotes in trading – and you’ve probably come across it before – is ‘the trend is your friend.’

What it means is this: trading the path of least resistance by always trading in the direction of the prevailing trend. Imagine a wave moving towards the shore; the easiest thing a trader can do is ride atop the crest of that wave, not swim against it.

Of course, a trend can change at any given time, but you can use technical indicators to try to pinpoint at which point a trend is likely to change direction.

Up, Down, Sideways

All financial markets move in two distinct trends: up or down. When markets are not in a trend, they are then moving sideways, where there is an ongoing battle between sellers and buyers. Correctly identifying which type of trend a market is currently in can help to present strong opportunities that come with transparent guidelines.

A Rising Market

If a market is rising, you may consider buying that market and trade with the prevailing trend, i.e. take the path of least resistance. The key will be picking the right moment to get into a buy position. Ideally you want to get into the buy position as low as possible, to maximise your potential upside. Some traders may wait for a pullback (a small dip in the market), but this carries the risk of waiting too long to get into the market and you could miss out on further upside.

A rising market, also known as an uptrend or bullish market, shows a series of higher highs and higher lows. In other words, each bottom (support) is higher than the previous one.

A Falling Market

Conversely, if a market is falling you may consider selling that market. To maximise your potential downside, you would need to enter that market as high as possible, which would enable you to maximise any downward move in price.

A falling market, also known as a downtrend or bearish market, is where the market creates lower lows and lower highs.

How to Determine the Trend

Conventional technical analysis says that during an uptrend you have higher highs, because buyers are in the majority and push prices higher, and lows are also higher because buyers keep buying the dips earlier and earlier. This also applies during a downtrend: lows are lower when the seller surplus moves prices lower, while highs are lower because sellers sell earlier and buyers are not as interested. That is why the easiest way to identify a trend is to connect two highs or two lows that you identified on the chart with a line.

The Trend Is Your Friend – Until It Ends

However, markets do not always trade in clear trends 24 hours a day, 7 days a week. There are stabilisation periods in every market, which are also known as sideways trends.

A market moves sideways when it’s at a point of indecision and buyers or sellers are at an impasse. Buyers and sellers test each other, but no pure consensus emerges. Here, most traders face two potential strategies: range trading or waiting for a breakout.

As you can see in the example below, the EURUSD was trading sideways before a downtrend was established and sellers overpowered buyers, driving prices downwards.

When Identifying a Trend

One of the most important things when identifying a trend is determining your time frame. Usually, when you are analysing a long-term trend, you’ll use a long-term time frame over a short-time frame. However, for intraday purposes, shorter time-frames are of greater value. Large commercial traders might be interested in the fate of a currency or company over a period of months or years. For retail traders however, a weekly chart can be used as a ‘long-term’ reference.

Riding the Waves of the Trend

By definition, trend analysis is based on historical price movements. That means that traders are looking at the past to predict the future.

Knowing the direction of the trend does help in taking positions, but bear in mind that markets tend to move in waves. These waves are called impulse waves when they are in the direction of the trend, and corrective waves when contrary to the trend.

By counting the waves or pivots in each wave, you can attempt to anticipate whether a trading opportunity will be against the trend or with the trend.

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