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posted on 10 September 2017

The Issues With The Trend

by Sam Evans, Online Trading Academy

Online Trading Academy Article of the Week

Over the last month of leading the ongoing XLT FX sessions, we have been doing our usual business of analyzing the currency markets in real-time and scouting the arena for only the very best low risk and high potential reward setups we can find.

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Following on from a sharp decline in the value of the US Dollar over this last year, things seem to have settled down a little as this market in general goes through the next transition, trapped between key levels of Supply and Demand ahead of the next big move. With these conditions in mind, many of my students and peers alike have been talking about the current trend, a subject which often causes both mixed feelings or confusion, and frustration for many traders in these times of uncertainty for the Dollar.

In most mediums of trading education, we often hear or read the phrase “The Trend is Your Friend". We are encouraged to follow the trend in our setups and strategies, being told that going with the momentum of current price action offers the best rewards and highest level of probability. While it is hard to deny that trends do indeed tend to continue for consistent periods of time, we also need to sit back and recognize that the matter of trend analysis can also be something very subjective in nature as well. No trend lasts forever, that’s why it’s called a trend. A trend it would simply be a certainty if it wasn’t, and there is no such thing as that in the price action of the financial markets. The issue most newer students of mine have is that they rely on lagging forms of trend analysis which only confirm that which has already happened. We also need to develop the skills to anticipate that which is likely to happen next.

The first hurdle seems to come from the many ways to define a trend in technical analysis studies, including the traditional methods of spotting higher highs, higher lows, lower highs and lower lows. Plus, we have such tools as moving averages and convergence/divergence analysis to aid us in the process too. All can be of great use to a trader, but these methods only confirm what has already happened across a very specific period of time as well. Perspective changes across various charts and we can see different pictures of the same thing if not careful. For example, in the below example we can see 2 trends of the same market:

Knowing the past market trends is only mildly helpful.

When we say that something is in an uptrend or downtrend you must understand that the trend we are currently observing is only a picture of price action across the timeframe or period in which we are looking at, and often when we shift our attention to another viewpoint things can often look very different, as shown in the above shots of the Dollar Index across 2 charts. So which trend do I follow if the trend is meant to be my friend?

From the start of 2017, we have been enjoying a steady and progressive downward trend in the DXY (Dollar Index). We have witnessed consistent lower lows and lower highs, signaling weakness in this market. From this perspective alone it would make good sense to look for a pullback to sell short into this falling market. However, looking at the same market from a smaller chart, we are right now in an uptrend. So, what is the best plan, long or short? This is a common issue for the trend trader in that it can often be difficult to really know what the trend is going to produce next. Are we in an impulse move or a corrective one? Rather than confuse myself with these mixed market signals, I choose to follow a simpler approach. I look to the most recent buying and selling activity, quantified by institutional demand and supply imbalances.

In this chart, we can see the impact of the major banks selling at the established supply zone on the daily chart and, with an apparent lack of demand to meet the selling pressure, we would assume the price is going to continue lower for now because the trend has room to run:

Trends continue until forces stop them. Learn to tell when the trend will reverse.

With no clearly defined buying activity on this chart we must look further out to see where we can find the next institutional level of demand. This is our way of anticipating the next trend to come. By zooming out, we can see some solid buying from the big market players in the following area of demand:

Why the trend is your friend is a misnomer

By taking the demand/supply approach to the trend we are looking to anticipate each leg of the trend, both impulse and corrective, which can only be spotted by recognizing the footprints of the banks via supply and demand zones on a price chart. When we look to define a trend, we always need to remember that any trend we are currently looking at is a thing of the past. It is an illustration of something that has already happened so to therefore simply assume that it will continue can often result in frustration. I choose to objectively analyze the most recent examples of buying and selling activity within the market and let the behavior of price lead the way. Sure, sometimes I am wrong and it costs me a little, but when I am right it pays dividends, thus consistently guaranteeing me a solid overall risk to reward ratio. To say I am not a trend trader would be wrong. I do trade the trend but I look for an opportunity to be in the trend from the very start…

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