Defining a trend and trading with the trend are key success factors in trading. This article will help you better determine the trend, understand its essence and possibilities of use.
How trader, you, probably, heard the old wisdom, what is better to trade in the direction of the trend. As they say: “trend – your friend“. This – wise advice, if you realize, that the trend might end. And then – trend is no longer your friend.
In this way, an extremely important question arises – How we can определить направление тренда? I am a supporter of the KISS rule, которое гласит: “keep it simple and stupid”! In this article, we will look at the method определения тренда and a simple method of waiting for the end of the trend.
Before, how to start, I would like to mention the importance of the time scale in determining the trend. Usually, when we analyze long-term investments, then the long-term timescales dominate the shorter-term ones. but, for intraday purposes, shorter time frames may have higher value. Trades can be divided into three trading styles or time segments: внутри-дневные, swing trades and position trades.
Major market participants, like companies, организующих производство в другой стране, interested in the fate of the currency over a long period of time, like months or years. Но для спекулянтов недельные charts уже могут рассматриваться, how long-term.
Moving averages
Considering, that the weekly chart is our original time frame, we can use it to determine the long term trend while pursuing speculative targets. To do this, we will turn to two very useful tools., who will help us define a trend. These two tools – Simple Moving Average and Exponential Moving Average.
In the above weekly chart, we can see, that in the period from May 2006 until July 2008 Years 20-period Exponential Moving Average (синяя) was above the 55-period simple moving average (red), and both are tilted up. This indicates a tendency for the euro to strengthen and, respectively, weakening dollar.
In August 2008 of the year, short-term moving average (синяя) turned down, указывая на потенциальное изменение тренда, although the long-term moving average (Red) haven't done it yet.
Identifying a change in trend
In October, 20-the daily moving average crossed below the 55-day moving average. Both lines bent down. At this point, the trend changed to a downtrend, which implied the preference of short positions in the euro against the dollar.
On the second weekly chart, we see, that the short-term moving average holds in December 2008 the year is relatively neutral and begins to turn up, indicating now a potential trend change to an upward. But the assessment of the 55-day moving average during this period shows, that the long-term moving average remained under the downtrend.
The first arrow on the chart above indicates, that the long-term moving average turned down, Pointing, what a week (longer term) the trend in the EUR / USD pair is now downtrend. The second arrow points, that the placement of a trade position could have been attempted, as soon as the price retraces back to the sloping downward moving average.
In this case, цель заключается в том, to определить направление тренда, and not the moment of entering or exiting a trade. Certainly, can't say, that there were no trading opportunities on shorter time frames, like daily and hourly charts. But for those traders, who prefers to trade with the trend, instead of, to try and catch a correction, it would be possible to wait for the trend to resume and trade in its direction again.
Double base indicator
Let's move on to the third graph and see, what's happening, when the 20-day exponential moving average declines towards a double bottom.
Considering, what model “double base” on the chart suggests support at the base level, we can observe the price dynamics on the daily chart, to get a better understanding of the development of the situation. The arrow points, where the short-term moving average rises. Once more – Moving averages are not used as trading signals, but only for the purpose of determining the direction of the trend.
Catch the wave
By plotting a short-term exponential moving average and a longer-term simple moving average on the weekly and daily charts, you can determine the direction of the trend. Knowing the direction of the trend really helps when making deals, but should be taken into account, that markets move in waves. These waves are called impulsive waves. – they, that develop in the direction of the trend and corrective – developing against the trend.
Counting waves or pivots in each wave, you can try to determine, whether trading opportunities should be considered against the trend or with the trend. According to the Elliott Wave theory, your impulse usually consists of five oscillations, and the correction wave usually consists of 3 Hesitation. Full wave motion consists of five vibrations, two of which are counter-trend.
Here is an example of Elliot Waves. Поскольку теория Волн Эллиота может быть довольно субъективной, I prefer to use pivot counting, to better identify wave depletion. This usually implies the presence, least, seven pivot points when moving in the direction of the trend, followed by five points during the correction. Sometimes the market will not follow these technical assumptions, but more often it will happen, providing some very lucrative trading opportunities.
Conclusion
By combining moving averages with pivot point counting and complementing this analysis by observing candlestick patterns, a trader can significantly increase the chances of making successful trades. Don't forget, what trade – this is a craft, and, hence, is also an art, and science, and takes practice, to develop consistency and profitability.
Source Forex Magazine
okbm(“http://nysetrader.net/opredelenie-trenda/”,”Defining a trend”)
