Identifying Trend Direction

The term "Trade with the trend" or " The Trend is your friend" is often used in the world of trading but many people struggle to identify trend direction. The reason that people struggle to identify trend direction is due to the fact that financial instruments don't move in a straight line and the trend may be different depending on which time frame you viewing price.

To identify a new trend I use dynamic support and resistance as well as trend lines bounces and in both cases we will need to know how to use swing highs and swing lows effectively to call the direction correctly. Swing high or low is when price is moving a certain direction and then pulls back or has a pause before resuming in the direction it was moving in. Below are examples of a swing high and swing low candle formation.

  

A swing high is formed when the high of a price is greater than a given number of highs positioned around it. 

A swing low is created when a low is lower than any  other point over a given time period.

Now that we are able to identify what a swing high and a swing low is we can now apply this to our charts in the following manner. In the below chart we can see how the swing highs and lows rejected or bounced off the EMA also know as the dynamic support and resistance.

In the below diagram a trend can be seen by drawing a line and joining the swing high and lows. In this example the swing lows where joined and now we can clearly identify the trend direction. A trend line is only a trend line if there are 2 or more touches. In the same diagram I left the EMA indicators on the chart so that you can see how the swing lows react almost the same way to the trend line drawn.
 
To draw trend lines I suggest you zoom out into the larger time frames and draw 1 or 2 obvious trend lines on each chart. Example lets say you are working on the 4H chart where a valid price action signal is present and you want to identify the trend. Start by zooming out to the weekly time frame drawing the most obvious trend lines on the chart then work you way on each time frame until you get to the 4H. These trend lines will indicate true valid key levels.

The one thing we will never know is when a new trend starts or finishes therefore we should wait for  market to confirm the new bias. In the case with trend lines if price breaks the trend line we can say that a new trend maybe forming, however a trend line needs 2 or more touches to confirm a new trend is in place. The same could be said about dynamic support and resistance.  In both these cases we can say that the second retracement are always important after a new trend.

Now that we have the tools or methods in identifying a trend, combing this with horizontal support & resistance levels as well as a valid price action signal we can confidently enter the market with a high probability trade.

Price Action with Dynamic Support and Resistance - Part2

This article is a continuation from the original Price Action with Dynamic Support and Resistance. I have decided not to place to much emphasis on the explanation but mention key points why we use it.

• Markets often respect dynamic support and resistance on all time frame periods
• Price action signals often occur at these levels
• Trade lager time frames such as Daily and 4H as smaller time frames can be more volatile 
• The more price touches the EMA lines the more the market starts to respect the trend
• Help us identify trends and the market bias
• Once we have identified the trend we can also take the slope into consideration
• I don't just trade the cross of the EMA, the reason being I could of entered a trade before the cross occurred with a counter trend price action signal. At a later the stage the EMA's may cross only to validate my entry.

Counter Trade Example

•  The safest way to enter is to wait for the EMA's to cross and once a clear trend is starting to form I could then enter a trade based on a valid price action signal in the direction of the trend. If the market makes an aggressive move either up or down wait for a pull back and if a price action signal appears then enter the trade. Example below doesn't have a valid price action signal this was to demonstrate the best level to enter at, however we could find a valid price action signal at the same level in the smaller time frames such as 4H and 1H.

Pull Back Entry Example / Diverging Trend lines

•  EMA should be used in conjunction with other analysis tools such as price action signals and horizontal support and resistance.
• When the EMA's lines cross and in a obvious direction  we can assume that this is the new short term trend being formed.
• Lets assume the EMA's crossed and new trend has been established and sometime in the future we see price break above the EMA's lines, but the EMA's have not crossed back in that direction we can assume that the trend is still in place and that price will eventually continue in the direction of the current trend.
• Once a trend has been set the EMA will start to diverge the further apart they move the stringer the trend. See image above for diverging trend lines.

Price Action with Dynamic Support and Resistance

In my previous article Trading Key Levels with Price Action, the main topic discussed was using a price action signal off these key event areas to enter the market. These key event areas are also know as support and resistance levels and are marked by horizontal lines drawn across bar highs and bar lows or near the same level. The other category is the dynamic or moving support and resistance levels which are marked by moving averages.

There are several different types of moving averages (MAs) in use by Forex traders. In fact, moving averages are the most common technical indicator across all financial markets, including the Forex .They are called "moving" because each new chart period is included in the calculation, while the oldest period is discarded. This has the effect of the average moving along as time passes and the chart develops. The indicator I use mostly is the EMA. The main reason that early chartists developed the exponential moving average was that they felt the SMA was too reliant on old data, and too slow to react to recent price action, so they devised a way to give the most weight to the most recent price action, and to let the weight taper off as you move back through time on the chart. I'm sure you asking what values should I use? It all depends how you analyzing price and over what  period. Most traders use 50, 100, 200 which allows them to see what the average price did the last 50, 100 and 200 days.

Now I'm sure you questioning the fact that I'm advocating that I trade purely price action without indicators so why am I discussing this? I use EMA for two things for trend analysis and  to identify dynamic support and resistance levels. It's pretty simple when the 2 lines example 50 and 100 EMA cross higher then we have a bullish trend in place, if they cross lower then the opposite applies. Please keep in mind that EMA only works for a trending market but when markets are range bound we need to rely on the static support and resistance levels. Trading with the trend you will want to trade away from the EMA or if you get a very obvious counter trend signal you will then trade toward the EMA.

 From the chart below we can deduce that price has bounced off EMA many times in the course of this recent uptrend. This demonstrates how valuable these levels are in showing us the dynamic or moving support and resistance levels.

Now if we take both static and dynamic support and resistance levels as discussed above and in conjunction with a price action signal this usually gives me a high probability setup that I can take advantage of. 

Hope this article can contribute toward your success in trading

Happy pipping!!