Learning to trade in line with the trend is arguably the most important part of technical trading. Traders who are constantly fighting the trend and trying to guess reversals are going to have a much harder time making consistent money that traders who ride the flow of the market.
Components of a valid trend
Every trend is made up of four components. Trends will be found across every single timeframe from the 1-minute chart to the 1-year chart and while every trend will have it’s differences they all contain the following components:
IMPULSE – A move in line with the overall trend
CORRECTION – A pullback move against the trend
HIGH – A high point formed at the end of an impulse
LOW – A low point formed at the end of a correction
For a downtrend the high & low data is simply flipped, like so:
Now you know that a trend is made up of four components; impulses, corrections, highs & lows. It’s the highs & lows that we use to identify a trend in a market, we see how current highs and lows react to the previous ones to determine whether the direction of the overall market is UP or DOWN.
If a market consistently prints Higher Highs & Higher Lows (highs & hows higher than the previous) the market is in an uptrend. If the market consistently prints Lower Lows & Lower Highs (highs & lows lower than the previous) then the market is in a downtrend.
When we know the overall trend direction we can then trade in line with it by:
Uptrend: Buying the Higher Lows at the end of the corrections and riding the impulse up
Downtrend: Selling the Lower Highs at the end of the correction and riding the impulse down
Finding entries with the trend
Working out the trend direction is the easy part, what’s not so easy is finding an entry at the end of a corrective move because there’s no way to know for certain whether a correction is finished. To find trend trading entries we can use a few simple price action techniques making use of Key Levels & Supply & Demand to help us gauge whether a corrective move is coming to an end.
Key Levels are horizontal support and resistance price levels ending in .000, .250, .500, .750. These rounded off levels are targeted as breathing room for institutional market participants, levels where profit taking and new order accumulation occur. For this reason we often see good reactions from these levels, making them a top selection for trend trading entries. If a corrective move looks to be slowing down at a key level there’s a chance the move is about to end, providing us with an entry.
Supply & Demand are zones targeted by institutional traders for re-accumulation of entries. These zones can be found by marking areas of consolidation (sideways movement) before large uninterrupted moves in the market. We can then look at these areas as bounce points in the future.
So here’s an example of a trend trading entry using Key Levels and Supply & Demand in action:
As you can see on the chart above we used the highs & lows of the market to identify the overall trend direction, and then found a trend trade entry by identifying a demand zone & key level that lined up nicely. When the corrective move traded into this area the market found support and soon made a run higher forming the next impulse move – this is where the profit is made!
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