Determine the Trend Before You Trade

Trend determination is obviously important for trend followers, but anyone trading in any style should be aware of the trend in the market they are trading. The overall trend can influence your trading style. If the trend is up, you probably will have a different way you treat buy signals from counter trend sell signals. If the trend is sideways, then applying a trend following method would be frustrating and probably not profitable. A downtrend in certain markets can have a different character than an uptrend. Beginnings of trends can be easier to trade than end of trends, in many cases. Therefore, it is important to know what the trend is.

But to complicate matters, there can be many trends at play in the same market, even on the same chart. There are trends within trends. Different period lengths on moving averages, or indicator inputs, can signal a different, often confusing and conflicting trend. There can be a counter trend down move on a 30-minute chart, while the daily chart is showing a powerful uptrend, while the monthly chart is showing a sideways trend. When they all line up, it is the most comfortable and reassuring time to take a trade, but if you wait for everything to be in synch you would probably trade very little, and often not in a timely manner. And often the comfortable and easy trade is the one everyone sees, and it often turns out to be untimely. It is best to keep it simple and just trade off the time frame of the chart you are analyzing.

Most of us want indicators to guide us, as indicators are quantifiable. We can lean on them with more confidence. However, the purest and fastest way to determine trend is just through studying the price structure. Price does not lag. Price is not derived from anything. It is current. It might frustrate, but it doesn’t lie.

The easiest way to define a trend using price structure is by observing high and low swing points. Swing points, or pivot points, are price bars that have a high point surrounded by two or three lower highs on either side, or a low price bar surrounded by two or three higher lows on either side.

However you define the swing point, the idea is to have a series of prices that keep taking out the previous swing point in one direction. This is the same theory of a market making higher highs and higher lows, although this isn’t always exactly true. Sometimes a pause will form in the price structure and prices temporarily go opposite to the trend, with the market making a lower high, but as long as a lower low is not taken out the uptrend is still intact.

These swing points are important to the price structure because they mark where prices stopped and reversed, at least momentarily. The market can then re-test these areas to see if price gets turned back again, or if price can overcome the previous resistance point and move beyond. The market is constantly testing whether trade is accepting or rejecting price and these swing points are the reference points for these tests.

I have not found any trend following indicators or approaches to be profitable as a stand- alone system. But I have found it not profitable trading against the trend. Therefore I want to know the most probable direction of the current trend of the market and time frame I am trading. Then I can enter on pullbacks against the trend, but always in the direction of the trend. It’s taken me many years of frustration to learn this lesson. It might be gratifying to pick a top or bottom of a market, but there will most likely be higher odds of success in going with the flow of the trend. If you jump into a raging river you can either flow with the current effortlessly, or swim like mad trying to go upstream. Usually the best you can do is stay where you are. So know the trend, and trade only in that direction.