How to define the trend? UP TREND versus DOWN TREND
In previous lessons we have talked about what Supply and Demand trading is and how it can help us to achieve success in the markets. We talked about imbalances, which manifest themselves as either peaks or valleys or in continuation patterns that will help us pin point “potential areas of interest. We narrowed the areas of interest further down by explaining the difference between fresh, original and used up levels. Finally I have shown you how to draw bases on the most important Japanese candle stick patterns so you are able to define — providing other criteria is met that you will learn in later lessons- potential entry zones
In this lesson let’s switch to another important aspect of our methodology — the Trend. You might have heard the saying “the trend is your friend — until it ends”. But how can we define the trend and when will we consider its end? This is what I am going to show you in this lesson.
As you will learn in future lessons the methodology rests on a concept called the sequence and realignment by using multiple time frame analysis to make trade decisions. The concept of identifying trend is the backbone of it. I therefore urge you to go through all the lessons several times so you understand it inside out. A wrong application will lead you to many losses. So lets start..
When you open charting software and switch through the time frames of any instrument you will realise that sometime price goes up, sometimes it is in a clear down trend and sometimes price is just flat. Each timeframe can have a different trend because Price is fractal. The term fractal means, that there are price structures within price structures and these structures/patterns repeat themselves over and over on all timeframes.
Sometimes you stare at a price chart and you first believe it is up, then after looking again you think it is flat. Why is this you might ask? Because depending on where on the chart you reference the last candle with the beginning you might get a different outcome. In this lesson you will learn the rules on how to exactly define the trend so that there is no subjectivity left. You will never have any doubt what the trend is, which is what we seek, clarity and objectivity
You might ask how can I make a trading decision to trade if each timeframe has a different trend? Isn’t that a mess? It may look like a mess but this is why we need to make a top down multiple time frame analysis so we align as many time frames as possible in the direction of the bigger picture’s trend. This concept will be taught in later lessons. In simple terms, to define a trend or for that matter a consolidation in a mechanical and methodical way, we use supply and demand imbalances as well as trend lines.
Just one word of caution upfront which is very, very important! Since we are primarily working with supply and demand imbalances, price making a higher high or a lower low does not necessarily mean that we have a trend
We basically have 4 stages:
1. An uptrend
2. A downtrend
3. A broken uptrend to the downside a.k.a Bullish consolidation
4. A broken downtrend to the upside a.k.a Bearish consolidation
An uptrend
· This marks beginning of a new upside trend in the market. Once we identify an uptrend, we need to look for long side opportunities in the market.
A downtrend
· This marks beginning of a new downside trend in the market. Once we identify a downtrend, we need to look for short side opportunities in the market.
A broken uptrend to the downside a.k.a Bullish consolidation
· This marks end of uptrend in the market. Once we identify Bullish consolidation in the charts, we need to stay away or look for quick reversal trading opportunities in the market.
A broken downtrend to the upside a.k.a Bearish consolidation
· This marks end of downtrend in the market. Once we identify Bearish consolidation in the charts, we need to stay away or look for quick reversal trading opportunities in the market.
So these are the 4 different trends in the market. If you open any chart, on any timeframe, you should be able to spot what is the current trend in the market or you should be able to spot which stage of market we are in.
To do this, we have very clear cut rules for each stage or each type of trend and that’s exactly what we are going to see in the forthcoming sessions.
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