As a trader , you have probably heard the old adage that it is best to "trade with the trend. This is sage advice as long as you know and can accept that the trend can end. And then the trend is not your friend. I believe in the KISS rule, which says, "keep it simple, stupid! Before we get started, I want to mention the importance of time frames in determining the trend. Usually, when we are analyzing long-term investments the long-term time frame dominates the shorter time frames.
However, for intraday purposes, the shorter time frame could be of greater value. Trades can be divided into three classes of trading styles or segments: Large commercial traders , such as those companies setting up production in a foreign country, might be interested in the fate of the currency over a long period of such as months or years. But for speculators a weekly chart can be accepted as the "long term. With a weekly chart as the initial reference, we can then go about determining the long-term trend for a speculative trader.
To do this we will resort to two very useful tools that will help us determine the trend. These two tools are the simple moving average and the exponential moving average. In the weekly chart above, you can see that for the period of May, until July, the blue 20 interval period exponential moving average is above the red 55 simple moving average and both are sloping upward. This indicates the trend is showing a rise of the euro and therefore a weakening dollar.
In August, , the short-term moving average blue on the chart below turned down, indicating a potential change in trend although the long-term average red had not yet done so. In October, the day moving average crossed over the day moving average. Both were then sloping downward. At this point the trend has changed to the downside and short positions against the euro would be successful. Still looking at Chart 2, we notice that the short-term moving average goes relatively flat in December, and starts to turn up, now indicating a potential change in trend to the upside.
But a closer look at the day moving average as of December, , shows that the long-term moving average has remained downward sloping. The second arrow indicates where a new short position could have been successfully taken once the price had traded back to the down sloping moving average. The goal here is to determine the trend direction, not when to enter or exit a trade. Of course this is not to say that there were no trading opportunities in the shorter time frames such as the daily and hourly charts.
But for those traders who want to trade with the trend, rather than trading the correction, one could wait for the trend to resume and again trade in the direction of the trend. Let's switch to Chart 3 and see what happens as the day exponential moving average trades down to a double bottom. Given that a double bottom on a chart suggests support at the bottom, we can watch the price action on the daily to give us an advance clue.
The arrow indicates where the short-term moving average is turning up. Once again, the moving averages are not used as trading signals but only for trend direction purposes.
Discover how these influential levels can switch roles, see Support And Resistance Reversals. By setting up a short-term exponential moving average and a longer term simple moving average, on a weekly and a daily chart , it is possible to gauge the direction of the trend. Knowing the trend does help in taking positions but bear in mind that the markets move in waves.
These waves are called impulse waves when in the direction of the trend and corrective waves when contrary to the trend.
By counting the waves or pivots in each wave, one can attempt to anticipate whether a trading opportunity will be against the trend or with the trend.
According to Elliot wave theory, an impulse wave usually consists of five swings and a corrective wave usually consists of 3 swings. A full wave move would consist of five swings with two of the swings being counter trend.
The image above gives an example of an Elliot wave. Because Elliot wave theory can be very subjective, I prefer to use a pivot count to help me determine wave exhaustion. This usually translates into a minimum of seven pivots when going with the trend, followed by five pivots during a correction. Sometimes the market will not cooperate with these technical assumptions but it can occur often enough to provide some very lucrative trading opportunities.
Below is an example of the wave in action blue arrows mark the direction. By combining the moving average diagnosis with the pivot count and then fine-tuning the analysis with an observation of candle patterns, a trader can stack the odds of making a successful trade in his or her favor. Remember trading is a craft, which means that it is both art and science and requires practice to develop consistency and profitability. Dictionary Term Of The Day. Broker Reviews Find the best broker for your trading or investing needs See Reviews.
Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. A celebration of the most influential advisors and their contributions to critical conversations on finance.
Become a day trader. May July Source: Finding the Change in Trend In October, the day moving average crossed over the day moving average.
Double Bottom Indicator Chart 3: Catch a Wave By setting up a short-term exponential moving average and a longer term simple moving average, on a weekly and a daily chart , it is possible to gauge the direction of the trend. How much a fixed asset is worth at the end of its lease, or at the end of its useful life. If you lease a car for three years, A target hash is a number that a hashed block header must be less than or equal to in order for a new block to be awarded.
Payout ratio is the proportion of earnings paid out as dividends to shareholders, typically expressed as a percentage. The value of a bond at maturity, or of an asset at a specified, future valuation date, taking into account factors such as No thanks, I prefer not making money.
Get Free Newsletters Newsletters.More...