Trend Analysis

Hey Guys, this is Nathan with some thoughts on trends and multiple time segments. If you like the article please Tweet or share and leave me a comment. I really enjoy building some interaction on the blog, so your participation is greatly appreciated!

In trading, we all know there are a lot of variables. One huge variable is the trend. Almost every trader wants to recognize the trend, whether they are going to trade with it or against it, but it begs the question: What is the trend?

How do we determine which way the market is trending? For a trader who scalps on the five minute charts, is the trend found on the 15 minute chart? That may be the trend he is looking at, but what if the 4HR is very strong in the opposite direction?

Let’s look at an example:

These are Current Charts of the USD/JPY. Which one is actually the trend?

 

This makes trading interesting. Things become very relative and subjective based on what and how you are looking at things.

A swing trader may say that the Daily chart (on the left) is obviously the true trend, but an Intra-day trader could very well assume that the 30Minute chart (on the right) is the best indication of the trend. Again, it is totally relative to what they are looking at.

However, I think that we do need to be able to establish some objective truths about what is going on in the market. If we just have the mindset that everything is relative in trading, than we can’t have any confidence or expectation in our trading. Without some objective reasoning that certain things are going on, how could we be confident enough to put our hard-earned money on the line?

Here is what I propose as a solution to this situation:

We determine OBJECTIVELY what the trend is in these 3 Segments: Long-term, Mid-term and Short-term.

Long term: Monthly and Weekly

Mid-Term: Daily, 4HR and 1Hr

Short-Term: 15Minute, 5 Minute, 1 Minute

Establishing the trend on these three time segments can help with your overall approach to a trade setup. It should allow you to enter a trade with some more confidence knowing that you have a larger view of what is going on with the specific currency pair you are trading.

This idea should be something that you can implement into almost any Trading plan or strategy. It is very simple, but very effective.

I actually thought that this idea of using three time frames was very original, but apparently I am not the first to think of it 😛 (DailyFx has a great article on Multiple TimeFrame Analysis where he uses the same terms for the 3 time segments)

Now, if you are a trend trader, you can use this idea as a filter for your trades.

In short, you can decide that a filter for your entries is confluence among the three time segments. In other words, in order for you to take an entry, you need the trend to be the same on the long-term, mid-term, and short-term time segments.

So, if you see a nice hourly sell set up, you check your three time segments. If they look like this:

Then you would not take that set up because all of the time frames do not support you.

If you see a strong 15 minute buy signal and your 3 segments look like this:

Then you would be okay to take the trade because all time frames agree with you.

Now, one may ask why the Monthly and Weekly charts need to agree with you if you are taking a 15 minute signal, and there is definitely validity to that, but I DO want them to agree with me. For one, it is just about total momentum. When you have the larger time frames trending your way, that is significant momentum.  The other reason I like the larger time frames to agree with me is because I often use a strategy where I add to a position that goes against me if I think it is going to turn back around. With the larger time frames still trending in the original direction of my entry, I have much more confidence that the trade will re-route into that direction at some point.

Now, I am certainly not saying that every trade that agrees with all three of these time segments is eventually going to go back into that direction if it doesn’t work out on the first entry, but I do think this is a great way to filter your trades and make them more precise.

Well, that is all I have for now, please leave a comment with your thoughts!

Oh! And definitely Follow me on Twitter, so you can yell at me if I don’t follow those rules^^^ 😉

 

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  • Al,

    Thanks for the comment. due to the nature of the forex market it is difficult to measure volume. Therefore I have not found a reliable way to incorporate it into trading forex. Binary options are much different than trading. It is up to you if you feel it is a good investment for me it is not.

  • AL, Ontario

    Nathan Tucci,

    I look forward to hearing your Daily Analysis on foreign currency pairs. I am currently in the research phase of gathering and understanding how the foreign currency market works. Will it not be better to improve the technical analysis if you incorporate the volume of foreign currency in your analysis? Also. Are binary options a good form of investment? Many thanks and keep up the good work.

  • dli

    This strategy is reliable but that needs more patient. Scalping likes to jump into cool water immediately, please.

  • Anonymous

    Hi, thanks very much for reading, and glad I could help!

  • Anonymous

    Hello Frances, thank you for reading and leaving the supportive comment. Very glad to be of some help to you.

  • Timcmaeron61

    AMEN!

  • Anonymous

    Hi. thanks for reading and leaving a comment. Yes, it is definitely a more risky strategy and I do not recommend it for most traders. However, you mentioned that it is trading on hope and not reality, but that is the very reason that I do want to be in line with the trend; so that it is not just me hoping it will turn around, but I have concrete evidence that the trend is still in my favor and I can add to the position in an area that makes sense. Minimizing your losses is a good and smart way to trade; I suggest you continue to do so, but you can add to positions without getting out of hand. Many successful strategies include adding, but you have to be very strategic in how you manage the trade.

  • Anonymous

    Hi Robert, thanks for reading and the educational comment. Your approach makes a lot of sense. I would like to learn more about you strategy. I have no doubt believing that some of the time frames are not necessary depending on how you trade, but for me, I like to get a perspective on all three. This helps me know if it makes sense to add to my trade or just cut it off.

  • Anonymous

    Hi, thank you very much for reading and leaving a supportive article! It is much appreciated!

  • Anonymous

    Hey, thanks for reading and leaving the comment! Yeah, for a very long term trader, the smallest time frame may not be necessary, but it may help with more precise entries. I mean, even if you plan on holding the trade for 2 or 3 weeks, it doesn’t hurt to start of strong, ya know?

  • Anonymous

    Hi Josiah, thanks very much for reading and sharing your thoughts. I appreciate the positive comment!

  • Anonymous

    Hi, thank you for reading and leaving a great comment. You are right that it is not necessary, but for me, it solidifies what is going on in the market in my head. It makes sure that I know what is going on and I don’t get caught up in a certain set-up when it is not in accordance with the rest of the market flow.

  • Anonymous

    Hey Prakash, thank you for reading and leaving a comment. Yeah, it is just a way to get a better view of things, and it can definitely be used with counter trend trading as well.

  • Anonymous

    Hi, thanks for reading and leaving a comment!

  • Anonymous

    Thanks for reading.. Well, that is exactly what I am doing. I am looking at my chart to determine the trend… However, I am just looking at it from more than one view to ensure that I have a better understanding of the trend than just the way it looks on the time frame I happen to be looking at at the moment.

  • Anonymous

    Hi Pierre, thank you for leaving a comment and reading my article!

  • Pierre A Pienaar

    Great strategy. Trend Trading is one of the best ways to minimise risks, and still make a decent profit. Thanks Nathan

  • Frankpage

    Interesting article. However what you are doing is complicating your trading needlessly with all this. Its very easy to see the trend, just look at your chart!

  • Anonymous

    Hi, thanks for reading and leaving some thoughts. You make a good point about the trend being too far from the actual trade set-up, especially with the 15 minute set up. I think you make a good point about perhaps not being with the trend at all because it takes to long to determine but I do still like to know that the long term trend is with me, especially if I want to add to the trade.

  • Anonymous

    Hi, thank you for reading and leaving the kind words! I greatly appreciate your time!

  • Anonymous

    Hi Matt, thanks for reading and leaving the comment. I do think that for a 1hr trader, taking more than just 4hr into account is a good idea. Also, creating a piece of software to identify this would be a great tool! I didn’t even think of it really… Maybe that will be our next project 🙂

  • Anonymous

    Hi Rajan, thanks for reading and leaving a great comment. I do agree that there are very different types of traders. and I certainly agree that you can be profitable without the time frames aligning. Many interactive traders do not use the trend at all and are still very profitable. I like to use the overall trend just for the purpose of momentum being on my side and using the adding strategy that I mentioned, but you are right in everything you said. Thanks again!

  • Rajan Gehi

    The current 4 hour trend on March 21 2012 for EUR/USD is Bearish.
    However the short term trend on March 22 2012 from 10:30 am EST to 12 Noon am was bullish
    and it moved the market by at least 40 pips

    Now I am an interactive trader who does not wish to trade the 4 hour chart
    Hence I prefer to look at the 5 minute/15 minute trend to make my trades.

    I intentionally gave this counter trend example to explain that there are two types of traders
    a) a Swing trader who leaves his trades open for more than a day
    b) a interactive trader who closes his trades when he is away from the screen

    The method you outlined is good for swing trading ….for people who trade long term
    But for interactive traders I think the  5 min/15 minute/1 hour charts are good enough

  • Matt

    Dear Nathan,

    Very interesting.  New in trading though but have always been told “trend is your friend”.  The question is how ofter can we see all these trend aligning?  For a H1 timeframe trader, I initially held the believe that H4 and possibly Daily would suffice….but your article has given me more insight.  Great work.  Do we expect that you will launch a software to easily identify these for traders?

    Very interesting article.

    Cheers

    Matt

  • Vidabaron

    Your trend strategy is very wise.  I know because trading this way almost never result is any substantial loss.
    Thanks for a good article.