Trading the trend is extremely common and thought of as the best way to trade the financial markets by many investors. So I ask "Should I use the trend direction in my trading analysis?". Let’s start by answering the question: What is a price action trend?
Price Action Trend
A price action trend is a general direction in which price is developing or changing. The conventional method of reading a trend is; 3 “pivot points” are required to confirm the trend. Each trend is made up of impulse waves and corrective waves. The simple difference is that the impulse waves are larger and faster than corrective waves therefore giving the overall direction of that particular market.
Determining the Direction
Both types of waves will create a series of highs and lows. Depending on the sequence of these highs and lows, the direction can also be determined. For example, if the sequence is lower lows and lower highs, then you have a downtrend, else if you have higher highs and higher lows, then you have an uptrend.
This may seem extremely simple; however there are certain variables that affect this analysis. One would be multiple time frame analysis. When looking at more than one time frame you begin to see trends within trends and so on. As a beginner trader this can be very confusing when trying to determine the correct direction of any given market.
Different Way of Thinking
So now back to the question at hand: Should I use the trend direction in my trading analysis? The trend will always be a large part of most trader’s analysis, but let’s look at this a different way. If we know that a trend (3 pivot points confirms) is when price is developing or changing wouldn’t you want to capture the move before the trend begins?
Now before we move on its important to note this is a very subjective article and nothing more than a different view on the trend. There really is no wrong way as long as money is made consistently. So in other words you would want to trade the beginning of any trend. In order to do this you may be better served learning how to read when the trend is changing as opposed to continuing.
Below is an image of a trend that is undergoing a change and/or developing a new direction. If we understand how to read the change then we are automatically going to be with the new trend even before it fully develops.
Trend Analysis Logic
Once a trend has begun it is more aggressive to trade in that direction the further price goes. The logic here is as follows:
IF in a downtrend, THEN you will eventually find more willing buyers and the trend will change. The closer you get to these buyers the less likely “trading with the trend” will benefit you.
IF in an uptrend, THEN you will eventually find more willing sellers and the trend will change. The closer you get to these sellers the less likely “trading with the trend” will benefit you.
In conclusion, using the trend is most beneficial when reading the change as opposed to following the development.
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