You’ve no doubt heard the old adage: “the trend is your friend” right?
Well, statistically it is, however traders often struggle to define the correct trend in play, and it is this struggle that leads less experienced traders to feel like the search for trend makes it more a foe than friend.
So let’s address this challenge and work towards a more trader friendly approach to trends.
Recent price action in the FX markets has given great examples of how sticking with a defined trend can really boost the equity in your account.
The concepts of trend plays a key role in technical analysis but, as with any analytical method, results are best achieved with added confirmation, and here at LFX we advocate using Order Flow Indicators and candlestick price patterns as defined in full in our Forex Trading Course.
Addressing the concept of trend
Trend: a general direction in which something is developing or changing
The easiest way to determine the trend is by looking at a price chart, which can be shown through many different types of charts. Here at LFX we prefer candlestick charts.
The most effective method of defining trend is using a trend line, experienced traders like to draw their own lines on their chart which helps them better visualize current and possible future trends.
The most effective method of utilising a trend in your trading is identifying prominent trend lines on the higher time frame, ideally identify the trend line on the time frame above your trading time frame.
We can see from the chart above that by connecting the lows of the weekly candles using our trend line we can see the trend of price on the higher time frame is upwards.
Now, dropping to the daily chart, our trading time frame, we want to align with the anticipated bullish trend. We use the same process we did on the higher time frame to identify trading opportunities.
On the daily time frame trend line, support is confirmed with bullish candlestick patterns, we get further confirmation from our Order Flow indicators which replicate the price trend to the upside.
Drawing Trend Lines: The Essentials…
A trend line cannot bisect other highs or lows. It needs to stay above or below the price action: it may touch highs and lows, but not pass through them.
Use a higher time frame to determine the key support and resistance zones on lower time frames. Essentially, the best way to find major trend lines is to zoom out on your charts and use higher time frame highs and lows to determine the trend.
Using the Breakout concept discussed in last week’s piece, we can identify bullish inside bars that form at trend line support, we would enter buy stop orders on an upside breakout of the large bearish candle that first tested the trend line support level.
Using the Littlefish FX Psychology Indicator to extract Trend profits…
It is worth noting that newer traders often struggle with the drawing trend lines, but fear not, here at LFX we are always working on innovative new tools to support the burgeoning trader in the quest for trading excellence.
One of our most recent developments for the Ninja Trading platform is an enhanced Psychology Indicator. This tool is a first class addition to your trading tool kit and is an excellent confirmation for taking your trend trading to the next level!
So how do we use the Psych Indicator to take advantage of the Trend…
The simplest method is that once we have defined the dominant trend on our higher time frame chart, we apply our Psych Indicator to our trading time frame. Taking signals that it delivers with the trend on the higher time frame.
In this instance we have identified that the the weekly trend is up and very bullish. Price is making higher highs and higher lows, both price and Psych Indicator move higher from bullish consolidation.
Now we drop to our trading time frame monitoring the chart for bullish signals to enter buy stops order to establish long positions with the dominant trend
The additional advantage of the Psych Indicator is we can really use it to stay in trend trades for longer, we don’t need to set targets for our trades we can wait for one of two signals, firstly we could wait for a bearish signal on the higher time frame to exit our long positions, secondly if we want to attempt to lock in more profits we could exit or tighten trailing stops on our long positions when we get a bearish signal on our trading time frame.
A final thought with respect to the Psych Indicator is that the indicator can be made more or less sensitive to current price action by adjusting the look back period, by increasing the look back period you get less noise with respect to signals, this is another way that the Psych Indicator can be used to keep you in the current trend for longer. In coming weeks we will take a closer look at the great potential it offers traders for boosting their confidence and performance!
Trend… the trader’s friend!
Trend lines combined with the Littlefish FX Psych Indicator offer lots of possibilities but in their simplest form, we can significantly increase our odds of a successful trades if we trade in the direction of the overall trend.
So we can successfully see the trend, it really is the trader’s friend!
Get your hands on all the trading plans, indicators and strategies required to gain a comprehensive understanding of the Order Flow trading techniques successfully used by the traders here at Littlefish FX. Find out more here.