From a risk:reward perspective, traders should always be looking to trade with the overall trend, creating as much room for upside as possible. However, many traders struggle with establishing the trend: they get confused looking at different timeframes, they get too specific drawing trend lines, they’re using the wrong indicators to identify trend or they just simply haven’t spent enough time learning how to establish the trend on their charts themselves.
Then there is the issue with entry to the trend. For the traders who have learned to identify the trend, they then find that they struggle with capturing the moves they anticipate. A number of issues can be hindering them here but usually they fall into two categories: using stops that are too tight and not picking high-probability entry points
We’re going to take a look at a really great method for helping you identify the trend and better yet, how to gain entry and capture big moves with reduced risk.
We’re going to use the MACD indicator to identify the trend direction. We’re going to use a moving average to identify high probability entries and we will use the Order Flow Trader to confirm our trade and enter the market.
The Moving Average Convergence Divergence indicator is a trend following indicator which measures the difference between two moving averages, one short term and one long term, to signal price direction. Mastering just this one tool can be a fantastic advantage to traders in identifying trend. They key is to spend time going through your charts finding setting which you like, that work for you and spend some time journalling market reactions with these settings.
So I am simply looking for MACD to be positive or negative, to signal direction, I am then looking to take confluent OFT signals in line with this directional bias and will use some basic market structure analysis to pick the best entry spots.
In the chart above we can see that the market begins to trend higher, making new highs, with higher lows on pull backs, this gives us a structural clue that we are entering a trend phase. This bias is then confirmed by MACD crossing positive, signalling upside momentum.
So we have our trend identified, but where do we enter?
We want to use the natural ebb and flow of the market to our advantage. Its important in a trend not to be too eager, and end up gaining a bad entry. A lot of new traders, see a market moving in on direction and try to jump in, acting in panic feeling that they may miss the move otherwise.
However, it is important to remember the old market adage “markets never move in a straight line”. The best entries in trend, are found at pullbacks.
Profit taking as the trend develops, short term supply/demand imbalances and anticipation of/reaction to economic events all create pullbacks in trends, which in turn create the perfect opportunity to get in at a discounted price.
However, one issue is, how do we know when a retracement is just a pullback in a trend, or in fact, a trend change?
Well this is the beauty of using the MACD with OFT. So long as MACD is still positive (in an uptrend) then I will continue to view pullbacks as buying opportunities, confirmed by OFT.
Remember, OFT is mapping the flow and volume of Banks & institutions in the market and so where we see an OFT buy signal, at a pullback in a bullish trend, we know that banks & institutions are active at these levels and will continue to drive price back up.
Where we don’t see OFT signals at pullbacks? we simply do not enter.
So not only does OFT work by giving us entry points to trending markets, but it also keeps us out at the tricky, trend change period.
Looking at the chart above we can see, that after the bullish trend had been active for quite some time, we saw a decline from highs which began in the same way as all the previous pullbacks, and so we would have been monitoring OFT for buy signals to continue trading the bullish trend.
However, we didn’t in fact see any OFT buy signals and, for the first time in months, MACD crossed negative, signalling that the bullish trend was over.
So e no longer look for OFT buy signals, We now monitor charts for sell signals.
Looking at the chart above we can see that price sold off quite sharply to begin with, with no retracements, however, we did then see a pullback, and were able to enter short on the OFT sell signals which confirm the bearish trend signalled by the negative MACD. MACD stayed to the downside and we were able to continue selling on OFT signals generated at pullbacks.
So I hope you can see just how simple yet effective this method is and how useful Order Flow Trader is on gaining entry to trending markets at pullback levels, offering great risk:reward.
You can take advantage of this powerful indicator through the LittlefishFX Forex Trading Course, along with our other bespoke indicators and material.