Tag Archives: Trend

How I Define the Trend

I occasionally get email requests asking how I define the trend, so to save on future email replies here’s the short answer…

It seems that perhaps many people assume I use an EMA, given that the charts shown in my newsletter typically display an EMA(20). That’s not my trend definition though.

I use fairly standard definitions.

  • An uptrend is a sequence of higher swing highs and higher swing lows.
  • A downtrend is a sequence of lower swing highs and lower swing lows.

So, let’s look quickly at how this works.

A swing high is simply any turning point where rising price changes to falling price. I define a swing high (SH) as a price bar high, preceded by two lower highs (LH) and followed by two lower highs (LH), as per the following diagram:

 

 

The Swing High is candle C. All other candles reference this one.

  • Candle A has a high which is LOWER THAN candle C’s high.
  • Candle B has a high which is LOWER THAN candle C’s high.
  • Candle D has a high which is LOWER THAN candle C’s high.
  • Candle E has a high which is LOWER THAN candle C’s high.

 

Likewise for the swing low.

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The Confusion of Trends on Different Timeframes

Here’s another great question from a YTC newsletter reader…

Question:

Lance,

I have another question. Its to do with “the trend”. We are told, “the trend is our friend”. We are also told, “the trend is our friend until the end”, and we are told, “trade the trend until it bends”.

But the weekly and daily charts of a currency pair can show down-trending. Yet the hourly and 30 minute charts of the same currencies can show up-trending. So what does one do? Wait for the smaller time frames to down-trend like the weekly and daily, or seize the opportunity and trade the up-trend on the hourly and half hourly charts, which oddly enough, means trading against the trend of the higher time frames.

Thanks,

Brian.

 

Answer:

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Trapped Traders – Part 1

Trapped traders are a simple concept you may wish to incorporate into your trading strategy, due to its potential to offer higher reliability trade setups.

These are price action based setups in which traders suddenly find themselves trapped in an undesirable situation, either:

  1. Stuck in a losing position, desperate to get out; or
  2. Stopped out of a position that then moves back in their direction, leaving them desperate to get back in.

 

The key in both cases is that the price action has placed traders in a position where their normal human emotional response will compel them to make a trade. We can then increase our odds by trading in the same direction as this new surge of order flow.

There are numerous ways this can present itself on a chart. We’ll look at one of my favorites today, and follow up with other trapped trader patterns in future articles.

Today’s pattern is called a 3-swing retrace.

You might also hear it referred to as an ABC correction, or an ABCD correction. It could also be considered in some cases a bull or bear flag.

We’ll start by examining a 3-swing retrace in an uptrend.

 

trapped traders - 3 swing retracement

 

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