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.

A swing low is simply any turning point where falling price changes to rising price. I define a swing low (SL) as a price bar low, preceded by two higher lows (HL) and followed by two higher lows (HL), as per the following diagram:

 

 

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

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

 

An uptrend is then a sequence of higher swing highs and higher swing lows, as seen on the left side of the following chart. And a downtrend is a sequence of lower swing lows and lower swing highs, as seen on the right side. The swing highs are identified by green dashes. The swing lows are identified by yellow dashes.

 

 

There’s a little more to it, which will be covered in future articles (or in much more detail in the upcoming ebook), such as where exactly I define the change of trend, what happens when we have matching price bar highs or lows, and when and how I define a market as trending sideways rather than up or down.

But for now the key point is that there’s no secret trend identification method. I use a very standard trend definition – HH/HL and LH/LL.

So, why the EMA on my charts if it’s not for trend?

The EMA is not actually needed as all my analysis can be seen though price action alone. It is there simply because it can provide a quick visual interpretation that’s close enough for much of the price action analysis that I conduct, including trend, momentum and volatility.

Of course, it could easily be used as your sole trend indicator, if you preferred. In many respects, it’s simpler. As you’ll see from the following chart, the two approaches give much the same result…

 

 

The fact is, it doesn’t really matter what definition you use, as long as your method of defining trend closely follows the price action in the timeframe within which you’re trading.

The reason it doesn’t matter how you define the trend is…

No Trend Definition is Perfect!

No matter how you define it, there will ALWAYS be a pullback that goes JUST far enough to trigger a change of trend, before then reversing again and resuming movement in the original direction. ALWAYS.

The trend is not your friend. Or if it is, it’s the kind of friend that talks about you behind your back.

You’ll see below that the HH/HL definition for uptrend broke down at point A, whereas using the slope of the EMA for downtrend broke down at point B.

 

 

This is where you need to be learn how to read the price action. Don’t automatically assume that a breakdown of trend (in accordance with your definition) implies a change of trend. Observe how price reacts at the change of trend location. Area A for example broke the previous swing low twice, but in both cases was not able to hold lower prices, closing above the breakout point. Candlestick fans will recognise two hammers. Trapped trader pattern fans will recognise a great three-swing retrace.

Failure to hold the change of trend provides a great entry back in the original trend direction (regardless of whether or not your definition now considers that counter-trend).

Happy trading,

Lance Beggs

 

 


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5 Comments to “How I Define the Trend”

  1. Nelson says:

    Thanks Lance!

  2. mohamed says:

    Hello Lance ,
    Nice article and I have Q here ,let’s consider we are on uptrend and the last SL make HH by one tick above the last SH and fail to close , do you still consider that this SL which make HH and fail to close is the point for objective trend change or you will not take this SL in your consideration due to this swing fail to accomplish any thing

    Thanks in advance

    Mohamed

    • Lance Beggs says:

      Make a judgement call. It’s dependent upon context. So… looking at the structure, which option makes most sense.

      This is what I mean when I say that EVERY method of rule-based trend definition will break down at the “edges” of the definition. As a discretionary trader, you an make a discretionary assessment.

  3. Mahesh says:

    Hi Lance,
    as you said no trend definition is perfect. Suppose if we consider the low that gave the highest high as the trend change pivot, then in the above diagram, the last up swing is very long. So if we consider that pivot at yellow line that started it as the trend change pivot, then we have to consider the downmove in that range as either sideways or a pullback in the uptrend. What do you prefer to consider such countertrend move in a swing that is over extended?

    • Lance Beggs says:

      After a very long (and potentially over-extended) price swing, such as this, the initial pullback sequence (PB/CPB) should be considered as part of the uptrend. Should they fail to follow through to new highs, then the trend will likely meet the definition of sideways. If not immediately, then it often happens shortly after, so you can be safe in pre-empting the change.

      Always look at a very large price swing as having potential to form a sideways range within the boundaries formed by the swing high and low.

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