Here’s another great question from a YTC newsletter reader…
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.
If only trading was as easy as ‘they’ make it sound – follow the trend, let winners run, cut losers.
I personally find trends quite difficult to trade. My natural instinct is to try to fade them. I have to work very hard to avoid my tendency to always be looking for the countertrend entry or reversal, whenever facing a monster trend. I’d like to say this is just a problem I face, but unfortunately it’s much more widespread than that.
Anyway, that’s a different issue from the one you raised.
How do we define a trend, when it appears different on every timeframe?
Your observations are correct – every timeframe has a different trend. Even if it’s the same direction, it’s characteristics will differ, such as speed or strength.
I think of it like the ocean rising and falling – tides and waves and ripples. Imagine watching the water level changing and observing the influence of different timeframes. For example, a change in water level might be made up of a longer timeframe falling tide, with a shorter timeframe rally as a result of a passing wave. And the wave itself is made up of smaller waves or ripples as well.
What is the actual trend though – over a long period of time it’ll be a downtrend, as the tide is the main influence. On a shorter timescale, it’ll be an uptrend as the wave passes and reaches up to its peak, then a downtrend. On a micro-scale it’ll be a series of even shorter up and downtrends.
This is not a perfect example, but the concept is the same. There is no one correct trend in price. The trend is dependent on the timescale chosen to observe the market.
How does one use this information in live trading? Like most things in trading, there’s no right or wrong approach. Some people prefer to take the simple approach and stick to one timeframe only. Define the trend in your trading timeframe, and ignore all other potential timeframe influence. I prefer to look over three timeframes. I define the trend on the mid-level timeframe, based on a structure of swing highs and lows. I use the higher timeframe to identify potential support or resistance areas which could form a barrier to my current trend. And I use the lower timeframe to finesse entries and exits. For example, as you mentioned, using a lower timeframe pullback to then enter in direction of my mid-level timeframe trend.
This doesn’t mean I’m only trading in the direction of the mid-timeframe trend, when supported by the lower timeframe, and without higher timeframe barriers. Some people may choose to do this. I like to also trade countertrend. So for example, a mid-timeframe trend that his rallied upwards strongly, overextending into a higher timeframe resistance, with a lower timeframe overextended rally to a short-term double top, the second top just breaking the first but then rapidly failing – a beautiful signal short, against the trend, but making use of the information from all three timeframes.
If you go much beyond three timeframes then I think you’ll probably just blow your mind with the complexity of the analysis.
However you approach it though, consistency is probably the key.