The Real Problem with Trend by Sam Evans

 

This week, while conducting and hosting my ongoing Extended Learning Track (XLT) - Forex sessions, we have been doing our usual business of analyzing the currency markets in real-time, scouting the arena for only the very best low risk and high potential reward setups we could find. Following on from a choppy and indecisive few weeks, things seem to have settled down a little as the market, in general, goes through its own phase or transition, trapped between key levels of support and resistance before the next big move. With these conditions in mind, many of my students and peers alike have been talking about the current trend, a subject which often causes both mixed feelings of confusion and frustration for many traders in these times of uncertainty.

In the overall majority of sources of trading education, we often hear or read the phrase, "The Trend is Your Friend." We are encouraged to follow the trend in our setups and strategies, being told that going with the momentum of current price action offers the best rewards and highest level of odds. While it is hard to pour scorn on these teachings due to the fact that in the training environment, it makes perfect sense, we also need to sit back and recognize that the matter of trend analysis can also be something very subjective in nature as well. There are many ways to define a trend in technical analysis studies, including the traditional methods of spotting higher highs, higher lows, lower highs and lower lows. Plus, we have such tools as moving averages and convergence/divergence analysis to aid us in the process, too. All of these can be of great use to the disciplined and patient trader, but I also believe that there is an aspect of trend which also requires significant attention and that would be through time frame analysis.

When we say that something is in an uptrend or downtrend, it is of vital importance to understand that the trend we are currently observing is only a picture of price action across the time frame, or period, in which we are looking at, and often when we shift our attention to another viewpoint, things can look very different. An ideal example of this would be the daily charts of EURUSD. Let's take a look:

 


Figure 1

 

From the period of early June, we have been enjoying a steady and progressive upward trend in EURUSD. We have witnessed consistent higher highs and higher lows, signaling strength in this market. From this perspective alone, it would make good sense to look for a pullback to buy into this apparently rising market. However, if we then expand our view of the currency pair, we get a very different outlook:

 


Figure 2

 

From this bigger perspective of expanding out the chart, the market tells a different tale. Now we can observe EURUSD to have been in a steady downtrend since December of last year, making from this angle a number of lower lows and lower highs, suggesting a greater weakness in the market over a longer period of time – so one says up, the other says down...anyone confused?!

This is a common issue for the trend trader, in that it can often be difficult to really know what the trend is going produce next. Are we in an impulse move or a corrective one? Rather than confuse myself with these mixed market signals, I choose to follow a simpler approach. I look to the most recent buying and selling activity, as shown in the example below:

 


Figure 3

 

My trading methodology that I share with my Online Trading Academy students is based around the pure logic of the supply/demand dynamic. I respect that price will only move when there is a large imbalance between willing buyers and willing sellers. With this in mind, I then look to the chart to decipher and hone in on where these imbalances and price shifts last took place. We can see from the above chart, trend often becomes irrelevant when we experience "Motion into Mass." An upward move will end when price hits a wall of supply, just like a downward fall will stabilize when price meets a group of buyers with willing demand. All movements in the market are just a result of price's reversion to mean, or rebalancing itself to put it another way. I encourage my XLT students to adopt the same approach in their trading and as we can see from the chart, many were involved in a great short at the highlighted area of resistance in the above chart and were willing buyers at the marked area of support. Both of these entry areas offered very low risk and great potential reward because the market was at what we call extremes. I, too, recently bought EURUSD and it has since pushed lower at the time of writing this article. Am I worried? The answer is no, because I still managed to achieve a solid 3:1 risk to reward on the trade and I can now move on to the next opportunity. In the same instance, it could have continued higher for greater profits and I was all set on the trade for this, but this time, it didn't want to go higher and I still made good money on the speculation from solid trade management and discipline. In both trades, myself and my students were not concerned about the trend that had already happened – we were instead looking for a low risk chance to get involved in the next potential trend, while making a little money along the way.

In summary, it is my feeling that when we look to define a trend, we always need to remember that any trend we are currently looking at is a thing of the past. It is an illustration of something that has already happened and to therefore simply assume that it will continue can often result in frustration. I choose to objectively analyze the most recent examples of buying and selling activity within the market and let the behavior of price lead the way. Sure, sometimes I am wrong and it costs me a little, but when I am right it pays dividends, thus consistently guaranteeing me a solid overall risk to reward ratio. To say I am not a trend trader would be wrong. I do trade the trend, but I look for an opportunity to be in the trend from the very start.

Have a great day,

Sam Evans sevans@tradingacademy.com

 

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