Trend

Trade with the trend

Always trade with the trend; the trend is your friend. You have probably heard it many times, and if this is the first time, treat it as a commandment. A trend is the primary direction the market is heading. In an uptrend you look only for buys, in a downtrend only for sells, and when there is no trend and the market is consolidating, you do not trade.

How much data to read

To judge the trend you need enough price behind you, and not too much. On the daily chart that is about six to nine months of data, on the 4-hour chart about a month and a half, and on the hourly chart about a week. In candles that is roughly 180 to 250: fewer and you cannot see the whole picture, more and the older trends start to confuse the read.

Drawing the trend

In an uptrend, start the trend line from the lowest point and connect the higher lows that follow; an uptrend is usually confirmed after three touches. In a downtrend, start from the highest point and connect as many lower highs as you can; three touches again. These lines matter because retail trades them, and the smart money liquidates them: in the institutional vocabulary a trend line is an area of liquidity.

Impulse and correction

Every trend is built from two moves. The impulse is the move in the direction of the trend; the correction is the move against it. The most opportune moment to enter is at the end of a correction, which is the beginning of the next impulse. Fibonacci levels are an effective way to pinpoint where a correction is likely to end.

Waves inside the trend

The market moves in cycles, or waves. A full cycle usually has five parts: three larger moves in the trend direction, the impulses, and two smaller moves against it, the corrections; it can also run to four impulses and three corrections. Zoom out to see the bigger picture of the waves. Train your eye to see the second of these two charts when you look at the first: the impulses and corrections should jump out at you. A line chart, or drawing the legs by hand, makes it easier at first.

Drop a timeframe inside any impulse and you find a whole new trend: inside each leg there is another one-two-three-four-five. The larger structure here runs seven waves, and each of its legs breaks into smaller waves of its own.

The advantage of seeing both the macro and the micro move is better entries and smarter exits.

Market structure

Always consider the higher timeframe. The daily and weekly charts establish the primary trend. The 4-hour, 1-hour and 15-minute charts are the intraday structure, and the 5-minute, 3-minute and 1-minute charts are the momentum structure, useful for spotting trend continuations. Each timeframe offers its own perspective, and reading the daily and weekly together with the 4-hour and below tells you whether the trade in front of you is a retracement or a continuation. One rule of thumb keeps the structure honest: a lower high is only a lower high if it goes on to create a lower low; if it does not, it was not a lower high.

In a buy scenario the higher timeframes, weekly, daily and 4-hour, are bullish while the lower ones, 1-hour, 15-minute and 5-minute, are bearish, and price is sitting at a discount level on the higher timeframe. When the 1-hour chart turns and aligns with the higher timeframes, you start looking for buys. The sell scenario is the mirror: higher timeframes bearish, lower timeframes bullish, price at a premium level on the higher timeframe, and the sell comes when the 1-hour chart aligns.

Structure on the chart

Always ask what the purpose of a move is, and always trust the higher timeframe.

Check the higher timeframe

The Trade Desk keeps the weekly, daily, 4-hour and 1-hour charts a click apart on the same symbol with your entries drawn on each, so you can see whether the higher timeframe agreed with you before you traded the lower one.