Introduction To Trends And Time Frames

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Making sense of trends and time frames is an often confusing task. At any one time, in any given time frame, multiple trends can be at play. There are long term secular trends, shorter term primary trends, still shorter term secondary trends and yet shorter still near and short term trends. Adding to the confusion of trends is the time frame. What may be easy to spot in one time frame may not be so easy to spot in another. This article will help to make some sense out of trend and time frame for binary traders. This is an important aspect of trading and one that I highly recommend everyone master regardless of their chosen strategy. The old saying, “the trend is your friend, trade with your friend” is as true today as the day it was first spoken. Likewise, the saying “a rising tide lifts all boats” is equally apt.

A trend is defined as a general direction is which something is moving or developing. In the case of trading financial assets a trend is a measurable direction in prices, usually up or down. Trends can and do exist in every time frame and understanding how they work is one key to avoiding frustration. Imagine this, the tide is rolling in and each wave that comes onto the shore is a little higher than the next. All of a sudden one wave pulls way way back, looking as if the tide may have turned. Is it more likely that the next wave will meet or exceed the previous high water mark or less? This is the essence of trend analysis, determining the direction of the market tide and the probability that the next wave will be higher or lower than the next.

The Secular Trend

The first, and strongest, trend for traders to be aware of the secular trend. The secular trend is one that last anywhere from 7 to 15 years and is usually in synch with underlying economic conditions. A secular bear market is one in which the markets trend down to sideways for a period measured in years. A secular bull market is one in which the markets trend upward for years. In a bull secular market it is more likely for shorter term bear markets to meet support and return to bullishness than they are to result in major correction. The same is true in reverse for a secular bear market. This trend can be observed on a chart of 10 years duration or longer as shown here. I use monthly closing to help focus the chart. Within the secular bear market labeled here there are periods of up and periods of down markets, these are the primary trend.

The Primary Or Long Term Trend

The primary trend is the largest measurable price movement within a secular market. These trends tend to last from 3 to five years depending on strength. You can see that within the secular market I have market there are at least five discernible primary trends ending with the final bull trend that broke the top of the secular bear market range. Take note that during the secular bear market that the bearish primary trends are much stronger and of longer duration than the bullish primaries. This same phenomenon will be true in reverse for secular bull markets. In order to analyze the primary trend I drill down to a 3-5 year chart of weekly closing prices, whichever is needed to include the entire movement. This next chart shows the final primary trend of the 1999-2020 secular bear market. We can see again that on this chart that there are shorter bull and bear markets within this trend but that the underlying primary is in control. Bear markets are not as deep as bull markets are tall. Trades made in this time frame would have an outlook of weeks or even months.

The Secondary Or Short Term Trend

Within the primary trend are secondary trends. These are the near and short term rallies and dips driven by news and events. They are also the trends of most interest to me and other binary traders focusing on weekly and monthly expiries. To view the secondary trends I move down to charts of daily price action like the one below. Signals on this chart would have an outlook of a few days to a week or up to a month. There are even trends within this trend driven mostly be fears and expectations and less by actual news or events.

Why Is Trend Analysis Important?

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It is important to understand trend for several reasons but most importantly to help understand why one trade is more likely to profit than another. If the market is trending lower in the primary trend then it is less likely for a bullish play on the secondary trend to work than a bearish one. Likewise, if a signal in the secondary trend confirms the primary trend then it has a higher chance of profiting than a secondary signal that is counter to the primary trend. One way to line up a great trade is to have as many time frames in confirmation as possible. The secular trend is really too long for binary traders but you can start with the primary trend and move down to the secondary trend and then the near term trend. A signal taken with all three trends in alignment has the most chance of success.

Introduction to Multi-Time Frame Analysis

An Introduction to Multi-Time Frame Analysis

Multi-time frame analysis (also known as multiple time frame analysis) allows traders to focus on the appropriate timing of trades as well as help identify when trends may be reaching exhaustion. This article will explain how to utilize this methodology with the forex pair EUR/AUD.

Benefits of Multi-timeframe Analysis

As explored in previous articles on trendlines and pitchforks / median-lines are used to locate key reaction zones in price. These same principles can be applied to multiple time frames to offer a more complete view of current market trends.

The idea is to, ‘see the forest through the trees’ – in other words, before entering a trade based on a given setup, you will always want to have a broader opinion of where the market is relative to trend. By viewing price action in various timeframes we can identify possible entry points within a given price advance / decline as well as help in timing these moves.

EURAUD Daily

Consider the EURAUD daily chart above- The pair was trading in a clear downtrend off the 2020 highs with a descending channel formation highlighting support into the April lows around 1.3678. As discussed in earlier lessons, the confluence of trendlines & key high / lows in price will often represent more significant areas of support & resistance. In this example, price is testing down-trend support – the focus now shifts to the near-term picture for further clarity on how we would trade this possible rebound.

Just because price is at support, doesn’t mean we can simply assume it will hold. Prices need to establish some form of behavioral change before we can look to trade against the broader trend. As we drill down into the 4-hour chart, an embeddednear-term descending channel formation can be identified (red). A break above channel resistance as price comes off key support would shift the near-term focus higher in the pair and will serve as our ‘trigger’ to get into the trade.

To identify our topside targets, we can derive an ascending pitchfork formation off the most recent low-high-low to construct an up-slope. The initial target on such a trade would be at the median-line (bisector) of the pattern with the focus weighted to the topside while above the lower median-line parallel.

Fast forward a few weeks and the pair indeed broke above down-channel resistance and came back to test that line as support (long-entry). The advance continued into the median-line followed by a break and rally into the upper median-line parallel a few days later. This simple example illustrates how analyzing price action through various lenses of time can help identifying trading opportunities within the context of a larger trend (also called primary trend). Oftentimes secondary (or even tertiary) trends within these patterns will offer near-term setups to trade against the primary trend.

Key Takeaways on Mulit-Timeframe Analysis

Some important aspects to keep in mind when utilizing multi-timeframe analysis

  • Too many time frames render useless – Some fall into the pitfall of trying to time entry/exit when all the time frames line up with a signal- but this will rarely happen.
  • When scaling down in time-frames, utilize a ratio of 1:4 to 1:6 between the trigger and the trend timeframes. For example, if you are taking a trade off the four-hour chart, look for the daily chart for trend analysis. If you are looking for a trade off the one-hour- look at the four-hour for trend analysis.
  • Recognize when you’re counter-trend trading – Often times the near-term picture will offer setups against the primary trend like the EURAUD example above. It’s important to approach these trades with more caution, meaning lower leverage and more conservative stops.

Multi-timeframe analysis allows traders to focus on the appropriate timing of trades as well as help identify when trends may be reaching exhaustion. In the example above, if the EURAUD had stayed within the confines of the near-term descending channel formation, no attempts would have been made on the long-side. With the same respect, had we not viewed the trade within the context of the broader trend highlighted on the daily chart, we may have missed the turn all together. Keeping that in mind, always trade within the context of the primary trend and look for near-term price action to offer triggers in time and price.

Why You Need To Determine The Trend Using The Time-frame You Trade Off

Figuring out which direction you should be trading in is highly important for making money from the forex market. Trading counter trend more often than not will only result in you losing money. People say they always trade in the direction of the trend but if you ask them which time-frame they use to get the trend direction off and which time-frame they use to enter their trades, you’ll find there is always a difference.

Its assumed this is the correct way to trade the trend, but people fail to see the problems brought by using opposing time-frames for trade entry and trend direction.

Today I’ll explain what these problems are and why it will be better for your trading if you determine the trend using the time-frame you place all of your trades off.

A lot of the common trading advice states you always need to be trading in the direction of the higher time-frame trend.

Traders usually implement this advice in a way where they will use a higher time-frame to get their trend direction and use a lower time-frame for entering trades.

This wouldn’t be a problem if the time-frames they use are close together i.e using the 30 minute chart for trade entry and the 1 hour chart for trend direction, but issues arise when the time-frames they use are far apart from each other, like using the 1 hour chart for trade entry and the daily chart for trend direction.

The biggest issue is you can find yourself losing money because your trading against the current trend.

Here’s an example to explain what I mean.

From looking at the image above we can see USD/JPY is currently in a downtrend on the daily chart.

A trader who uses the daily chart to get their trend direction and the 1 hour chart for trade entry will be wanting to get sell trades placed in the event of a continuation lower taking place. Now in order for the trader to see the downtrend change into an up-trend, the price must move above the current high in the image.

This is where the problems begin.

For the high to be broken the market must move a large distance, in terms of pips the distance from the current low to the current high is 639 pips.

So long as the current high isn’t broken the trader will think the market is in a downtrend even though the price is actually moving up.

On the 1 hour chart which the trader uses for entering trades you can clearly see the market is trending higher with new higher highs and higher lows being made each day.

Because the trader believes the trend on the daily chart is the one he needs to be following, the uptrend we can see on the 1 hour chart is not relevant to him. He knows he needs to trade in the direction of the higher time-frame trend so for the whole time we see the market move higher on the 1 hour chart he will be placing sell trades trying to anticipate when a reversal is going to occur and cause the downtrend on the daily chart to continue.

Needless to say the trader is going to lose money on a lot of the sell trades he places because he is trading against a more recent trend.

The market may be in a downtrend on the daily chart but on the 1 hour chart its in an uptrend and since the 1 hour chart is showing us more recent market action than the daily chart, it makes sense to trade in the direction the price is current moving in.

The bigger the discrepancy between the time-frame you use for trade entry and the time-frame you use for trend direction the more you will be lagging behind the market.

It’s very similar to using an indicator, people say to use the higher time-frames for trend direction because it shows which direction the market has been moving in for the longest length of time. What they don’t understand is it doesn’t matter how long the market has been moving up or down in the past, what matters is the direction its CURRENTLY moving in right now.

Currently means now, not last week, not last month and not last year. Which direction is the price moving in right now, that’s what is most important for you when you’re looking to take trades.

Our trader who was using the daily chart was basing his trading decisions on the fact the market had been moving lower on the daily chart for a long duration of time. But that does not mean the price is moving lower right now and since he places his trades using a time-frame which shows more recent price action it doesn’t make sense to use a time-frame which shows older price action to determine the current trend.

If the trader was to just wait until the price had started showing signs of reversing before trying to go short instead of attempting to short whilst the 1 hour trend was up, there’s no doubt he will have had less losing trades and will have saved himself money.

In fact he could have been placing buy trades in the direction of the trend on the 1 hour chart and made himself more money to use for the market eventually reversed.

Placing trades using one timescale and getting the trend direction from a different timescale will cause you to unnecessarily lose money. The trend on the daily chart is only relevant to a trader who uses the daily chart to place his trades, not to a trader who uses the 1 hour chart for trade placement.

Would it really make sense for a trader who places trades using the 5 minute chart to determine what the trend is using the monthly chart ?

Using Lower Time Frames For Trade Entry And Trend Direction

Whilst you should always determine the trend using the time-frame you use to place trades some problems can arise when you trade using the really low time-frames such as 1 minute or 5 minute charts.

On these time-frames each tiny up and downswing the market makes is visible which is a problem when the market begins to consolidate between swings on the higher time-frames. Many false signals are likely to occur which will lead you to believe the trend is moving one way only to see it suddenly snap back and move the other way.

The image taken from a 5 minute chart of EUR/USD shows an example of the confusion which can take place when determining the trend using the lower time-frames.

If you look at the sequence of highs and lows before the blue line you can see the direction of the trend was quite clear. Now if you compare that with the structure seen after the blue line its evident things can get pretty confusing.

When the price was falling we had the standard lower low followed by lower high sequence which is typical of all down-moves in the market, when the down-move came to an end and the price started retracing, we started seeing lower lows followed by higher highs then higher lows followed by lower lows, these frequent changes in direction would have left you scratching your head as to which way the price is actually moving in.

Needless to say this can be very annoying especially when it cause you to lose money.

My advice to the traders who use 1 minute and 5 minute charts is to get the trend direction off the 15 minute chart.

On the 15 minute chart its much easier to see the important highs and lows which means you’ll be able to figure out the market is in a consolidation quicker than if you were using the 1 minute and 5 minute charts.

Summary

Using different time-frames for trade entry and trend direction sounds like a good idea but it is a flawed because of the time difference between the time-frames themselves. If you begin determining the trend direction using the time-frame you use to identify and place trades I promise your trading will see an improvement.

Thanks for reading, please leave any questions in the comment section below.

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