In the early stages of trading, trend identification is considered a compass to the “treasure”. One of the effective strategies that I always want you to aim for is trend trading with Price Action. Because it’s easier to follow the trend than it is to fight the trend (reversal trading). If you can identify the trend, you have more than 50% chance of winning.
For all traders, trends are the big picture. It is what makes the difference between profit and loss orders. Intraday trends are characterized by unsustainable and quick endings. Thus, traders need to be careful, especially when they are the correction against the big trend.
We can completely use indicators such as moving averages to determine the trend of the day. However, if we know how to combine the indicator with Price Action, we will get better results.
Use moving averages with Price Action to identify trends
We will use the SMA30 (Simple Moving Average) in combination with Price Action to determine the trend of the day. We will look for a shallow pullback followed by a peak/trough to confirm an up/downtrend.
To confirm an intraday uptrend, we would look for the following conditions:
- Candlesticks are above the SMA then they go back to retest but couldn’t breake it
- After that, there are bullish candlesticks with large amplitude, showing that the uptrend is still there. The bears have absolutely no chance to push the price below the SMA.
- Price retraces to the MA without creating a bar with a top below the SMA (no bear power).
- An uptrend is confirmed when the price breaks out and closes above the nearest high (confirming the structure of an uptrend).
Similarly, to identify an intraday downtrend, we would look for the following conditions:
- The price penetrates the SMA from above and then returns to test but couldn’t overcome it. There are signs of bearish continuation when the Bearish Pin Bar appears there.
- Long bearish candles appears through the lowest low.
- The price retraces to the SMA without creating a bar with a bottom above the SMA (no bull power).
- The downtrend is confirmed when the price drops and closes below the nearest low (confirming a bearish structure).
The session opens with 1 Bullish Gap.
- Instead of predicting whether this gap will start an uptrend or will be filled, we wait for the price to return to the SMA.
- The price touches the SMA.
- This candle is below the SMA
- This candle bounces up but doesn’t not touch the SMA.
- When the price penetrates and closes below the lowest nearby low. We confirm that an intraday downtrend has formed.
Identify Trends with Price Channel and Price Action
In this second method, instead of using one MA, we will use a price channel consisting of 2 MA. This price channel will show us the trend of the day.
These two MA lines include 1 SMA30 (blue), and the other is SMA50 (pink).
To analyze this price channel is quite simple. When there are 2 candles lying completely above of the price channel, we confirm the uptrend. On the contrary, when there are 2 candles that are completely beloww of the price channel, we confirm the downtrend.
In the above example, we have an uptrend at the beginning of the session, but at the end it is a downtrend.
Compare 2 methods of determining the intraday trend
Both methods use SMA and Price Action to identify intraday trends. But the logic of the two is different.
The SMA method focuses on finding the weakening of momentum from the pullbacks to identify the trend. The idea is that the Pullback segment will have weaker momentum
The price channel method looks for strong up/down segments that push the market above 2 bands and start a new trend.
After reading this article, you will be able to detect the trend with the simple tools of Price Action. Let’s practice regularly to master it. Thank you and see you again in the next articles.
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