Trend indicators are useful but are in lag? Our method is systematic price action with trend identified through context.
Price action is a good fit for the methodical approach to trading. Relatively easy to establish, back-test and edit. Based on the close of a bar and that bar relative to as many prior bars as is necessary.
Trading range or trend?
The market spends most of its time in a trading range. Trends take up only a small proportion of the demand. Our systematic approach must, therefore, work in both markets. To do otherwise, as many trend-following systems do, is to miss the majority of trade opportunities.
The problem with price action and a systematic approach is the identification or confirmation of a trend. To help, many traders rely on trend indicators. For example, the MACD is a valid trend indicator when employed in the correct time frame.
Moreover, there are many ‘to buy’ trend systems available that claim to provide a reliable trend identification system; this may be. However, all indicators take their cue from price, and the price has to change sufficiently to give the trend.
A pure price action trader, on the other hand, will read the context of the chart to indicate a trend; this is made to sound natural to achieve by established price action traders. But as with anything after many hours of practice and once mastered will always seem easy from that point.
Let’s take a look at a trending opportunity this week with Sterling.
We can see from the yellow box that we have three bear bars. Our system took the close of the first of the bars within the yellow box short. But we are now flat waiting for more information. We know that the more significant trend supports a sell short but in our timeframe, an hourly chart in this instance, we are at the bottom of a trading range indicated by the red arrow. A reversal is 50/50.
The two bull pull-back bars, however, are weak and support an early entry short at this point, or if uncertain we can wait for an entry bar, which comes next. We sell short for a target equal to a measured move of the yellow box.
It is the second move down (the second yellow box) that established the trend short for at least three to four times the distance of the first yellow box.
We can either hold our second trade (most advisable for intermediate traders) or exit with profit and re-enter for the final leg.
We say most advisable above as many traders once out with profit would not get back into the trade quickly enough to take advantage of the trend.
To finish our point about trend identification. The remainder of the day, as shown by the chart below, are tradable pull-back bars. As we are reactive and not predictive, we can trade each appropriate bar or sequence of bars relative to context.
Notice there are three possible pushes long with the final bar being an extension driven, probably, by the welcome UK financial news released at the time.
We do not consider this a trend due to the context to the left, the identifiable three pushes already and the news-driven extension or possible exhaustion bar.
We only traded the close of the bull bar, the fifth bar after bar 1, long for a scalp. The imminent release of financial news of significance at about bar 3 kept us flat.