You may have come across the saying “The trend is your friend“ but actually identifying a trend and trading it are two completely different stories.
This article’s main focus will be on how to identify a trend and what tools there are to stay in a position for long/mid-term swing trades.
First off, there are three different stages how the market can move:
Your first task when viewing a new asset/token/coin is figuring out where price is in relation to what happened to the left and what it is doing now.
In order to obtain a view of what is going on you have to zoom out. An intraday or scalping timeframe (M30 and lower) won’t suffice to see the full picture and thus using higher timeframes is mandatory. What I mean by that, you have to use at least the daily TF or higher.
What is a trend:
A trend is a long term move in one direction that can sustain over days, weeks and even months or years. Each trend consists of multiple short-term trends within. You can also view the different trends as a type of cycle which can take place on any timeframe.
How do we identify a trend:
As mentioned before there are three different types but our main focus will be on the uptrend and on the downtrend.
In very simplistic terms:
An uptrend consists of higher highs and higher lows
A downtrend consists of lower highs and lower lows
These key elements can be found on any given timeframe where the shifting of the trends are fairly visible. Often you can use trendlines in order to determine the direction of trend but it all comes down to the very basics of higher highs and higher lows for example in an uptrend.
How to determine the strength of the trend
Generally speaking as price is trending higher and higher more buyers step in and not only that also shorts are forced to close their position by buying. This is to a certain amount visible by increasingly bigger bullish candles. The bigger the candles the stronger the move and the less likely it will be that the market will allow you to enter at the level prior to the breakout.
How to enter trades in the direction of the trend:
Once price is moving fast you often see people talking about buying the dip. In a very strong uptrend as previously mentioned the pullbacks are relatively small and thus entering can be sometimes difficult to time.
In an uptrend you want to buy and in a downtrend you want to sell the rallies — a different topic for another time though.
Hiccups in between
Of course as you can imagine price never goes up or down just in straight lines. It sometimes just consolidates a little and continues its journey higher or lower or goes sideways for a longer period of time. Depending on where price is in relation to the overall market structure (What is Market structure) and to what happened on the left it can either be a phase of consolidation before continuation or an actual trend reversal.
Trend reversals are a completely different topic though but let me just get into that quickly.
Catching the bottom or the top of the trend is a difficult task and most of the time no achievable. The same goes for calling bottoms and tops — until the market hasn’t actually proved your theory right which sometimes can take longer than expected anticipating bottoms or tops shouldn’t be your number one priority but rather expect continuation of the current trend. Now there are plenty of exceptions where different approaches in certain situations come into play but this would extend this article’s main purpose by far.
From a trading perspective anticipating the top of a bull trend can also often lead to a strong bias and the stronger you are convinced price must do what you think it very likely won’t do that.
Trade the direction of the trend and not what you think where price should be going. Be fluid as water as once Bruce Lee said.
Shorting a very strong uptrend for example is like swimming upstream. It requires more discipline, experience and risk management. Often trading against the trend involves more risk and isn’t smooth. (See example above: A lot of people were expecting BTC’s latest rally to stop at 6.k and preemptively jumped into a short position)
You identified the direction of the ongoing trend and now you may ask how do I stay in a trade:
There are many many different ways determining how strong a trend is and if the trend is still going into the direction you have evaluated.
Exhibit 1: MA 200
Downtrend — Price stays below the 200 MA on the daily timeframe
Exhibit 2: The GUPPY or GMMA
I bet you can google yourself how the guppy works but in short:
It consists of 5 slow and 5 fast EMAs. If the EMAs are compressed bulls and bears are in agreement, but when the fast EMAs go above the slow EMAs the trend turns bullish and vice versa bearish.
To make things even more simpler, as long as price is above the guppy and if the guppy is green the trend is still active or in a bearish case red. Now it’s a fallacy thinking that you only have to buy green and sell red. The guppy is just a mere colourful tool for depicting how the mid or long term trend is. Given it’s nature and being calculated by EMAs it gives you very late signals and thus potential lost profit if you solely rely on the guppy.
Exhibit 3: EMA 9 & 18
Exhibit 4: MA 50/200
The issue with trading moving averages is, that every time price dips into a demand zone, the moving averages are sloping down and by the time they point upwards again you missed your optimal entry and end up buying high instead of buying low.
Usually if an impulsive move occurs it’s wise to go along with the crowd and trade the direction the market has given you. In strong trends taking counter trend trades can be risky. It’s far more easier to sell rallies in a bearmarket than anticipating where the bottom is going to be. The same applies to bull markets — buying support and or dips will be way more profitable than falling victim to the guesswork of figuring out where the top is going to be.
The trend is your friend — until it isn’t.
Let’s say the market is trending higher and there were 10 buying opportunities and you bought each of them and sold local highs but the 11th one was actually the top and when you thought it’s going to stop at support and went long but price didn’t stop there but instead went lower, you’d still have a pretty good strikerate and not only that you’d sit in pretty nice profits.
If the trend is changing you can once again shift from buying the dip mode to selling rallies again.
You now may think, but Sir I could make double the money if I go long at the bottom and short the top — theoretically yes, practically NO!
As mentioned earlier swimming upstream can be an exhaustive and difficult task to accomplish and not only that if you go with the trend you are going to have safer entries and better risk/reward because moves in the direction of the trend tend to be longer and thus offering more potential profit than trades against the trend.
It’s important not to lose sight of the overall bigger picture. It’s tempting to get lost on intraday timeframes and observe price action how it behaves and where it wants to go but ultimately the higher timeframe will win the game.
Buy dips in an uptrend and sell rallies in a downtrend.
The rules are the same regardless of the timeframe. You don’t have to catch the bottom or top in order to make money but you have to be consistent with what you are doing and in balance with the market. Trading your personal bias of what price might do here and there can often lead to a false analysis and thus forcing you giving money back to the market.
Thank you for your time and reading this article.
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I invested in crypto in mid 2017 through the recommendation of a friend but knew nothing about TA at this time nor about market cycles. I was fortunate enough to sell in December 2017 based on a gut feeling. It was this time around when I discovered Crypto Twitter and started following all the big accounts based on their following-count. As time passed by I noticed big discrepancies between what was going on on the chart and what people were predicting.
As a newbie to TA and without a mentor I was forced but I’d rather say I motivated myself to learn technical analysis. I tested dozens of different indicators and strategies until I discovered price action trading for myself as my go-to tool for trading. It was a long and painful journey and I try to educate myself on that matter almost everyday ever since.
I also noticed that alot of big accounts on CT pretty much have no idea about technical analysis and somehow I can’t shake the feeling that the information they provide misleads people.
The longer I’m in this game the more I see people on CT being scammed, misled or they are just given false hope. As the days go by I learn and try to share the information I acquire and maybe it helps someone not committing the same mistakes I did when I knew nothing about this space and TA.
The Daily Chain – Inform. Educate. Succeed.