Intermediate Level

Learn more complex tools and techniques that will help you in trading.

Lesson 3: Mechanical Trend Trading

Trend
trading can be an extremely hard thing to master, and most individuals rarely
do it. Buying low and selling high is programmed into our brains from the early
days of trading to the stage where it is almost impossible to do so when it
comes to shifting gears on busy days. 
From a private point of view, trend trading was the very last thing I’ve
learned to do, because it was just that difficult to figure out.

You’re
likely to come up with a host of pages telling you to sell to fixed-number
exponential moving averages, etc., but you don’t have a consistency meter.
These moving averages or other means of trend assistance or opposition are
obtained from particular cases, and at least from a systematic point of view,
this sort of technique has a low win rate.

It’s
because, as symmetrical as the market can be, it changes and can become
completely asymmetrical when any type of basic stimulus is introduced…… and
these stimuli occur all the time. “V” tops and bottoms happen, and
the trend itself may exist at any angle. You could have a slow, constant trend
at a low angle, or a sharp, parabolic trend at a high angle. In both circumstances,
the fixed-number EMA will not work at the same timeframe. It’s going to break
down on the lower-angle trend. It’s just common sense.

Now, of
course, there are ways to perfect this, and many individuals have, but the
fundamental issue is not resolved: what particular levels are really going to
behave as a cost acceleration launch pad?

The answer
is a diagonal trend. These trends are usually guilty of just about anything on
your graph, and using them is very misunderstood. But before we get too
engaged, let’s go over the first thing we need to learn about any trend:

How do we understand that there’s a
new trend in the first place?

The newly
developed trend has one undisputed key feature: a broken trend from the prior
trend.

The
timeframe, duration and severity of the move will differ. A trend line break on
a 1-minute chart can’t come close to touching the meaning of a trend line break
on a daily chart. And when this occurs, they’re all paying attention. It’s a
really big deal, so don’t underestimate it.

Next, the
trend lines can be “fanned” to demonstrate increasingly sharper
angles to the trend. This is an ancient term / technique, described below,
which serves a range of purposes. The “standard” is three
increasingly steeper trend lines before the last break.

You can
see that the smaller the angle of the trend line breaks, the more important the
movement becomes. And depending on the interval of the break, you’ll see more
and more activity moving in that general direction.

Once the
trend is ongoing, reference points can overwhelm you. Our task today is to
assist clear up a big part of that.

Find those strong turn points

Below is
the same graph, zoomed in to an hourly timeframe with horizontal support /
resistance rates added. Notice three things in this piece:

1. Not a
single significant high in this trend bounced straight from the bottom of the
earlier spectrum, “to the pip.” Each of them intersected the prior
wicks of the candles, or peaks, in a failed effort to match the prior trading
variety.

2. Each of
these peaks indicates some type of confluence (others not shown on this graph).

3. The red
arrows that use the trend line itself as a momentum launch pad.

Now as
easy as this is to demonstrate after-the-fact, trading at these highs can be a
very challenging method. Most traders would have had a difficult time finding a
few of these, never mind all of them. And while we have short-term techniques
to discover these highs, not discussed in this article, knowing that they exist
after-the-fact is still enough to assist us out tremendously when it comes to
riding the wave.

In
paragraph 3 above, please pay attention to the backward retests on these
trends. Since it is simply impossible to capture all the absolute highs and
lows, one needs another means of entering once the move is underway.

Reference Point Gold

Your
charts are basically made of…

…ranges,
with sharp price movements. On that hourly graph above, you’ve got a sharp move
lower, a range, a sharp move lower, a range, etc… and that’s what’s going on
in trends. What this gives us is gold in the form of a reference point, when a
sharp move is ongoing, extracted from the prior range.

Let’s clarify:
each of these “ranges” in a pattern is generally made up of flags or
pennants (standard or reversed).  Knowing
this on its own provides us even more to work with once the next sharp step is
ongoing. Let’s take another look at that graph, now broken down to a 15-minute
version for this demonstration, from another view:

So now we’re
beginning to get closer in terms of working with them.  You’ll notice a few things going on:

1. All
these formations CAN be pennants, but you should ignore the original smaller
drives and draw them as flags. The basis of the flags becomes important for
backward retests on these trend lines (green arrows) as prices use them as an
intraday launch pad for acceleration. This gives you the opportunity to look
forward and get in on the move sooner.

2. The upper
(blue) trend lines are also frequently used as launch pads to increase, but not
by much, the cost. This is a very prevalent event, and not just in the context
of developments. Take note of that.

3. When
the red trend lines break, they’re all retested on the back end. When the price
accelerates, the upper flag line breaks and the heads lower.

So right
out of the door, there are 2 possible entry points: 1. Break / back test of the
upper diagonal trend line (red trend line), or 2. A break from the base of the
flag.

But wait,
there’s more to it. Take a look:

As you can
see, the chart is modified at the lower trend line (now highlighted in red) to
move in the direction of the trend, as compared to the trend. You’ll see that
in one of these cases, it was used as support, and in the last two, as launch
pads for drives lower, in the direction of the trend.

Inside the Channel: Adaptive Entry
Points

Now that
we understand how to determine whether a significant move is ongoing (and have
entry points at the top and bottom of the flags or pennants) what about all the
activity between these lines?

Let’s go
to a latest instance, a 5-minute chart, to demonstrate what happens once all
these downward motions are ongoing.

High on
this graph is the back test of the regular graph (last leg lower in the
examples above). This is a very large deal on its own. It is what is called a “descending
triple tap,” which in itself is a powerful inversion sign.

The green
arrows on this graph indicate all intraday input options using this technique.
In short, the price breaks through the prior trend line with the confluence and
utilizes it as a launch pad for the reduced next leg. There’s a large question
here, though, about my fundamental methodology, which I’ll explain in a second.
First, just take a look at the chart:

If one
were to attempt to do this live, in real-time, you might be asking yourself,
“How do I know which lines to use? There are tons of them out there!”

The answer
is as follows and as fundamental as everything else we’re doing here:

First,
look for historic hits, also known as confluence. These trends are buried all
over your chart, and most people don’t even see them. Do you remember the
paintings that you had to look at long and hard before you saw a 3D image
appear? They’re called 3D stereograms, and basically, you’ve had to relax your
eyes and look at one key point in the picture and voilà, it’s starting to pop
up at you, and you’re allowed to see the “concealed image.” Finding
these lines can be a lot like that, in a manner of speaking. Just begin
drawing, and you’ll begin seeing them everywhere, acting as reactionary points
in the future. Practice is ideal. Be implacable.

Second,
work your way back.

My few
words of guidance to effectively find the ones that matter, begin on the
correct side of your graph and work your way back. People like to see things
clearly, and in the heat of the moment, going back through tons of history
doesn’t assist you at all. Any trader on a desk will believe the same way. It’s
like being right in front of you.

Start with
your feet on the lower steps. You’ll notice that on all the instances in this
article, at least one touch came from the last step up before the collapse.

Third, if
you want more confirmation, you can use easy bar patterns to verify the
reversal. Let’s take another look at that graph, this time observe the
fundamental bar patterns:

The big
take-home here is that the down-close engulfing bars within the range of the
prior bar (1 and 4) offered much better instant follow-up compared to the doji
(which usually represent indecision) being present. Overall, I’ve discovered
this to be true when it comes to these internal rehearsals, or just
“hidden” trends.

Let’s take a look at one more instance of this, using
the prior reduced drive in this trend:

Once Again, All Crucial Points Are
Here:

– Every
trendline used for the retest has at least 3 prior historical hits. Any other
(2 prior hits) is only used for confluence.

– Every trend
line used utilizes a point on the last step greater as a reference

– Wait for
them to break and predict that they will be used as an acceleration platform in
the not-so-distant future

– Reading
individual bar patterns at the moment of entry is one of the easiest ways to
confirm a trend line that sticks.

– When the
price enters the median variety of the prior range, pullbacks tend to get
deeper.

So, no flow of order, no
secrets, no magic, nothing. It’s just trend lines. You can thank these trends
for doing the dirty job when your 8 EMA crumbles to little bits. So, begin
drawing them, and observe what’s going on along the way. Nothing else can assist
you out more than your own private request.