Hello Friends...

We have always read that "Trend is your Friend", all we need to do to rake in those Pips is to stay with the Trend...... But how do we know what is the direction of the present trend & if it is trending at all?

Largely speaking there are two methods to know about the trend of markets,

  1. Moving Averages
  2. Trend Lines
Moving Averages

        Moving Averages is one of the oldest and simplest form of Technical Analysis and are very good for Trend Identification and often also act as floating support and Resistance. The best example of this is the 200 Day Simple Moving Average, which in a broader sense can also be termed as the holy grail for trend identification. In most of the cases this also acts as a very good Support & Resistance.

          The 200-SMA acts fabulously in the lower time frames also, but as is tended to be in most of the strategies using Moving Averages, the lower the Time Frame the higher the Whip-Saws.

Trend Lines

           Trend-Lines are lines drawn on the price chart connecting various highs and lows of the prices to get an understanding of the direction of the price or trend.

Above is the Daily Chart of EURUSD pair. The green line is the 200 Day Simple Moving Average. The Blue line is the Bullish Trendline & Red Line is the bearish trendline. 

See how beautifully price reacts at the 200SMA & also the trendlines.

200SMA acts at various point as Support, but once broken acts as a resistance and vice versa. A similar action is see around the trendlines.

How to profit from this learning?

    Lets now get down to business. How do we profit from this knowledge? The very reason for all this exercise. Its quite simple. We have to be long when the trend is UP and Short when the trend is down. 

    But friends always remember even 'Trend Lines' & SMA's are made & prone to be broken so Money Mangement is very important in every trade. Never take a risk of more than 2% in any single trade at anytime.

     also there will be false breakouts, so one has to be very nimble and fast in reversing trades. Here is an example of false breakout in the above chart

Always take only long trades when price is above 200SMA & trade only on the short side when the price is below 200SMA & follow trendlines for places of entry. To take optimum entry points we add an oscillator to the chart. 

The Oscillator is Stochastics with setting 
  • %K Period - 8
  • Slowing - 4
  • %D Period - 3
These are the settings I use, some people use (9,3,4), some people use (5,5,5), some people use the  default settings. These settings are subjective from person to person, which can be kept as per ones comfort levels.

Here are the conditions to take entries, these will be refined and explained in further details in further articles.

To go Long:

  1. Price must be above 200SMA.
  2. Price should be very near to trendline
  3. Stoch should give a bullish crossover in the O/S region.
  4. Stop Loss = Immediate Pivot Low - Spread - Filter

To go Short:

  1. Price must be below 200SMA.
  2. Price should be very near to trendline
  3. Stoch should give a bearish crossover in the O/B region.
  4. Stop Loss = Immediate Pivot High + Spread + Filter

This is the strategy in a nutshell, you may be confused with a few terms, also would like to fine tune  the strategy, which will be done in the further articles.

Also a point to note is that, there might be times when the market is indecisive and doesn't trend at all. We will also discuss about identifying such periods and various ways to trade them. Below is a chart of a market when 200SMA is not giving us a clear picture of the trend. The area marked between the black horizontal lines in the indecisive area of the market.

The main benefit of this method is that
  1. We are trading always with the trend.
  2. We wait price to come to our comfort zones(near trendlines), so we have very low risk.
  3. The strategy uses the best indicator of the market, ie price. A completely price based system.

Shoot me with your doubts and inputs in the comments.

Best Regards,
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