Most traders have heard of the commonly used saying “The trend is your friend, until it bends”. In our members Forex Price Action Course we are always encouraging new traders to trade only with the trend because this is one of the very few Forex sayings that is entirely accurate. What many traders have a problem with is that they know they should trade with the trend in their favour, but more often than not they find themselves entering trades fighting it.
The reasons traders quite often trade against the trend are because of two simple reasons;
- They don’t know how to identify a trend
- They love to pick the tops and bottoms of markets
How to Identify an Obvious Trend
The most common mistake traders make when looking to identify trends is thinking that all or most Forex pairs are always trending. The fact is that more often than not price is not trending at all. Most of the time price spends ranging, consolidating or chopping up and down.
The next facet traders have major struggles with is how far to look back on their charts and whether they should be looking at long, medium or short trend trends. On most charts you will be able to see an overall trend that has many smaller term trends moving inside. The questions in this situation are; is price just retracing within the longer term trend? Or is this a new trend forming?
To answer these questions each trader must work out what sort of time frame they are looking to trade for. With the methods we teach here at Forex School Online we are looking to trade from swing points back to the next swing point. We are not looking to catch major swings in the market that last for weeks and months, but rather trade swings from one level to the next. With this in mind we know we are looking to trade with the short-term trend in our favour. We are not zooming our charts right out to ascertain the long-term trend because we are not looking to trade with the long-term trend. The chart below is an example of what we term a market swing. This chart has been in an up-trend higher and the swing is from the low to the next high. To get on the right side of these shorter-term swings within the trend, traders need to be looking for the short term trends.
Below is attached a chart example highlighting two different trends. On this chart you will note there is both a longer-term and short-term trends. Those traders who are looking to trade on the daily charts and hold trades for long periods at a time would be looking to trade in-line with the long term trends. Traders that trade like Forex School Online and are looking to trade from one swing point to the next would be looking to trade with the short term trend in their favour to ensure they are on the right side of the market for the next swing in the market.
The best trends to trade with are the trends that are both strong and obvious. These are the trends that when you flick to the chart, you straight away notice price moving strongly either higher or lower. If you’re unsure if there is a solid trend in place, the chances are that price is not in a trend. If the trend is strong and obvious a five year old will be able to point it . These simple trends that stand out are the trends that often produce the biggest winning trades with the lowest risk.
SUPER IMPORTANT: Every time frame chart you trade needs to be analysed and traded individually. For example if you are trading the 4hr chart you trade within the current 4hr charts trend, you do not trade with what the daily charts trend is doing. This is very important. Every chart has their own trend. The weekly can have a completely different trend to what the 4hr chart may have. Treat each chart as individuals.
How Can We Spot a Trend Change?
A very reliable method that can help traders spot trend reversals with price action is known as the 1,2,3 pattern. This pattern is especially useful for spotting short-term trend reversals and can help traders looking to trade the short-term swings get on the right side of the trend.
Many traders use moving averages to try to identify trend reversals. The problem with this is moving averages are built from using old historic price and by the time they show a trend has reversed, price has already moved and is off and gone. Using price action as it is printed ensures that traders are right on the ball and able to catch the trend much earlier than if they used indicators.
Using the 1,2,3 for Spotting Trend Reversal
This pattern is very simple and yet effective at showing a change in order flow for the next trend. This pattern is all about watching the market make an initial reversal followed then by confirming with a fresh high or low.
The first step in the 1,2,3 pattern or the 1 in the pattern is the first leg of the reversal. For example; if we are in an up-trend the 1 would be the first leg lower to make a new lower low (LL). The number 2 or the second leg of the pattern is price retracing, but not making a fresh high or low. So for the current up-trend example the first leg moves lower and the second step is price moving back higher, but NOT making a new high. Instead, step two needs to make a new lower high (LH). If price does go onto make a new high, the up-trend Is still in play. For the last leg of the pattern or the 3, price again moves lower, moving past the new low that was made from the first leg and going onto to make a new lower low.
That may sound very confusing, but the chart below explains this clearly with a price action chart. For this example price was in an existing up-trend and for the trend to change we are looking for a 1,2,3 back lower. The first leg of this trend change is price making a new lower low highlighted by the number 1 on the chart below. The next step of this pattern is price retracing and making a new lower high. It is crucial price in this second step does not move up higher to make a new high, otherwise that would be confirmation for the trend to continue higher. The last leg of this pattern and also confirmation that the short-term trend has changed is leg 3 which is price moving back lower again to make a new lower low. This involves price moving lower and past the first low to make a new low.
The 1,2,3 pattern can be used for spotting changes in both up and down trends. The example above is of an up-trend changing to a down-trend. The example below is the opposite of an down-trend changing to an up-trend with the 1,2,3. For this trend reversal we need to see a new higher high, followed by a new higher low and then for price to make a new higher high for confirmation the trend has changed. See the chart below:
Where to Enter into Trends | This is Critical
One of the critical teaching points of Forex School Online is getting traders to start trading from value areas and at the correct swing points. Unfortunately a lot of traders are entering the market every day from areas that are putting themselves on the wrong side of the market. To read a tutorial on how to enter with the big guys read here: Make Forex Trades with the Smart Money. To enter from value areas traders need to trade from the correct swing points and this is even more critical when trading with the trend.
When looking to trade with the trend on their side traders need to enter from strategic areas rather than just spotting a trend and jumping aboard. The strategy used to enter with the trend is known as riding waves or entering on market retracements. For example, if price is in an up-trend traders can enter from value areas by waiting for price to retrace lower and make a new low.
In all markets price has to move up and down. No market moves either straight up or straight down. Price needs to rotate to find new orders to continue to move. If price is in an up-trend, price will move up before at some stage moving lower, before then continuing on to make a new move higher. From an order flow perspective this move lower in an up-trend is often created from the traders who made profit from the move higher taking profit. As these traders take profit the price moves lower. If at this low point new orders come in to buy, price will again move higher and the trend will continue. It is at these rotations that traders can target value areas to enter the market. This strategy works the same way for both up and down trends.
The chart below explains this pattern with price in an up-trend. You will note price has been continually moving higher followed by a rotation lower and then the price continues higher with the up-trend. It is at these rotations lower in to swing lows that traders can find trades that are from value areas.
Putting it all Together
The final step when looking to trade with the trend is using high probability price action setups to make strategic entries. High probability price action reversal setups include:
I really hope you enjoyed this article and more importantly can put it to use in your own trading to make high probability and low risk trades. I know from personal experience learning to trade with the trend rather than against it can be a turning point in a trader’s career.
Safe trading and all the best,
Trend Trading Video Tutorial