Trend indicators for options trading

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Contents

The 5 Best Trend Indicators That Work

Last Updated on March 16, 2020

One of the most common questions I get from traders is this…

“Hey Rayner, how do I identify the direction of the trend?”

However, it’s not as simple as it seems — even if you use trend indicators.

The Daily chart is in an uptrend.

But when you go down to the hourly chart, it’s a downtrend.

And if you go down to the 5-minute chart, it’s chopping all over the place.

So what should you do?

Well, you’ll know the answer after reading this post because you’ll learn:

Then let’s begin…

This is the most important thing before you can identify the direction of the trend (and it’s not an indicator)

The trend is an illusion.

You read me right. I said the trend is an illusion.

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Because you can manipulate the trend and see what you want to believe in.

You might be wondering:

“How do you manipulate a trend?”

A trend is meaningless without knowing your timeframe.

Here’s the thing:

You can have two traders looking at the same market and one says it’s an uptrend, and the other, a downtrend — because they are looking at different timeframes.

Here’s what I mean:

Daily chart:

15minutes chart:

Before you attempt to identify the direction of the trend, you must know your timeframe.

You’re probably wondering:

“So Rayner, which timeframe should I use?”

This depends on your trading approach, whether you’re a day trader, swing trader, or position trader.

But as a general guideline:

  • Day traders are on the 30minutes timeframe and below
  • Swing traders are on the 1 – 4-hour timeframe
  • Position traders are on the 4-hour timeframe and above

Once you’ve defined your timeframe, focus on it 100% because the other timeframes are “noise” to your trading.

Next, let’s look at the 5 trend indicators that work…

Trend Indicators #1: How to use Price Action and identify the direction of the trend

Price action refers to reading market structure, momentum, and sentiment to identify trading opportunities.

It’s one of the most important things you can learn because it gives you a valuable insight of the market you’re trading (that may not be found on trading indicators).

  • Where will losing traders puke?
  • Where are traders placing their stops?
  • Where will new traders enter the market?

Now that you’ve understood the importance of price action, let’s learn how to read it and identify the direction of the trend.

Here are 3 things to remember:

  1. An uptrend consists of higher highs and lows
  2. A downtrend consists of lower highs and lows
  3. A range is contained between the highs and lows

Here’s what I mean…

Uptrend:

Downtrend:

Range:

Sometimes it’s difficult to identify the direction of the trend based especially when the candlesticks are “flying” all over the place.

So in the next section, you’ll learn how to identify the direction of the trend without using candlestick charts.

Trend indicators #2: How to tell the direction of the trend without using a candlestick chart

Here’s the thing:

Candlestick charts can get messy if the wicks are long which makes it difficult to identify the trend (especially for new traders).

And a simple solution to it is…

You’re probably wondering:

“What is a line chart?”

It shows the price on your chart by taking the price at the close and then connects the closing prices together via a line.

So, you’ll see a squiggly line on your chart which makes it easier to identify the trend.

Here’s what I mean…

Candlestick chart:

Line chart:

See the difference?

And here’s how you can interpret line charts:

  • If the line is pointing higher, it’s an uptrend
  • If the line is pointing lower, it’s a downtrend
  • If the line is flat, it’s a range

Simple stuff, right?

You must know that line chart only considers the closing price. This means you won’t know what the high/low of the candle is — and this will hamper your trading decisions.

In my opinion, a line chart is useful to identify the direction of the trend. But for precise entries, exits and trade management, it’s best to stick with candlestick or bar charts.

Trend indicators #3: How to use moving average to identify the direction of the trend and the strength of it

The moving average is an indicator that “summarizes” past prices and is plotted as a line on your chart.

Yes, it’s a lagging indicator but…

…it doesn’t mean it’s useless because the moving average indicator can help you identify the direction of the trend — and the strength of it.

How to use moving average to identify the direction of the trend

Here’s a simple technique that works:

  • If the price is above the 200MA, then it’s a long-term uptrend
  • If the price is below the 200MA, then it’s a long-term downtrend

How to use moving averages to identify the strength of the trend

Besides the 200MA, you can use the shorter-term moving average to identify the strength of a trend.

  • In a strong trend, the price tends to stay above the 20MA
  • In a healthy trend, the price tends to stay above the 50MA

Moving average works best in trending markets (whether it’s a strong, healthy, or weak trend).

But if the market is in a range, the moving average has little significance and it’s best to ignore it.

If you’re curious to discover my “secret” moving average trading strategy (that you can use), then check out this video…

Trend indicators #4: Trendlines

A Trendline is a tool you draw on your charts. It can help you identify the direction and the strength of a trend.

But before I get to it, you must learn how to draw trendlines the correct way.

How to draw trendlines like a pro

Here’s my 3-step technique:

  1. Look for at least 2 swing points (it could be a higher low or lower high)
  2. Connect the swing points using a trendline
  3. Get as many “touches” as possible on the trendline

How to identify a trend and the strength of it with trendlines

Here’s how to interpret the trend:

  • If the trendline is pointing higher, it’s an uptrend
  • If the trendline is pointing lower, it’s a downtrend

If you want to determine the strength of a trend, then pay attention to the angle of the trendline.

As a general rule:

  • The steeper the trendline, the stronger the trend
  • The flatter the trendline, the weaker the trend

Here’s what I mean:

Now you’ve gotten a glimpse of how to use trendlines to define a trend.

But if you want to discover my trendline trading strategy using proven techniques that work, then check out this video here…

Trend indicators #5: How to trade with Channels and find “sweet spot” for your entries & exits

In case you’re wondering:

“What’s a Channel?”

A Channel is a variation of the Trendline.

The way you draw and interpretation it is the same as Trendline.

The only difference is… Channel has an extra line that’s parallel to the Trendline.

Here’s an example:

Channel helps you identify where opposing pressure could come in. This means you can take profit ahead of time — before the price has a high probability of reversal.

Not sure what the trend is? This little-known technique will give you clarity

Here’s the thing:

If you look only at the water, you’ll miss the ocean.

If you look only at the trees, you’ll miss the forest.

If you look only at the current price, you’ll miss the long-term trend.

So what’s my point?

Stop being fixated on what the market is doing each and every moment.

Instead, zoom out your charts.

Zoom out your charts and see the big picture.

Here’s what I mean:

Zoom in view:

Zoom out view:

See how much of a difference it makes when you’re looking at the big picture?

A mistake made by many traders is they become so involved in trying to catch the minor market swings that they miss the major price moves. —Jack Schwager

My personal method: How to identify and trade with the trend

As I’ve shared with you earlier…

There are different ways to identify the trend and there’s no right or wrong or best approach.

But if you ask me, these are the 2 things I ask myself:

  1. What’s the long-term trend?
  2. What type of trend is this?

1. What’s the long-term trend?

I’ll use the 200-period MA to define the long-term trend.

If the price is above it, the market is likely to be in a long-term uptrend and I want to have a long bias.

If the price is below it, the market is possibly in a long-term downtrend and I want to have a short bias.

2. What type of trend is this?

Not all trends are created equal.

After many years of trading, I’ve realized most trends can be broken down into 1 of 3 categories…

  • Strong trend
  • Healthy trend
  • Weak trend

Strong trend

A strong trend is when the price has little to no pullback and remains above the 20MA.

In such a scenario, the pullback may never come as the price keeps breaking higher. Thus, in strong trending markets, the best entry is usually breakout trades.

Healthy trend

A healthy trend is when the market has a healthy pullback and remains above the 50MA.

In such market conditions, it’s possible to trade the pullback. Possibly towards the 50MA or, previous Resistance turned Support (in an uptrend).

Here’s what I mean:

Weak trend

A weak trend is when the market has steep pullbacks but remains above the 200MA.

In such a scenario, you can trade from the 200MA or an area of Support (in an uptrend).

If you want to learn more about trends, go read The Trend Trading Strategy Guide.

Frequently asked questions

#1: Which timeframe should I use to identify the trend?

The timeframe should be relevant to your trading:

  • If you’re a day trader, then you’ll identify the trend on the lower timeframe like the 1-hour or 30-minutes timeframe.
  • If you’re a swing or position trader, then you’ll identify the trend on the daily or the weekly timeframe.

#2: Do I have to adjust the moving average settings to suit different timeframes?

There are no best settings out there because it depends on the type of trend that the market is in.

If the market is in a:

  • Strong trend, it will tend to respect the 20 MA
  • Healthy trend, it will tend to respect the 50 MA
  • Weak trend, it will tend to respect the 200 MA

Personally, I’ll use whichever of these 3 moving averages that the market is respecting more, for the timeframe I’m trading on.

If you want to discover more on moving averages, then check this out:

Summary

Here’s what you’ve learned today:

  • Why a trend is meaningless without looking at the timeframe behind it
  • How to use price action and identify the direction of the trend
  • How to identify a trend without using candlestick charts
  • An easy way to tell the direction of the trend using Moving Average
  • How to draw Trendlines and identify the strength of a trend
  • How to use Channels to better time your entries & exits
  • My personal method to identify and trade with the trend

So, here’s a question for you…

How do you identify the direction of the trend?

Leave a comment below and let me know your thoughts…

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How to Setup Trend

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EMA 26

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What is Trend Trading?

Trend trading is to buy or sell following the directions and momentum of the price of an asset. John William Henry in 1976 developed this effective proven strategy after he studied and technically analyzed the companies and all market data available. He discovered that with the proper information and using some analytical tools, it could be possible to predict with a great certitude the future direction in which the markets will move by identifying a price trend. This prediction ability makes possible to obtain big profits from trading on the right assets at the right time. This method was so accurate that with the time it became a mechanical trading system for future trading. Trend trading does not speculate, it uses an analytical system to identify a price trading.

In a nutshell. Trend trading is a technical analysis that tries to predict the substantial future movement of the asset’s price in one direction over a period of time with a great certitude. It identifies a price trend and follows it.

Trend trading lets the price of assets lead you

J.W. Henry believes that nobody can predict anything. Therefore, you need to let the price of an asset lead you. Since he found that “shares prices are the key sources of information needed to make the right trading or investment decision”. Every minor or major social phenomenon or news will affect the market and can produce big changes. Those are very difficult to predict. However, the share’s prices have proven to predict the future of the market. The method to get profits trading is to be able to identify a price trading and follow it.

Trend trading Golden rules

  • Only trust the price. They are the best reflection of the completely economic situation.
  • Prices usually move in two directions, you need to find a low-risk entry point. It should be a step back, you have to remember that share prices move in waves. Share prices drop then rebound or the opposite can happen.
  • Learn to let your profits grow and run. There is always the temptation to buy or sell to soon. If you learn to wait properly your profits will increase substantially
  • Do not get greedy waiting to reach top or bottom, the price correction can catch you.
  • Set where you will exit if you are right and most importantly whereyou will exit if you are wrong or your stop loss point
  • Manage risk properly

How to Invest With Trend Trading

1. Identify a trend trading that is in place.

2. Find a low-risk entry point.

3. Set your exit if you are wrong or stop loss point

4. Once the trade becomes profitable, reset your stop loss point.

5. Be patient to stay in the trending for its duration but don’t wait to reach top or bottom

6. Set your take profit or exit point

The hardest part of this system is that you have to be able to be 100% rational, the predictions are impossible. However, once a price trend is identified no matter what you must follow it.

Breakdown

It’s the price’s movement of assets below the level of support. The commodity or share price decreases or falls below its support line. Usually, it is followed by a sharp price decline. The breakdown is a clear trend trading indication for selling an asset because the market pressure will lead to a general short selling of it.

Breakout

It’s price’s movement of assets above the level or resistance The commodity or share price increases or it is above its resistance line. Usually, it is followed by a sharp price rise. The breakout is a clear trend trading indication for buying an asset because the market pressure will let to a general buying of it

Trade Breakout Understanding Trend

A trend is a direction in which an asset price is moving or where its market is headedThere are three types of trends, Uptrend,Sideways,and Downtrend

Uptrend is a series or consecutive assets price increase with higher lows. Keep in mind that every consecutive low has to be higher than the previous lowest to be classified as uptrend otherwise, it can be a Reversal.

Downtrend is a series or consecutive assets price decreases with each consecutive peak lower that previous low.

Sideways trend it is not considered a real trend by some scholars because the price has changes increasing and decreasing without a real trend.

Trend Lengths are classified as long-term,intermediate, and short-term.

Long-term Trend is any trend or price movement in one direction that last more than 4 months when a trend last more than a year it is called a Major-term Trend.

Intermediate Trend is any trend, which lasts from one to three months.

Short/Near-Term Trend is any trend that lasts less than a month.

Trending Charts is the graphical representation of the closing price during a period with the tread, resistance, and support lines

Trend lines are the linear representation of a trend. This is done by adding or drawing a straight line to clear show the price movement directions. These are particularly useful to identify the trend direction and the reversal’s point.

Support Lines is a line drawn at the level at which prices are prevented from moving lower; this is also known as Supporting Level.

Resistance Lines is a line drawn at the level at which prices are prevented from moving higher; This is also known as Resistance Level.

Peak is the highest point at the end of an economic expansion before the start of an economic contraction. In trend trading, it is represented by a straight line at the highest assets closing price.

Trough is the ending point of an economic contraction just before the start of an economic expansion. In trend trading,it is represented by a straight line at the assets lowest closing price.

Reversal is the change in the direction of a trend, e.g. a rise changes into a decline or vice versa

With the amount of information available on the internet, about the social, political and economic situation of any place in the world as well as the public records of shares, commodities and all public trade assets. Trend trading has become the best way to get profit from commodities, shares, or Forex currency trading.

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