One of the most popular tenets of trading is that the “trend is your friend”. But the determination of trend is very much a matter of perspective, and obviously a relative term. For example, what may be considered an uptrend to a very long term trader looking at a weekly chart, could be considered a sharp downtrend to a day trader. So how can you make a qualified decision?
In my experience, the best way to make a call on the trend is to be as objective as possible. To do otherwise will result in far too much ambiguity and uncertainty. And I’d like to show you a very easy way to establish a trend bias, no matter what the time frame you’re trading, but for the purposes of this article, I’ll talk about day trading, which is what I’ve been teaching for about 8 years now.
One of the easiest ways I’ve found to determine the daily trend bias (DTB), is by simply observing the closing price on a daily chart, relative to its 8 day exponential moving average. And I have to give credit to a book I read by Josh Lukeman called “The Market Maker’s Edge” for finding this out.
Now, I know this sounds stupid simple, but that’s just the point! It’s dead simple and can be determined in a heartbeat, just by looking at the close of the daily chart. And I have to say, simple as this is, it’s actually an extremely effective filter for Forex day trading. If you’re looking for an easy way to be sure that your day trading is only being taken in the direction of the daily chart, this works very well in my opinion.
Should you ever trader counter trend (against the daily close of the 8 EMA)? That’s a question that only you can answer. It needs to fit YOUR game plan and your own experience level, therefore only you can answer this. Certainly there are some extremely good counter trend trades. After all, price doesn’t go up or down forever. There will be a resistance or support level that is finally hit, and price will reverse, at least in the short term. For example, if the daily chart has been trending down for some time, you might continue looking for short trades, however… you can also watch for clues for a reversal, such as the prior day’s high being broken, and/or a key level of support being hit, that kind of thing. And then you can watch for recognizable, proven patterns setting up for trading opportunities. Even though this may be against the trend indicated by the closing price on the daily chart relative to the 8 EMA, for the experienced trader, these trades can be extremely lucrative.
Personally I find that the above methodology for determining trend is very effective, and far less subjective than other methods. If you’re still trying to get to a level of consistent profitability, you might want to consider only trades that are in line with the daily trend bias. Remember: all we want is an approach that will tip the odds in our favor. By aligning our trades with the DTB, along with key levels of support or resistance and a few other simple tools, you can be more confident that you’re taking trades that have a high probability of success.
All the best,
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