Pundits all say “the trend is your friend” – and we agree. But “the trend” is often not fully understood by many traders. My trading method uses multiple time frames – in most markets I use three intra-day charts. Each chart is set to a different time frame. It is not unusual for trend to be the same in all three charts – nor is it unusual for trend to be different in all three charts – or any combination of trends in the three charts.
So what is “the trend”?
Trend must be associated with a time frame to have significance.
It is not a bad thing that trend is different among my three intra-day charts. It fact, it is a good thing. It tells me a lot about strength of the market.
Strength – that is another aspect of trend. Trend has direction – up, down or sideways – and the up and down trends also have a strength component. A weak trend is a bit like a sideways trend – I can trade in either direction with the right trade setup. However a strong trend should only be traded in the trend direction. These generalities apply to the chart upon which the trade is to be constructed. But what about the other two charts used in short term trading?
The three charts are usually configured as follows:
1. A ticks per bar count that enables me to “See the Music of the Market” – this is our primary intra-day trading chart.
2. A secondary trading chart of about 1/10th the tick per bar count as the primary trading chart – I often construct trades on this chart.
3. Another chart of about 1/10th the tick per bar count as the secondary trading chart – I use this for entry and exits – and for scalping a market.
When the trend is the same on all three charts – and it is strong – I only trade in the direction of the trend.
When the trend on the primary chart is strong, but the trend on the secondary chart is flat or in the opposite direction, I may take a trade against the primary chart trend IF the setup looks really good – but I will watch price direction very closely and exit at the hint of a reversal on my trading chart.
If the trend on the primary chart is weak, I will generally trade in either direction from the secondary chart.
This is only a small part of what understanding and using trend can do to help you become a better trader.
I will talk more about trend trading implications and methods for the next few days.
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