Forex trading for beginners a primer.

I think this is a really good primer.

I would add that not uptrends/downtrends are equal. Trends can show up in different ways.

1. You can have trends with minor pullbacks, higher lows that don't break the previous highs. First chart.

2. But there are also trends where the pullbacks are much deeper, and the price overall is still going in one direction.

3. Then there are also trends that are fast in one direction, which generally happens when there is a big gap between major levels or there is some major news event. The price just goes in one direction without breaking the high lows of previous bars/candles (just a way to look at it). Second chart.

This is an example of second trend type (I talked about in my previous reply) on the EUR/USD, because I did not attach a chart for this before in my reply.

This is the daily chart for the month of April 23 (move started from mid of March 23).

The overall month was up around 300 pips from lowest low to the high. But all throughout the month (starting from the low) you had very deep pullbacks. It is an uptrend still.

You would see all 3 trend types on all timeframes (even the lowest TF).

I agree with you that most days are range days. Take the London session on EURUSD from 20th August & 21st August for example.

Both days were sideways, and the break happened during NY open (on 20th). Even today, London was mostly sideways after the initial move, there was no follow through.

In my experience, almost 2-3 days in a weeks are sideway days on EURUSD during active sessions, if you are an intraday trader.

I'm not sure about all other pairs, but if you trade other pairs on intraday, do share your strategy & what exact behavior(s) have you noticed in the price movement.

1. You can have trends with minor pullbacks, higher lows that don't break the previous highs. First chart.

Yes, but i would say that trend is atleast 1 broken high, since it is easy to comment on a chart that has already formed there is always a possibility that the trend could end in double top and never go forward after that. But when we trade a trend we can't trade it thinking what would happen next as trading is not prediction making but following a methodology.

If you were not referring to the double tops when you said no new higher highs, but a trend that end up in consolidation then breaking out later. i would still say that is a series of higher highs or higher lows in your chart albeit same lows after forming 1 higher low.

2. But there are also trends where the pullbacks are much deeper, and the price overall is still going in one direction.

ofcourse that can happen which is what trading is about we assume that the trend will have a small pullback but it ends up pulling back deeper then expected but it still is a trend just something that did not work as expected. Maybe we will have to take a loss in this case because price pushed deeper into out stop loss.

3. Then there are also trends that are fast in one direction, which generally happens when there is a big gap between major levels or there is some major news event. The price just goes in one direction without breaking the high lows of previous bars/candles (just a way to look at it). Second chart.

Faster trends are a luxury if you are in their favor and can be a curse when trading against. But still it is a series of lower lows in your chart and the wicks visible on the chart are lower highs.

I would end the reply by saying that simplicity is a must in trading and having a simple visual image of what we are going to be trading and breaking it down to simplest of rules will be the only way to be successful in trading, so trends can be fast or slow or really slow but having a simpler explanation in the form of lower highs and lower lows or higher highs and higher lows is what would should be a general explanation of a trend.

Yes, but i would say that trend is atleast 1 broken high, since it is easy to comment on a chart that has already formed there is always a possibility that the trend could end in double top and never go forward after that. But when we trade a trend we can't trade it thinking what would happen next as trading is not prediction making but following a methodology.

If you were not referring to the double tops when you said no new higher highs, but a trend that end up in consolidation then breaking out later. i would still say that is a series of higher highs or higher lows in your chart albeit same lows after forming 1 higher low.

To answer this, I agree that when you are in a trade, you don't know if or not the price momentum will continue in a direction or will it just consolidate at the high/lows.

I don't mean no 'no new higher highs'. I meant a series of higher lows that don't break below the previous highs. Attached image.

Of course all this is good in hindsight. When you are actually trading it, you don't know how the trend will appear, or if at all.

As a trader,how do you determine the strengths of a trend and what indicators do you use to confirm it's direction?

All the indicators are lagging indicators, you can only determine it after the fact in hindsight, after the move has happened. Price can go from Point A to Point B, slow or really fast. We don't know what it will be, and we don't have to.

@patrader put it really well I think "when we trade a trend we can't trade it thinking what would happen next as trading is not prediction making but following a methodology."

This is really important. Because when you are in a trade, you don't know if that would end up being a trend, or just go sideways.

There are oscillator indicators, but they will only tell you what has already happened & is reflected in the price.

But if you had to, avoid using any indicators
a. Just look at what the price is doing. If you need to, you can add 9, 12 & 21 EMAs on your chart.

When the markets are trending the EMAs would not be flat. In a fast trend, the price will move away from the moving averages fast (I mean deviation from the moving averages).

b. When the trend is slowing down or atleast making a pullback, attached is the Daily chart of EURUSD. See how the Moving Averages have started to go flat, meaning the market has slowed down. So, you could range here till the high (before breaking), or you could reverse the uptrend.

c. For the direction, you can clearly see it on the price chart, and the moving averages are also trending in that direction.

But this is all after the fact analysis. I think your question is about how to determine before the fact? Is it?

The important point I would ask you is, why do you want to determine the strength of the trend? I mean when you are about to take a trade, what is your approach to entry & exit?

Hello deelee,
This is in context to what you asked finding the direction and strength using indicators. But i would say you could easily find the direction with your own eyes but you could use indicators.

Trend direction using Moving Averages:

You can use the most basic indicators like moving averages or a moving average ribbon for checking the direction of the trend. If the ribbon is going up then the trend is up if the ribbon is going down then the trend is down.

So lets says we have a 5 minute timeframe and the following EMAs (exponential moving averages):

24*5 =2 hours, this ema will show you the trend on the 2 hour timeframe
48*5 = 4 hours
and so on...

24 EMA, 48 EMA, 144 EMA, 288 EMA will show you trends on the 2,4,12,24 hours. If the price is trading below 24 ema it means that price has been falling in the last 2 hours. If the price has consistently stayed below that moving average means that 2 hour trend has been down.

Trend Strength using MAs:
A strong trend would barely touch the larger moving averages, but if you have many crossovers or periods where moving average ribbon is flat then it means we are ranging. Also the spacing between the EMA would be large enough in strong trend and they wont be too close to each other.

Trend strength using Bollingar Bands:
You could also use Bollingar bands to see the trend strength, a srong runaway trend would stay on the upper band of the Bollingar and frequently appear to pierce the standard deviation.

Other indicators are RSI,ADX etc etc.

I will write more about naked charts reading strength using your eyes in the upcoming posts.

Trading Trending Markets:

If you spot an existing trend, almost always you would want to enter the trend either during a pullback or a break of the previously formed high.

If you think new trend is forming you want a lower high in case of down trend otherwise assume an uptrend.

If an uptrend is a series of higher highs and higher lows, and downtrend is a series of lower highs and lower lows. You can assume that the sequence will continue and buy when you perceive the price is pulling back into an existing up move or down move.

If you believe the market is ready to go up again in an uptrend another thing you could do is mark a box/line around the last up candle and trade the breakout of that candle.

See attached image:

Image:

The beauty of trading is for every buyer there is a seller, that means for your uptrend analysis there can be someone who is assuming that the down trend has started.

Image:

There are multiple ways one can trade a trend. But your entry & exit matters in order to manage your risk.

For example, some traders strategy is to pick the start of a new trend, which is generally very risky, but some traders are quite good at managing their risk on these trades.

In most such cases you are fading the existing trend.

See first attachment chart, which is monthly chart of EURUSD, someone could actually long on the break of that candle's high.

Although it never broker its high & did not work out in hindsight, but some traders who fade the trend, or mean reversion, they look for some indication that the existing momentum is fading. And certain price action in opposite direction is their trigger. This applies on all timeframes.

In theory, if someone were to enter, there would be 2 possible points
a. Break of the high.
b. A pullback inside, on lower TF like the daily. And then try to identify the very basic level of support & resistance.

The very basic ones could be the Fib Retracement levels. See the attached second chart. It is the daily chart of that monthly bar.

Normally, if the opposite momentum is there, I mean to fade the existing trend, you would immediately break the highs (it did not in this case, but it is only in hindsight that I say this). The entry b. is actually a riskier trade in terms that it will work, but lower in terms of SL.

But once you broke the low of this opposite momentum (I mean the monthly low of the highlighted candle in this example), generally speaking, it means the momentum on that side is strong enough to trade that side.

Support and Resistance:

This topic is the most commonly know among newbies but they don't pay much attention to it as they think it is a hit or miss or it is far simpler to be actually usefule. For them it is much easier to use some indicator that tells them where to buy or sell then to actively plot S/R lines on chart and trading price action around them. I believe this topic deserves to be discussed and presented to all newbies.

How to draw them:

For newbies i suggest shifting to a bar chart as that makes it much easier to spot them. Se attached charts for more details.

Support:

This is price area where price historically went up when it came to it. Focus on the word historically doesn't mean it will happen again in the future.

Resistance:

This is a price area where price historically went down when it came to it. Focus on the word historically doesn't mean it will happen again in the future.

Pay attention to the word area because these levels are not a single line, it is more like an area where you could see the price reacted by either going up or down historically and you may expect it to happen again.

To add to this, for any new traders, you can think of support & resistance more as zones, not exact price points.

You can also call them Supply & Demand Zones.

Demand Zones: Are levels where you can expect buying. But there is no guarantee of it.

Supply Zones: Are levels where you can expect selling. But there is no guarantee of it.

How can you trade it?
There are 2 ways to enter.

1. You can either enter as soon as price hits your level, which can be higher risk.

2. Or you wait for a price action pattern on that level, and trade a break of that PA.

Here is an example on US30 (Dow).
a. The first chart is the monthly. It should be clear.

b. Now, switching to the lower timeframe, which can be weekly or 2 week chart, you will look for a signal that would indicate weakness. Right now, it is not look weak. To be a seller you want signs of weakness, otherwise it could very well be a false break of 42,000.

What would it look like. Look at this example, chart 3.

Today on the EURUSD, on intraday, you have another example. Once you break a support zone, the price will try to pullback to that break point.

These are the possible scenarios (in the chart).

You would ideally want to be on the side of the intraday trend, which is down.

But on the higher timeframe, 1270 is a solid low. So, if you are entering on the pullback of 1300 (which is an important break point i.e. break of the support, and psychological round number), you want to see that you get a good close below 1270 in next hours.