Hello traders! I’m sure all of you by now have heard the old trading phrase, “The trend is your friend,” or even the long version, “The trend is your friend until the bend at the end.” The implication of this timeless phrase is that we should be going long in uptrends and short in downtrends – making our trading easier. Easier how? Generally speaking, when you trade with the trend of your chosen style/time frame, you will make money more often (have a higher win-loss ratio), your winning trades will be larger and your losing trades will be smaller. Sounds pretty good, right?
Obviously, the long version of this trading phrase gives us a clue that trends don’t last forever. Wouldn’t it be great if they did? No, of course not! If trading were really easy, there wouldn’t be any money in it! So it is actually a GOOD thing that trends pause and /or change direction. So our next bit of chart analysis will help us determine if a potential change in trend is coming.
On the following chart I’ve drawn in two trendlines, indicating the origin of the move to the upside on this 240 minute EURUSD chart. The way I look at this chart, it took some huge money to stop the trend from going down and reverse its direction. Who has that kind of money? Certainly not me, and I would imagine not most of you either! No offense meant, but this market does trade several trillion (with a “t”) dollars a day, so it takes A LOT of money to change direction here. So who is doing the buying? Hedge funds, multi-national corporations, it doesn’t really matter for this discussion. All we know is this would be the “smart” money for this time frame.
The blue trendline labeled “1” indicates the first valid trendline, with blue arrows indicating the data points used to draw the trendline. The blue circle indicates where the trendline has been broken. The way I look at these big money traders is that they are “scaling in” or adding to their position as the price is falling, then loading up as price turns. Do they continue to buy at every pip? Of course not.
The second trendline labeled “2” indicates the second valid trendline (colored black here.) The black arrows indicate the data points used to draw the line, and the yellow circle indicates the break of the trendline. Who is buying against the first couple of touches of the trendline? Smart money, but probably not the players who changed this chart’s direction. The major thing I would like to point out is the angle of trendline 2. Notice how it is getting flatter vs. trendline 1. What does that tell you about the determination of the bulls in this move? They are certainly not as aggressive as they were in the steeply angled trendline 1 !
In the next chart, I’ve removed some of the labeled information from the first chart for clarity’s sake. Notice the pink line labeled “3”. Again, the pink arrows indicate the data points used to draw the trendline, and the green circle indicates the break of the line. The break even happened on the next candle after the third data point! What does that tell you about the people still buying here? That they would probably be many amateurs, newbies, 90%-ers, donors, whatever you want to call them.
Notice anything about the angle of that line? Yes, it is flatter than trendline 2. Again, what is happening to the commitment/intensity/enthusiasm of the big money players moving this market in this time frame? The answer is “getting less.” In fact, my point of view is that they are actually exiting their positions, and possibly getting set up for a short trade instead of the long trade that had worked for two weeks! This entire chart looks like our classic Online Trading Academy “rally-base-drop” that you may have read about before.
So what did we learn today? Flatter trendlines can indicate a weakening trend – especially after several flatter trendline breaks! I don’t personally believe that the first trendline break is an indication of a trend reversal, only that the trend is weakening. I would be very hesitant to try and trend trade on a third flatter trendline; first trendline I would, second flatter trendline is a maybe in my plan, the third flatter trendline is a red flag. In fact, that is the line I am looking to break for a trend reversal trade. For further clarification of trendline trading rules, contact your nearest Online Trading Academy Center to sign up for a class!
Until next time!