I had similar conversations with two different people recently…
Or, more specifically:
a) How do you know which ‘segment’ of a big overall trend to measure and work with?
b) How far back in time should you go when measuring trends and drawing trendlines?
They’re two questions that address at the same issue from slightly different angles so let’s take a closer look at the thorny issue of working with trends.
(I say ‘thorny issue’ because trends and trendlines seem to be one of those areas that have a few different workable approaches. But some traders can get a bit prickly when defending the ‘proper’ – i.e. their – way of doing it!)
So the first thing to understand is that trends are simply waves within waves within waves.
You might have a strongly uptrending market on a 2-minute chart. But that move might only be a minor pullback of a strong downtrend when you look at the same market on a 1-hour chart.
When you look at the daily chart the market might appear to be printing a sideways ‘holding’ pattern.
And when you look at the big picture on a weekly or monthly chart, you might find the market is actually in a multi-year ‘super’ uptrend.
So you’ve got all these different things going on all at the same time. And you could make a good case for both buying and selling the market all at the same time depending on which aspects have caught your eye.
So before tying your colours to the mast and declaring ‘Uptrend!’ or ‘Sell this market!’ you need to ask yourself 2 questions:
1) What am I trying to achieve with this trade?
2) Which timescale will give me the framework for the trade?
That first question is a bit of a dead-obvious one, isn’t it? What am I trying to achieve with this trade? I’m trying to make a load of money of course!
But don’t be too quick to brush it aside.
Will you be making a ‘quick kill’ trade here or are you hoping for a ‘slow burner,’ one that lasts for days and milks the most out of a trending move.
Both options might appear open to you on, say, a 60-minute chart but they’d actually be best inspected on different timescales (and this is where the timescale and framework for your trade come in).
For your quick kill on the 60min chart you’d be best chunking down to say a 10min or a 5min chart so you pick up the trending activity on that shorter timeframe. It’ll give you the framework for your quick trade.
In this case you’d be working ‘inside’ the bigger overall trend and you might only go back a day or two on those shorter timescale charts, picking out the trendlines that are relevant to the scope of your immediate trade.
For the 60min ‘slow burner’ you might chunk up to an8-hour or daily chart.
You’d need to take a good section of the recent price action into account here. Looking further out than the 60min timeframe gives you the framework for the trade in this case.
But start dropping your trendlines and countertrend lines in place and you’ll soon see when there’s no need to go back any further in time.
I.e. if you find yourself drawing trendlines from price action that look place months ago which then projects out many hundreds of pips above from the current market price, it may offer little benefit to the analysis of this particular trade.
In that case you can be confident you’ve covered all the relevant trend analysis and can get on with managing the opportunity.
And don’t forget there’s loads of free material on the foundations of good technical analysis (including drawing trendlines on charts) over in the Trader’s Nest School here: