1. When the market was trending, he turned his system on.
2. When the market was in choppy zone, he turned his system off and
ignored any trading signals.
What you can do is just the same with any trading system or robot.
Determining the trend using a simple moving average can be replaced with a
more sophisticated, versatile technique that you will learn in the next pages.
How to determine the trend
Some people learn from their mistakes, but smart people learn from other
people's mistakes. So let's start with examples of a wrong but very common
approach to market trend analysis.
What you see in this chart is explosive price movement that is usually the result
of a news release. All brokers, platforms and various currency tools are
indicating a “strong uptrend”, tempting people to jump in and make a profit.
What happens next is, at best, a choppy zone, or a hard fall.
What is actually in the chart are a few consecutive long green candlesticks.
This is not a real trend, but immediate price action, tempting traders to initiate
trades and experience a costly and painful exercise. To avoid falling into this
trap, you need to focus on longer trends. This is what a real trend looks like:
The price is consistently rising with no sudden changes or explosive
movements. You can expect that this trend will continue and you should take
only bullish signals. Obviously the trend won't last forever and you can even
have bad luck by entering the market at the end of the trend, but the odds
work for you. It simply cannot be better. There are 100s of free or proprietary
indicators to identify the trend but believe or not, no indicator is better than the
human eye. As Albert Einstein said:
“Make things as simple as possible, but not simpler.”
Now let's reveal the easy but the most effective method to identify the trend.
1. Zoom the chart in/out to show about 200 bars. Notice that 200 bars on
daily chart (or 200 trading days) correspond to 1 year.
2. Connect the lower left corner with the upper right corner. If the line
overlaps with the price bars several times (the more times, the
line
overlaps with the price bars several times (the more times, the better),
you have found a reliable uptrend. See the example below.
3. Connect the upper left corner with the lower right corner. If the line
overlaps with the price bars, you have found a reliable downtrend.
As you see, the market is like a sea wave and it keeps on going up and down.
Sometimes the dips are too deep to consider it a reliable uptrend, or the rallies
are too high to consider it a reliable downtrend. Knowing the “trend reliability”
is the key to discover the real and reliable trend. So, how do we determine if
the trend is reliable, or whether it is better to stay off? The best way is to forget
any lagging indicators, but to use pure price action.