Traders get so caught up with the word “trend”. I mean, the trend is your friend, it’s so catchy it must be true. Yet trying to determine that trend can become such a difficult task you can no longer see the forest for the trees.
In other words, the trend is a very vague term. What matters more than anything in determining trend is determining your timeframe. Just because a 5 minute chart is screaming bearish doesn’t mean the daily chart isn’t screaming bullish and that short term chart is about to get run over.
We’re about to look at a chart with the ticker SQ. Can you tell what it’s trend is? It all depends on what your timeframe is.
The daily chart is on the left, 60 minute in the middle, and 5 minute chart on the right. The solid moving average is a 50ema which is custom coded to turn green when it’s more bullish, red when it’s more bearish, and white when it’s neutral.
The dotted line is the 20sma with same coded parameters.
One of the best ways to determine a trend is looking at 2 different moving averages. In this example, the 20sma and 50ema. The 20 is faster than the 50 so when it is above it is a bullish signal, when it is below it is a bearish signal.
I like to use a slower acting faster moving average and a quicker slow moving average. Hopefully that confused you but I can explain. Basically, the simple moving average takes the last 20 closes, adds them up, and divides by 20. The result is a smooth line called a simple moving average. It reacts equally to all price action.
The exponential moving average however is effected more by more recent data. As a result it can move faster than a simple moving average when a stock gets going.
By keeping the shorter term moving average equal and weighing the longer term moving average to allow it to move quicker, you have a faster result when looking for crossovers in my personal opinion.
There will be countless others who say I’m wrong here, but that’s the beauty of trading, everything matters, nothing matters but price, everything works, and everything fails. Just do what works for you.
Back to our chart. If the 20 is above the 50 it’s a bullish trend. If the 20 is below the 50 it’s a bearish trend. So what is the trend here? It solely depends on your timeframe.
The daily is still showing a strong uptrend. The 60 minute recently turned bearish at the yellow arrow.
The 5 minute turned back bearish at the yellow arrow which happened only yesterday. So the end result here is a bullish daily trend, a bearish 60 trend, and a bearish 5 minute trend. What do you do with that info?
It depends on whether you are a day trader or a swing trader. If you are a day trader, you have a bearish trend and are shorting either on breakdowns or on pullbacks.
If you are a swing trader you are sitting out as you can see the shorter timeframes are not giving you any clear reason to take a long trade yet.
If you are day trading, you are aware that the higher timeframe is still bullish and you are looking for smaller targets.
If you are swing trading, you are waiting for shorter term bullish crossovers to start looking for trend entries.
Yet in the end, this picture can help explain why there’s always two sides to a trade. There can be multiple trends going on at the same time, it simply depends entirely on the timeframe the trader determines to use.
This is why some traders like to use a higher timeframe and a lower timeframe before taking a trade on their trading timeframe. Going forward, you can see how using a higher timeframe and a lower timeframe before you take a trade could help to determine what other trends are in play.
In the end, you simply have to trade what works for you. Just remember, the trend can change at any time. Don’t get so caught up in this that you can’t see the forest for the trees, simply be aware that trends are very subjective to personal opinions and timeframes.
Think of that next time someone else says the trend is up when you say its down, you both very well could be right.
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