The style we are teaching on here is conservative, safe, low risk, stress free trading on the Daily time frame and up. One of the ways to do this is to ALWAYS trade in the direction of the trend. This then begs the question “Which trend”. The answer is and always will be, THE IMMEDIATE TREND. The next question MUST be “is the immediate trend in agreement with the next larger trend”. We need to know this to determine whether we are trading with the trend or against the trend. A trade with the overall trend has more chance of success (profitability) than a trade against the trend and is emotion free and far less nerve wrecking!
To determine where you are in a trend you must first zoom out to get the BIG PICTURE - see attached USDJPY Daily chart. Just eyeballing this chart you can tell straightaway it is in a downtrend - yes? We can then break this down into smaller separate legs ( Major Swings) identified by the thick red and green arrows - yes?
Now, look to the left of the chart in the May 2007 to Feb 2008 period. Using the red 20 MA line as a guide as a filter, we can identify the smaller and shorter trends shown by the short, thick yellow lines - yes?
You can keep repeating this to identify the trend by zooming in until you find the portion of the chart you are wanting to trade - yes?
Note that any trade taken in the direction of the red arrows is IN AGREEMENT with the OVERALL TREND and is “usually” longer and more profitable.
Trades in the direction of the thick green arrows (Major Swings) are COUNTER TREND (against the overall trend) but because they are “corrective” swings, will also “usually” be profitable but will be shorter.
Now note the thin green arrows marked “counter trend” in the May 2007 to Feb 2008 time period. These are counter trend trades against a “Swing”. Note how each successive trade gets shorter and shorter. These are the trades which, while they look good looking back, will blow your account and your mind WHEN you don't have the experience to trade these.
So, the point being made is ALWAYS know ALL the trends of the time frame you are trading AND know which part of the trend you are in. This allows you to determine the risk and “comfortability” in your PLAN.
For all those in the early steps on The Path of Learning, IGNORE all counter trend trades and only FOCUS on those trades which are in agreement with the overall trend.
If you think you are already smarter than you are, then consider your trend to be a huge concrete ball on a gentle slope. You can push the ball down the slope (requiring less effort, energy and attention) to gain momentum (trading with the trend) or you can push the ball UP the slope (requiring huge amounts of effort, energy and attention) (trading AGAINST the trend) and eventually running out of energy and the ball rolling back down and flattening you! (blown account!)
Trend recognition is fundamental and part of our total PASR trading method/style.
