Trading success is heavily dependent upon being on the right side of the trade and executing the trade at an optimal time. But what does it mean to be on the right side of a trade? For a technical trader, this means that you are trading with the trend, but even this statement is somewhat ambiguous. The problem is that not all trends are created equal and there are multiple trends spread across many time frames that exist simultaneously.
How do you determine a strong trend to trade?
You have 2 choices: to use price action or to use trading indicators.
How do you determine a strong trend to trade with indicators?
To determine a strong trend, if you use indicators, you must optimise constantly, and, since the market is always changing from strong trends to narrow trading ranges and then back again, you will find that your optimisations are based on what has recently happened and that they will fail as the market transitions into a new phase.
Many traders, especially beginners, are drawn to indicators, hoping that an indicator will show them when to enter a trade. What they don’t realize is that the vast majority of indicators are based on simple price action.
If there is a bull trend, a pullback, and then a rally to a new high, but the rally has lots of rejection bars, many bear bodies, a couple of small pullbacks, and wicks on the tops of the bars, any experienced trader would see that it is a weak test of the trend high and that this should not be happening if the bull trend was still strong. The market is almost certainly transitioning into a trading range and possibly into a bear trend.
What I’m trying to say is you don’t need an oscillator to tell you this. The big problem of indicators comes when the market is trending strongly. If you focus too much on your indicators, you will see that they are reaching overbought or oversold areas, and forming divergences all day long and you might find yourself repeatedly entering countertrend and losing trade after trade.
By the time you come to accept that the market is trending, you will not have enough time left in the day to recoup your losses. Instead, if you were simply looking at a bar
or candle chart, you would see that the market is clearly trending and you would not be tempted by indicators to look for trend reversals.
Price action is far more important than any other information.
That’s why, let me share with you 15 price action signs I search for, to determine a strong, healthy trend.
How do you determine a strong trend to trade with price action?
The market breaks its previous swing high or low
Historically, a trend was generally defined as a series of higher highs and higher lows (bullish trend) or a series of lower highs and lower lows (bearish trend). That’s the first condition of a trend. So Price Action Is Important For Trading.
The distance between swing highs or lows
How far swing highs are apart is a sign of trend strength. If the most recent swing high was far above the prior swing high, that shows the asset has a lot of buying interest and strength. If a swing high forms just barely above the prior swing high, the price may still be in an uptrend, but it is not moving as strongly The same for a downtrend.
Most of the bars are trend bars in the direction of the trend.
A Trend Bar has a body that is greater than 50% of the entire bar range. If a Trend Bar closes above its opening price, it is a Bullish Trend Bar. If a Trend bar closes below its opening price, it is a Bearish Trend Bar.
So when you read candlesticks, don’t just look for classic candlestick patterns. It’s much simpler to search for trend bars, by analyzing the bodies of the candlesticks. If you see many bull trend bars, for example, you’re probably in a strong uptrend. So Price Action Is Important For Trading.
There is very little overlap of the bodies of consecutive bars
For example, in a bull spike, many bars have lows that are at or just below the closes of the prior bar. Some bars have lows that are at and not below the close of the prior bar, so traders trying to buy on a limit order at the close of the prior bar do not get their orders filled and they have to buy higher. The same for a downtrend.
In a bear spike, many bars have highs that are at or just above the closes of the prior bar. This shows strength and it’s an important sign because the market is unable to go higher and it keeps pushing lower. So Price Action Is Important For Trading.
There are bars with no wicks or small wicks in either direction
This indicates urgency in the market. For example, in a bull trend, if a bull trend bar opens and immediately trends up, traders were eager to buy it as soon as the prior
bar closed. If it closes on or near its high, traders continued their strong buying in anticipation of new buyers entering right after the bar closes.
They were willing to buy going into the close because they were afraid that if they waited for the bar to close, they might have to buy at a higher price. So Price Action Is Important For Trading.
Gaps between the bodies
Occasionally, you will find gaps between the bodies. For example, the open of a bar might be above the close of the prior bar in a bull trend or below the close of the prior bar in a bear trend. Again, a gap is a sign of urgency and a sign of market strength. So Price Action Is Important For Trading.
Trend bars after a gap
In some cases, a gap appears in the form of a strong trend bar. This is even more powerful. Not only the market formed an up gap, like in this example, but it also continued with a strong trend bar, indicating the conviction of buyers and their willingness to push price higher. So Price Action Is Important For Trading.
No retest of previous breakouts
You probably know the classic way to trade breakouts: you must wait for prices to retest the breakout level. A retest refers to prices reversing direction after a break and returning to the breakout level to see if it will hold. In the case of a break to the upside, for example, after the initial wave of buying has run its course, prices may stall and trigger very short-term profit-taking selling.
The tendency is for prices to return to the breakout level, which should now act as support and attract buying interest. But in a strong market, you will not get a
retest. The buyers are unwilling to let the price drop lower.
There is little profit-taking after the breakout, so the price won’t come to retest the breakout level. So Price Action Is Important For Trading.
No significant trend line breakouts
Plotting trend lines on a chart is one of the easiest ways to get a quick idea of an asset’s trend or direction. A broken trendline is a technical signal that can suggest a change in trend. In a strong trend, you don’t experience breakouts of significant trend lines. So Price Action Is Important For Trading.
Sideways corrections after trend line breaks
So when a trend line breakout occurs, there’s no momentum behind the move, there is sideways price action. A sideway drift occurs where the price trades
within a fairly stable range without forming any distinct trends. The price action instead oscillates in a horizontal range or channel, with neither the bulls nor bears taking control of prices.
So, in the case of an upward trend line breakout, despite the fact the sellers managed to push the price below the trend line, the trend was strong enough to stop further downward momentum to happen. So Price Action Is Important For Trading.
Small corrections and sideways pullbacks
In an uptrend, we have more bull bars than bears bars. When he saw this on our charts, this means that the bulls have more power and are increasingly moving the market upwards. Also, during a market controlled by bulls, the red bars are getting smaller, as the bears can’t drive the prices down. So the corrections will be small, and in some cases, the price action will appear in a sideways range.
Conversely, during a market controlled by bears, the green bars are getting smaller. This price action indicates that the bulls can’t drive the prices upward. Again, a correction will be smaller when you compare them with downward waves. So Price Action Is Important For Trading.
The pullbacks have strong setups
For example, this pullback in a bull trend has strong bull reversal bars as a signal bar. This is a clear pin bar. This pattern will attract many counter-trend traders. Why is that? Let’s think logically. After a strong up move, many traders are waiting to short the market. A strong signal, like a pin bar, or an engulfing candle, will encourage them to short the price. This is basically a trap. The price moves aggressively higher from a pin bar, sellers enter, the market continues to trend higher. So Price Action Is Important For Trading.
The pullbacks usually have weak signal bars
It would be perfect to find a pin bar after a correction, or an engulfing candle. This would add more weight to the setup. But in the strongest trends, the pullbacks usually have weak signal bars, making many traders not take them, and forcing traders to chase the market. There is a sense of urgency.
You know the scenario: You find yourself waiting through countless bars for a good pullback and one never comes, as the market slowly continues to trend. So Price Action Is Important For Trading.
Breakout bars have large bodies and small wicks
When the price finds support or resistance in its way, it usually manages to push through with a strong candle. The breakout bar that has a large bull trend body for example and small wicks or no wicks is a sign of strength. The larger the bar, the more likely the breakout will succeed. So Price Action Is Important For Trading.
Wicks below green bars and above red bars
In a strong uptrend, you will also see a lot of wicks below the green bars. This represents a good signal that the bulls are in control of the market and that are trying to push the prices upwards. You will also see a lot of wicks above the red bars in a strong downtrend. This shows that the bears are in control of the market and that are successfully pushing the prices downwards, despite the initial reaction of the bulls. So Price Action Is Important For Trading.
Charts provide far more information about who is in control of the market than most traders realise. Almost every bar offers important clues as to where the market is going. Prior highs and lows, breakouts, the sizes of bodies and wicks on candles tell a lot about what will happen next.
So next time you open a trade, make sure you add these concepts into your analysis. If you learned something new and found value, leave us a like to show your support, subscribe to our channel and click the bell icon to stay in touch when we release new videos. Until next time. – Reza Abbaszadeh