Talking about Trends part 1

Today I want to talk about trends. We all did hear the famous line “The trend is your friend.” Well, this line is so true. But this simple sentence leads to a lot of confusion. So let’s delve into this matter.

But let me confuse you a little bit more. I promise I will clean up the mess. What is a trend? Some see three bullish candles in a row and call it a trend. Then there are traders who put a Moving Average on the chart and say if price is above that line, the trend is bullish and below that line for bearish. Then there are trades that look at an oscillator and say if price is above the 0-line, the trend is bullish and below the 0-line for bearish. I am not going to say this is wrong, as there are many different ways to approach a trade. But I want to state, that there is a lot of information missing in this approach. Others talk about higher highs and higher lows, which is about the classic definition of a trend. While I tend to agree with the latter one, there is still information missing. Talking about trend requires more than saying “the trend is bullish” or “the trend is bearish”.

Let’s talk about fractals. The markets are fractal by nature. And I am not talking about the Bill Williams Fractal Indicator. Not yet that is. So what are fractals? Did anyone of you ask yourself this question? Now we are getting into Chaos Theory. No worries, I am not going to lecture you about the theory of complex systems. When we think of Chaos we have a picture in mind where there is no order at all. Most of us do not know that Chaos is a higher form of order (complex and dynamic). We are already talking about fractals. Fractals are self repeating patterns. While each single pattern looks the same, each single pattern is individual. Snowflakes are very a very good example to describe the fractal nature. Each individual snowflake looks like the other. But in detail they are all unique. And this applies to the financial markets as well. I can post any chart and hide the timeframe. No one would be able to tell what timeframe it is. This is the fractal nature of the markets. And now we are getting closer to talk about trends.

Above I gave a classic definition of trends. We are looking for a series of higher highs and higher lows for a bullish trend. A bearish trend therefore would come with a series of lower lows and lower highs. But since markets are fractal by nature, we need to define the timeframe. Let me give you a fictive example where we are looking at the daily timeframe and we see a series of higher highs and higher lows; hence we have a bullish trend on the daily timeframe. But this may merely be a pullback on the weekly timeframe, where we have a series of lower lows and lower highs. Or a series of same level highs and same level lows, which would define a ranging market.

Let me illustrate this with some charts. I will not go into details at this time as that would take too much time and space. For now we’ll take a general view of the market flow.

USD vs CAD H4

This is the 4 Hour chart of USD vs CAD showing us a series of higher highs and higher lows. This is bullish.

USD vs CAD D1

This is the daily chart of USD vs CAD showing us a series of lower lows and lower highs. This is bearish.

USD vs CAD W1

This is the weekly chart of USD vs CAD showing us a series of higher highs and higher lows. Recently we are seeing a potential shift of trend (more about this in a later post).

USD vs CAD M1

This is the monthly chart of USD vs CAD showing us a series of higher highs and higher lows. This is bullish.

As you can see by the charts, it is not suffice to say the trend is bullish. We need to refer to the trend on a specific timeframe. The charts clearly show that a pullback on one timeframe can be a trend on another timeframe. And this goes on and on. We have a bullish trend on the monthly timeframe while the daily is bearish. The weekly already formed a lower low and a lower high, which is basically bearish but the monthly is in a bullish trend.

I will get deeper in the topic of trends in future posts. I hope you enjoyed this article and found value in reading it. If you have any questions and feedback/suggestions please leave them in the comments section below.

Happy trading,

TT