Is The Trend Really Your Friend?
Following the trend is a key lesson in any new trader’s educational journey and a lesson which is taught in the world of investing across the board. However, we must remember that any trend is something that has already happened and when we trade, we are trying to determine what is going to happen next. These are very different concepts.
Obviously, trends do have the tendency to continue to a degree but as we know, changes in trend also occur and being aware of this and learning how to interpret it becomes a powerful skill in any trading arsenal. Big changes in trend direction occur regularly in all markets, and if timed correctly, can lead to opportunities to jump on board new movements early in their development. This is where the power of multiple timeframe analysis comes into its own.
With the current level of uncertainty in global financial markets, we are seeing increasing volatility and sharp changes in direction on a more regular basis. Never has there been a greater need to digest the power of supply and demand dynamics, and how they impact price. Understanding and recognizing major market imbalances is one of the fundamental keys to predicting major trend changes and shifts in momentum. Let’s look at some recent price action on Crude Oil Futures (CL):
We can see that CL has been in decent downward trend, consistently making a series of lower highs and lower lows, for over a week. If following the methodology of traditional technical analysis, we would be looking for trading opportunities which would involve short selling CL to reengage and follow the existing trend. However, the objective and astute trader must also be aware of where a trend reversal is likely to happen as they don’t want to be the last person jumping on board the move. This can actually increase risk and decrease reward.
When a trend change does occur, it can often be very quick and rather unforgiving as we can see in the below example:
If you had been following the trend you probably wouldn’t be feeling too confident in that strategy right now. We must learn how to anticipate these shifts in price action ahead of time and secure ourselves an edge in the marketplace. Obviously, there is a lot more to identifying these changes in price that can be explained in the context of a short article but to give you an idea of what is involved, look at the below chart:
By looking at CL on a bigger timeframe, we shouldn’t really be too surprised that a sharp correctional rally in the currency pair occurred after testing a major Demand zone. If we remain completely objective, we can see that CL trended down to the bottom portion of a well-established range. Until this range is broken, we must assume that it will hold which would suggest more upside potential for Crude Oil to come.
Remember that everything we see in the news or on a price chart, is the result of something that has already happened. Our job as traders and investors, is to analyze what has happened, to give us an idea of what may happen next. The key is to open our eyes and look at the big picture as well as the small one. We hope this was helpful.
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