Although day trading exposes people to the immediate price action and the rush of trading, but it is important to trade with a larger trend in mind. We’ll be going through a mix of indicators, price action and chart patterns to explore some of the ways to tell if you’re on the right side of the trend.
1) 200 Daily Moving Average or Exponential Moving Average
The Daily Moving average is one of the most used sentiment indicators to help determine whether markets are bullish or bearish. Although moving averages can be used as dynamic support and resistance, they serve another purpose. The premise is simple: if price closes under the 200 MA, the market is beginning to get bearish, and if price closes above the 200 MA (Red EMA), the market is beginning to get bullish.
Adding an additional EMA to create a “MA Cross” strategy, such as a 50 EMA(Blue EMA) to a moving average is also a popular method of confirming a trend, the most well-known cross strategy is the 50/200 Cross, producing either a Golden Cross (Bullish) or a Death Cross (Bearish). Often traders mistakenly think that these are signals to enter a position immediately; it’s not. It’s a signal that the larger trend has changed and that the trader should change their strategy accordingly. Looking at the chart, we can see that a Daily 200/50 Golden Cross occurred on Bitcoin in November 2015—not long after that, price pumped to $500 and then dumped to $300—but the trend had changed, and adopting a “buy the dip” strategy change would have put you on the right side of the trend–until 2018. The Death Cross in April 2018 signaled that the market trend has changed bearish.
2) Price Action and Chart Patterns
Although it might sound simple, price action is a more raw look at what the market is telling you about price–it may simply look at volume in conjunction with a chart pattern. It’s a minimalist look at the structure of the market or simply observing that there are more buyers or more sellers over a certain period of time at certain price points, creating resistance and supply zones.
So, for example, our current price action for 2018 has leaned towards adopting a bearish outlook on taking trades. These are based on a simple observation that volume has trended down since the peak in 2017, that the market structure is making lower highs on each successive bullish reversal, which means that zones of resistance are often more successful—this clearly means that price action is decidedly bearish. Most chart patterns are leaning bearish, such as trendlines and descending wedge patterns we can observe.
With trend trading, most momentum indicators are a lagging indicator; but that’s fine since being in on the larger trend means you can anticipate moves that fit the larger trend. For instance, the Relative Strength Index is a well-used lagging trend indicator. Essentially, when RSI is trending bullish, the indicator will regularly remain above the median line (RSI 50) and between RSI 80 on the scale—this is a bullishly trending market, and any “dips” into oversold territory (between 50 and 20 RSI) are likely buying opportunities. If we observe the bitcoin chart from 2017 to 2018, you’ll see that there is a marked difference in RSI momentum. In 2018, RSI has remained largely in the bearish zone (under 50) and has largely pivoted around the 50 mark—essentially, when price momentum moves into bullish RSI territory, it’s been a good selling opportunity.
Although each of these types of perspective on the market can be utilized to become a tool for trend trading, the importance is not only recognizing the trend but also recognizing a change from one trend to another.