Technical Analysis Optimal Time Frames for Trend Trading

One of the most perplexing areas of trading is identifying trends early enough to still have low-risk, high-reward entries. Every book ever written on trading has told us that we should always align our buying or selling in the direction of the trend, and that this is the key to trading success.

In some respects, that may be true, however, most of these books fail to make three very critical distinctions:

1. When is it too late to join the trend?
   
2. What trends are the most important?
   
3. When are trends likely to reverse?
   

To answer these questions, let's first think in terms of keeping it simple and what would cause a trend to end. First, trends in the shorter term are continuously changing.

Shown below is a ten-day look back at a 15-minute chart of the ES (E-mini S&P 500). In it, we can see how trends change frequently in the short term, and waiting too long to join these moves can prove hazardous.

S&P 500 – 15 min Chart​

Since the direction of price changes so frequently in these smallest of time frames, attention to the bigger picture should come more into focus, as these are the dominant, more powerful shifts in the market.

In addition, by dedicating more attention to the larger trends, you will also enhance your odds of success because this is where the large institutions and hedge funds do the majority of their buying and selling.

Therefore, in this weekly chart of the ES shown below, we can see that the trend is still higher, and if we want to “join” the trend, we should focus on buying dips when approaching quality demand zones.

S&P 500 – Weekly Chart​

This brings us to the question of where trends usually reverse. The answer quite simply is that smaller trends tend to reverse—or at least correct—when they touch larger-time-frame supply and demand levels.

In the chart below, note that since it bottomed (as shown) and began its bull market, the ES (uptrend) has pulled back when it touched or traded into those fresh supply levels that were created when the market was trending lower.

S&P 500 - Supply and Demand Zones​

Similarly, the retracements in the bull market were best purchased at (or in) the fresh demand levels formed earlier in the move. Moreover, these demand levels proved to be the lowest-risk entries for joining the uptrend, as opposed to waiting for a new short-term uptrend to get underway.

It's important to understand that when an uptrend in a smaller time frame - in this case a daily frame - approaches a weekly supply zone, going long becomes a high-risk, low-probability trade.

Instead, these areas should be deemed profit-taking zones on long positions, and low-risk counter-trend opportunities for initiating short positions.

Put another way: The trend is no longer your friend at these junctures.

The last aspect of trends that is widely misinterpreted is the manner in which these moves culminate. Most downtrends usually end in a massive flurry of panic selling in which everyone owning the market finally has to sell. And when all that selling is done, there is only one direction for the market to move and that is up.

In the same way, when the market has been moving up steadily and people are chasing returns, everyone who wants to own the market already does. Thus, when demand diminishes and supply increases, the market has only one direction to go and that is down.

In Summary
The larger trends can indeed be used as a way to increase our odds in trading. Additionally, supply and demand levels should be an integral part of any trend analysis, as identifying these zones is the only way to quantify real buyers and sellers.

Gabe Velazquez can be contacted on this link: Gabe Velazquez

 

[mdan]

We like Gabe. He is an instructor from Online Trading Academy.

May I tell you a story?

My husband and I gave our savings to OTA. We were looking for a way to make income to help pay for medical bills since he deals with a chronic illness. On top of everything else purchased, we specifically paid for something called "Pro Picks" and this was for the Forex Pairs. A lifetime of trade ideas based upon their Supply and Demand training.

(Note: they are no longer called Pro Picks because the FTC got involved in their aggressive marketing practices. People complained! They are now called "OTA picks")

When the salesman sold us on these OTA Picks, since my husband has these health issues, we decided it would be advantageous for us to "fall back" on them in case we didn't immediately grasp the concept taught by OTA.
And instead of purchasing an annual subscription we purchased a lifetime. Had we only purchased a year, we would not be so upset and we could move on. But, we are stuck seeing how they do not work, well, until death do us part. The salesman didn't say a thing as we spoke our thoughts in front of him He had dollar signs in his eyes. Thirty Seven thousand dollar signs when all was said and done.

Nevertheless, what one needs to consider is this; if the OTA Picks are the fruit and results of their "Supply and Demand" instruction-and they constantly fail, then how good is the "patented" training they provide? In other words, one would think they would have awesome stats since the same instructors teaching the students are the ones who create the list, right?

On the day we were given the spiel, when they showed us the stats on the Pro Picks trades, the stats "appeared" favorable. However, that is not what we have experienced "post" sale.

On todays date, they have 16 Forex trades on the board. Two are currently open, five are pending and the remaining are Closed For Loss. Yet overall, the stats read a 47% win rate.

After four years, my husband hardly attends the on-going training classes. OTA is always selling the Picks as well as other "training" not on the menu. The instructors are given opportunities to "sell" their personal strategies for a small fee on top of the already paid classes. I.e. Signature Series.

However, the reason for the lack of attendance is because if and when someone is interested in purchasing the Picks, he says something to prevent them from throwing away money. And why shouldn't he warn others? As a result, he is pounced on verbally by the proverbial cult following. He has been called names and insulted and the instructors have said nothing. All because he wants others not make the same mistake we made.

The very same people that have also been with OTA for years. What do I mean? These same people who should have been kicked out of the nest by now, so to speak, are still attending the same training years later. But when you pursue a four year degree, isn't there a time when you have a general working knowledge? Or do you attend the four year for 8 years, plus? Isn't there a time when you have "learned" in order to go out on your own?

So, we like Gabe, but we stay away from any recommendation of OTA.