The importance of trading with the trend + Suppy/Demand zones
A trend can be defined with price action or indicators. Understanding that all indicators lag and price behaviour is key I prefer price action to tell me if we are up trending, down trending or trading in a range. Before understanding the basics of market structure it is important to know that its more likely for a trend to keep going on than for the trend to reverse. That is why professional traders look for areas to jump on the trend not areas to go against it. Also, keep in mind what time frame are you using to define the trend, for example, if your trades don't last more than an hour would you jump on the weekly chart trend ? what happens in 1 hour won't affect the weekly chart. So if you are trading the 5 or 15 min chart you can trade with the trend of the 1 or 2 hour chart.
How to define the trend ?
• An up trend is when price is making higher highs and higher lows
• A down trend is when price is making lower highs and lower lows.
• If there is no way to define the trend then you can say it is in a trading range with no clear
direction.
When has the trend changed ?
To explain a trend change we will consider the chart below. First we can notice a clear up trend making higher highs and higher lows (1,2,3) then we create a new lower low (4) where we break below previous higher low (2) then price fails to create a new higher high and instead creates a lower high (5), finally when price breaches the previous lower low at (6) we can consider a change of structure. opposite situation happens in a down trend market.
ABCD CORRECTION PATTERN
There is a very common pattern that pretends to be a change of structure but really it is just a correction pattern to continue the uptrend. Look at the example below. An up trend creates a higher high (A) and a higher low (B). Then creates a lower high (C) and finally a lower low (D) before continuing its up trend.
What did not happen that the trend didn't change ?
If the high after (C) had been also a lower high and then it breaks below (D) and (D) acts further as resistance then the trend had changed.
What is more important here is to understand that trading a continuation of the trend has a higher probability of working, on the example shown the correction ended right at a 4hr demand zone that was valid because the trend was still skewed to the upside.
How to define the trend ?
• An up trend is when price is making higher highs and higher lows
• A down trend is when price is making lower highs and lower lows.
• If there is no way to define the trend then you can say it is in a trading range with no clear
direction.
When has the trend changed ?
To explain a trend change we will consider the chart below. First we can notice a clear up trend making higher highs and higher lows (1,2,3) then we create a new lower low (4) where we break below previous higher low (2) then price fails to create a new higher high and instead creates a lower high (5), finally when price breaches the previous lower low at (6) we can consider a change of structure. opposite situation happens in a down trend market.
ABCD CORRECTION PATTERN
There is a very common pattern that pretends to be a change of structure but really it is just a correction pattern to continue the uptrend. Look at the example below. An up trend creates a higher high (A) and a higher low (B). Then creates a lower high (C) and finally a lower low (D) before continuing its up trend.
What did not happen that the trend didn't change ?
If the high after (C) had been also a lower high and then it breaks below (D) and (D) acts further as resistance then the trend had changed.
What is more important here is to understand that trading a continuation of the trend has a higher probability of working, on the example shown the correction ended right at a 4hr demand zone that was valid because the trend was still skewed to the upside.