Trends

For a trader to look at a chart and completely understand what he is seeing, he must reach a conceptual understanding of a trend. A trend is simply a general direction in which something tends to move. In the financial markets, if a security were trending upwards, it would be moving upwards in price across a period of time. If it were trending downwards, it would be moving downwards across a period of time. Understanding market trends are as simple as this. A trend, once it is in motion, tends to stay in motion. That is, if price is moving upwards, it will probably continue upwards or if it moving downwards, it will probably continue moving downwards.

Trends are Fractal

In order for a market participant to thoroughly understand why price is moving in a particular way, he or she must understand the fractal nature of trends. Fractal simply means that it follows the same pattern regardless of the timeframe. For example, if one were to remove the horizontal and vertical identifying axis of a chart, a chartist would have a remarkably difficult time identifying which security or even which timeframe he were looking at. In the world of technical analysis, a 5 minute chart looks the same as weekly chart. This said, there is an important realization which a trader must grasp before he can completely understand trends. Since a trend tends to keep traveling in one direction, this means that all of the trends across all of the smaller timeframes will typically travel in the same direction as a larger trend. From this point forward, we will refer to the larger trend as the "primary trend" and the trend which a trader acts on as the "minor trend".

Trade with the Trend

So how do we act on this knowledge? We can increase our likelihood of success in trading by only accepting trades which are in the direction of the primary trend. For a practical example, let's say that Trader Tom trades breakouts in the stock market. When he sees price clear a trading range, he initiates trades in the direction of what he perceives to be a newly-formed trend. The minor timeframe, or the timeframe on which he bases his trading decisions is on the 5 minute chart. However, he is an intelligent trader in that he factors in the direction of the primary trend, which for him is the 1 hour chart. If the 1 hour chart is trend upwards and the 5 minute chart breaks out upwards, this is a trade which carries a high probability of success, so Tom will take this trade.

M5 Breakout

The above image shows a routine breakout trade on the 5 minute timeframe. As soon as the price broke from its trading channel, the trader went long at point A. In the below image, the primary trend shows where this breakout occurred on the 1 hour timeframe. As can be seen, price typically travels in the direction of the primary trend and the best opportunites are generally found in the direction of the trend.

H1 Breakout

The Best Timeframe

For a trader to succeed in the financial markets, he must decide both the timeframe he will trade on and the timeframe he will monitor as his primary trend. The decision is ultimately up to the trader, but for those who make their decisions on the minutely timeframe, the the hourly chart serves as an excellent primary trend. For those who trade based on the hourly timeframe, the daily chart would be most appropriate. A trader who initiates trades on the daily timeframe would probably find the weekly chart as an excellent primary trend for directing his trades.

A general rule of thumb for determining which timeframes are appropriate is that a rally or a decline on a minor timeframe should not cause much more than a "bump" extending for a few candles on the primary timeframe.