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Building the Best Forex Trading Strategy EverFour (4) Methods for Identifying and Following the Master Price Trend

‘The trend is your friend, learn to recognize and to follow your friend’

In this analysis, we are going to investigate 4 different methods for identifying the master trend in a price chart. But first of all, we are going to refer to the 3 different market phases and then how to apply the appropriate timeframes.

The 3 Different Market Phases

There are three basic market phases, common for all Financial Markets:

(a) Consolidation Period (The markets moves sideways within a certain Range or else a Price Channel)

(b) Going Up / Uptrend

(c) Going Down / Downtrend

The 3 phases can also be described as:

(i) Consolidating Period (ranging)

(ii) Trending (up or down)

(iii) Trend Reversing (up or down)

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Master Trend and Timeframes

There is a master trend for almost every timeframe you trade. Most probably, this trend will not be visible directly in the timeframe you trade. You need to search for the master trend 2 timeframes above your entry chart (MetaTrader). For example:

  • Trading the M5 chart → use the M30/H1 charts for identifying the trend
  • Trading the H1 chart → use the H4/D1 charts for identifying the trend
  • Trading the D1 chart → use the W1/M1 charts for identifying the trend

The Essence for Top-Down Researching

The wise way to analyze any market trend is starting on the highest timeframe by going down (Top-Down Analysis). This approach will provide you a wide understanding of the current market conditions and the true market depth.

Therefore, if your execution timeframe is H1, start researching the D1 and then the H4 timeframe to identify any trends and opportunities. The execution timeframe H1 will be useful in determining the ideal time to enter the market. Avoid to start your analysis on the lowest timeframe by going up (Bottom-Up Analysis).

 

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Major Methods for Trend Identification

There are many ways to analyze the master trend. These are four (4) widely used methods for that purpose.

 

(1) Identifying the Formation of Price Channels

  • Method: Later-Stage Trend Identification
  • Timeframes: All
  • Reliability: 5/5
  • Applicability: 2/5 (requires several price hits)

Long-term price trends tend to evolve within certain price channels. Price channels consist a pair of two parallel trendlines and can be ascending, descending, or horizontal. If the price touches the boundaries (external trendlines) of those channels usually strong buyers and sellers become active.

USDX -When the price touches the boundaries (external trendlines) of those channels usually strong buyers and sellers become active

Price channels and trend lines are two of the most important aspects of technical analysis, no matter if you trade Forex, Equities, or Commodities.

The 3 Types of Price Channels

As it was mentioned before, financial assets tend to move within a price channel. The angle of the price channel defines if there is a master trend, or if the market is consolidating, as follows:

(i) If the market moves within an Ascending Price Channel the trend is bullish

(ii) If the market moves within a Descending Price Channel the trend is bearish

(iii) If the market moves within a Horizontal Price Channel there is no master trend and the market is consolidating

The Features of a Strong Price Channel

These are some key features of a strong price channel:

(1) The price channel is visible in both the D1 and H4 charts. Preferably, it can be seen also in the H1 chart.

(2) The price channel is characterized by a strong and balanced ascending (/) or descending angle (\).

(3) The slope of the price channel is neither feeble (<30 degrees) nor too steep (<50 degrees).

(4) The price has already made multiple hits on or close the boundaries of the channel (3-4 minimum price hits on each side). Less than 3 price hits can signify the potential for the formation of a price channel but not an existing price channel.

(5) The price hits on the H4 chart must be within 40-50 pips of the price channel’s top/bottom

(6) Some price action may be observed outside the channel but most of it must occur inside the channel. Even entire bars/candles are acceptable outside the channel, but not more than 2-3 bars/candles. After 1-3 bars the price action must return within the channel. Ideally, candlestick formations (Japanese) will appear at this point, confirming the price reversal. In the case of a descending price channel, we should expect candlestick patterns such as the Doji, the Hammer, the Shooting Star, etc. In the case of an ascending price channel, we should expect candlestick patterns such as the Evening Star, the Hanging Man, the Harami, etc.

(7) The price channel may contain 1-3 internal trendlines. These trendlines will be parallel to the two boundaries (external trendlines) of the channel.

(8) There might be multiple price channels in the same chart, and these price channels may co-exist for long periods of time.  The price action is often able to respect multiple different trends but eventually most of these trends will become obsolete and only one trend will prevail (there can only be one at the end).

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