📈 Four (4) Methods for Identifying and Following the Master Price Trend
‘The trend is your friend—recognize and follow your friend.’
In this analysis, we will examine four different methods for identifying the primary trend in a price chart. First, however, we will outline the three distinct market phases and explain 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 move 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 nearly every timeframe you trade. However, this trend is often not clearly visible within your trading timeframe. To identify the master trend, you should look two timeframes above your entry chart in MetaTrader. For example:
✅ Trading the M5 chart → use the M30/H1 charts to identify the trend
✅ Trading the H1 chart → use the H4/D1 charts to identify the trend
✅ Trading the D1 chart → use the W1/MN charts to identify the trend
The Essence of Top-Down Researching
The most effective way to analyze any market trend is to begin with the highest timeframe and work downward (Top-Down Analysis). This method offers a comprehensive view of current market conditions and reveals the underlying market structure.
Therefore, if your execution timeframe is H1, begin your analysis on the D1 chart, then examine the H4 chart to identify trends and opportunities. Use the H1 chart to determine the optimal entry point. Avoid starting your analysis from the lowest timeframe and moving upward (Bottom-Up Analysis).
Major Methods for Trend Identification
There are several ways to analyze the master trend. Here are four (4) widely used methods for this 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 often develop within defined price channels. These channels consist of two parallel trendlines and can be ascending, descending, or horizontal. When the price reaches the boundaries (outer trendlines) of these channels, strong buying or selling activity typically occurs.
Price channels and trendlines are two of the most important elements in technical analysis, regardless of whether you trade Forex, Equities, or Commodities.
The 3 Types of Price Channels
As mentioned earlier, financial assets tend to move within price channels. The angle of the price channel determines whether 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 key features of a strong price channel:
(1) The price channel is visible on both the D1 and H4 charts, and preferably also on the H1 chart.
(2) The channel is defined by a strong and balanced ascending (/) or descending () angle.
(3) The slope of the channel is neither too flat (less than 30 degrees) nor too steep (more than 50 degrees).
(4) The price has made multiple touches on or near the boundaries of the channel—at least 3 to 4 on each side. Fewer than 3 touches may indicate a potential channel, but not a confirmed one.
(5) On the H4 chart, price touches should occur within 40–50 pips of the channel’s top or bottom.
(6) Some price action may occur outside the channel, but most of it should remain within. A few bars or candles (no more than 2–3) outside the channel are acceptable, but price action should return within shortly after. Ideally, Japanese candlestick formations will appear at this point, confirming the price reversal. In a descending price channel, look for patterns such as the Doji, Hammer, or Shooting Star. In an ascending channel, expect patterns like the Evening Star, Hanging Man, or Harami.
(7) The price channel may include 1–3 internal trendlines, which should be parallel to the outer trendlines.
(8) Multiple price channels can coexist on the same chart, and may remain valid for extended periods. Price action may respect several trends simultaneously, but eventually, most will fade and only one dominant trend will remain.
(2) Observing the Sequence of Highs & Lows
- Method: Mid-Stage Trend Identification
- Timeframes: All
- Reliability: 2/5
- Applicability: 4/5
This is the most classic method for spotting a trend. Its main advantage is that it can be done visually, without relying on indicators or complex techniques.
The Existence of a Trend
An uptrend occurs when there is a sequence of higher highs and higher lows. In other words, the market forms a new higher low followed by a new higher high.
A downtrend occurs when there is a sequence of lower lows and lower highs. In other words, the market forms a new lower high followed by a new lower low.
The End of a Trend
(i) An uptrend ends when the market fails to form a new higher high and eventually creates a new lower low.
(ii) A downtrend ends when the market fails to form a new lower low and eventually creates a new higher high.
(iii) If (i) and (ii) happen twice in a row, the market has entered a consolidation phase and is expected to range.
(3) The ADX Indicator (Average Directional Index)
- Method: Early-Stage Trend Identification
- Timeframes: M30 and above
- Reliability: 3/5
- Applicability: 4/5
The ADX was introduced by J. Welles Wilder in 1978 (New Concepts in Technical Trading Systems) as an indicator to measure trend strength in price data.
Introduction to ADX
The ADX consists of three lines:
(a) the ADX line, which measures the strength of the trend
(b) the +DI line (green), which represents bullish strength
(c) the -DI line (red), which represents bearish strength
The ADX can be used for three purposes:
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Determining the direction of the trend
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Determining the strength of the trend
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Signaling price reversals
Using the ADX
A strong trend occurs when the ADX is above 25, there is no clear trend when the ADX falls below 20.
- When the green (+D) line is on top of the red (+D) line, ADX signals an uptrend
- When the red (-D) line is on top of the green (-D) line, ADX signals a downtrend
- When the two lines (+D, -D) are found close to its other, the price is ranging
Trading Signals:
-A bullish signal can occur when +DI moves higher than -DI, but only when the master trend is also bullish.
-A bearish signal can occur when -DI moves higher than +D and at the same time the master trend is bearish.
Notes:
- The ADX indicator can be easily combined with moving averages
- The ADX indicator can be combined with MACD and RSI for entry confirmation
- The ADX can be used in multiple timeframes {it is more reliable on M30 and above}
(4) Moving Averages (MAs) & Moving Averages Line-Up
- Method: Early-Stage Trend Identification (Price Crossovers)
- Timeframes: M30 and above
- Reliability: 1/5
- Applicability: 4/5
Moving averages are among the most popular tools for identifying trends, especially among equity traders.
Using a Single Moving Average to Determine the Trend
When trading equities, you can identify the trend simply by checking if the market is above or below the 200-day moving average (MA). This method can be applied to other financial markets as well, though its reliability may vary.
Notes:
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You can use Simple Moving Averages (SMAs) or Exponential Moving Averages (EMAs); EMAs are generally considered more reliable.
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The most important MAs include the 50, 100, 144, and 200 periods.
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MAs can be used on any timeframe (M5 and above).
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The length of the MA periods should align with the timeframe used; generally, shorter timeframes require longer-period MAs, while longer timeframes use shorter-period MAs.
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Price crossovers with MAs can be used as signals but are not always reliable.
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MAs can be combined with many other technical analysis tools.
Moving Averages Line-up
An alternative way to identify the trend is by combining three different MAs and observing their alignment.
Example:
By combining the 21 EMA, the 100 EMA, and the 200 EMA:
(i) When the Price is above 21(EMA), 21(EMA) is above 100(EMA), and 100(EMA) is above 200(EMA) you have an ideal uptrend.
(ii) When the Price is below 21(EMA), 21(EMA) is below 100(EMA), and 100(EMA) is below 200(EMA) you have an ideal downtrend.
(iii) When the three moving average is hitting each other, there is no trend and the market is consolidating.
Notes:
- The spacing between the moving averages is important. The more space between the moving averages, the stronger the price momentum.
- Experience has shown that you can’t rely any research solely on Moving Averages and their combinations
🎯 Summary and Conclusions
Of the four methods discussed, the best for identifying and trading the trend is the first one: Price Channels. Financial assets often move within channels, which not only help determine the master trend but also provide ideal entry and exit points near their boundaries. Combining price channels with chart patterns (► Learn more)) and candlestick patterns increases reliability. Some traders also pair price channels with Harmonic Patterns (► Learn about Harmonic Patterns). You can use and trade price channels on all timeframes, but it’s important to wait for 3–4 price hits on each boundary to confirm the channel.
Observing the sequence of highs and lows is useful for confirming short-term decisions (entries). This method can be combined with any other system to add value and can be applied across all timeframes.
The ADX indicator is also helpful, not only for identifying the trend but as a signal tool at crossovers between +DI and –DI. ADX crossovers work best on timeframes above M30.
The Moving Average method is mainly useful for trading equities. It’s not effective to rely solely on moving averages or their line-up to identify trends in currency pairs.
Whichever method you choose, the key is to focus on the right timeframe. The best timeframes to build a trending system are H1, H4, and D1. Trends on very short timeframes can be unreliable due to market noise. Regardless of your execution timeframe, identify the trend by analyzing the next two higher timeframes (e.g., H1 → H4 → D1). Finally, the most effective way to analyze any market trend is to start at the highest timeframe and work downward (Top-Down Analysis).
■ Four (4) Methods for Identifying the Market Trend
George Protonotarios, Financial Analyst
(c) November 2016
