Last updated on July 21st, 2020
In a 2 part series about an objective way to draw trend lines, there was something important that is a must for any trader.
While trend lines can give you a great view of the current market structure, some people may be thinking they are also an entry into a trading opportunity.
Trend lines can be used as entry triggers as you draw an opposing trend line to the longer term trend line. A trigger is simply that – a trigger.
- You can use a moving average crossover to enter a trading setup
- Reversal candlestick patters are often used by price action traders
- You can even enter your trade at the close of a momentum type of candlestick
Regardless of what it is, there is something more important that if you ignore it, it could cost you the trade.
Interesting enough, most people ignore this variable not understanding that the edges in trading are very small. Not every move on your charts is something worth trading.
Trade Location – Finding Turning Points
Location is important in where you setup a business. It’s important in where you buy your home.
In trading, location for your trade is no less important.
Whatever trigger you are using, you can probably find them in random places all over your chart. I believe that much of what we see on the chart is random direction and doesn’t present a true trading opportunity that:
- Has an edge in the market
- Is something that you can be consistent with
- Is anything but low interest price movement
I am going to use the objective way to draw trend lines that was discussed in a previous trading tips article. What we have in this one hour chart is an uptrend line that is briefly violated. The candlestick with the arrow is a typical reversal candle that people look for at a support area. This has been known as everything from a kangaroo tail to a “fakey”.
Given that price is bouncing off an up sloping trend line, you’d be looking to take a position long in this market. Given the previous thrust impulse move, it would be a safe bet that we’d get another move in that same direction.
Price doesn’t move in a bubble. Check out the four hour trading chart
This trend line is showing price is currently in a higher level down trend and worse, your trading location is right below it.
In this instance, price sold off 231 pips that would have rocked any trader going long.
- Good entry setup
- Up sloping trend line containing price
- Solid looking reversal candle.
It didn’t matter that all signs pointed to a decent trading setup on that time frame. The location in the context of the higher time frame was not great.
Anything CAN happen in the markets but traders do their work based on probabilities of one thing happening over another.
In this example, accepting that higher time frames often exert their power of lower time frame charts, the probabilities of a continued move upwards was low
Are Moving Averages Better Than Trend Lines?
Some could argue that drawing trend lines is an art, a discretionary art, and not all traders will draw them the same way.
Legitimate point so let’s look at something more objective: moving averages.
Here is another 60 minute chart.
Price is making higher highs and higher swing lows which indicates an uptrend if you are using price action patterns to determine trend.
The arrow shows a candlestick pulling back into a zone where there is a “support zone”. Note: Moving averages don’t actually support price.
The moving averages crossed to the upside, put in a strong momentum impulse leg and is pulling back for our entry. What also puts the odds in our favor are:
- Price has just broken from consolidation
- Price broke with momentum
- Breakout – pullback is a standard trading setup
This is a 4 hour chart and the arrow is on the area where your buy on the 60 minute chart showed up.
What did you miss? You were buying right into an area that once supported price. Former support often acts as resistance (but not always)
A momentum candlestick slams price back to the downside in what looked to be price retesting the area of a former breakout (like our trading setup appeared to be doing)
Take The A 1 Trading Setups
Location on the chart is important. Once thing that traders do is they believe they have to take a trade. A day with no trade is a wasted day to many of them.
Instead of finding structure or reasons to invalidate a trade, they simply jump on their trading signals. It may not even be trend lines or resistance/support areas that alert you to be on alert for a low probably trade. It could even be a slow momentum in price as displayed by narrow range candles or conflicting candle patterns.
Are you even trading with an edge?
What happens a lot is people will read up on trading theory and toss a few trading variables into something resembling and actual trading plan. What doesn’t happen often is the testing of the trading plan and theory to see if it’s even an edge in the market.
What are you using for trading location?
Whatever it is, make sure you see if there is anything standing in your way. Be selective and wait for location to be on your side.
One trading technique is using support and resistance zones taken off of bigger time frames. On the examples shown above, the moving average cross would come too late to take advantage of a reversal. You would simply note the support/resistance area from the higher time frame and jump down to a small time frame to watch the move unfold.
Location. This may be the missing link to your trading. Ensure you are taking your trades in locations that are conducive to the direction you want to go. Taking a trade at a random area that has no reason to act as an area where order flow may increase, is rolling the dice.
Sometimes you win.
Sometimes you lose.
What you don’t have though is consistency and a trading edge that over time, has a positive expectancy. Without that, your long term trading success is under attack.