Before taking any trade, we must zoom out to the higher time frames to understand the clear market structure. Trading using only the lower time frames like the 15 min and 1 hr can leave us very exposed to the overall trend that might be happening on the higher time frames.
We must zoom out to understand the true trend that price action is in.
To build market structure we do not want to over complicate things – we will be starting with the monthly or daily and working our way down to the 1hr drawing a trendline where appropriate.
To become a consistently profitable trader we must condition ourselves to get into routines that check all timeframes. Even before taking a trade it’s crucial to understand whether the higher time frames agree with the trade you are about to place.
In addition, later on in the strategy we will be going over two incredibly powerful techniques such as ‘Backtesting’ and ‘Forecasting’; with both of these we will be using multiple timeframes.
Always zoom out before taking a trade, the higher time frame will hold the most significance across all technical indicators. If a technical indicator suggests a trend reversal on the 1 hour but trend continuation on the daily or monthly do you really want to be taking the trade?
Spotting a trend
There is a really simple technique we use at the Social Traders to identify and post trends. First of all zoom out to either the weekly or daily timeframe (whatever gives you the best clarity) . Remember, we’re not too interested in what happened in the market 20 years ago. We want to be focusing on the last 5 years of data at a push!
Just by doing this easy exercise of drawing out the swing points within the trend we can now clearly see that price action is in a ‘Uptrend’. The example we’ve used here is fairly obvious however, this is a great habit to get into when on the lower time frames and where that trend might be as obvious as this one.
Now we’ve identified that this piece of price action is in an uptrend we should be extra cautious about taking short positions as we would be going ‘counter trend’ or against the trend.
And this is the exact opposite when in a downtrend. If we see that price action is within a downtrend, we should be extra cautious when taking long positions as again, we will be going against the trend.
From doing this simple ‘mark out’ technique, we should be able to draw basic Trendlines to our charts on the higher time frames, so that when we drop down to the lower time frames to execute the trades we won’t have lost sight of the true market trend.
From this, we might be able to draw basic Trendlines to our charts on the higher time frames, so that when we drop down to the lower time frames to execute the trades we won’t have lost sight of the true market trend. The image you see above if the exact same piece of price action before but now all we have done is added two simple trendlines to give price action a ‘boundary’ to respect. It is important to remember that trend lines are ‘subjective’ so don’t marry your Trendlines! Use them to give you a good understanding of the overall market trend. But do not 100% Price action will reject from your drawn Trendline. We’ll cover this in more depth in a later video.
In the previous episode we covered candlestick formations and how they can be used to aid our entries into the market. The same techniques can be applied when looking at the different timeframes.
You could have a textbook setup in front of you on the 1 hour timeframe but when you zoom out to the higher timeframe you noticed that the previous daily, or weekly close could suggest otherwise. If you hadn’t zoomed out before taking the trade you would have likely entered a position that you couldn’t see any reason why it would go against you; and then it did.
All of the previously talked about candlesticks can be found on all timeframes, so if you see a evening star on the daily or weekly timeframe there is a good chance that the following monthly trend will be Bearish (as the evening star is a bearish reversal sign)
If the previous daily candle close was a Bullish Engulfing, you don’t really want to be looking for aggressive short positions the following day. Even if the trade setup is a perfect ‘go to set up on the lower time frames.
These are just a couple examples but It’s these small 1% tweaks like this that will benefit your trading in the long run
As part of this strategy we will be using the 50 Exponential Moving Average as our one and only indicator.
The EMAs will be used in conjunction with other analytical tools to confirm significant market moves and to gauge their validity. We will be using EMAs to determine a trading bias. For example, if an EMA on a daily timeframe shows a strong upward trend, we should take this into account if we are looking to enter short and also use it to our advantage if we are looking to trade long.
We will be using the 50 EMA on the 15m, 1 hour, 4 hour and Daily timeframe primarily. We are using the 50 EMA as it is seen to be faster reacting and therefore more reliable. We must make sure we are checking the location of the 50 EMA when checking the timeframes as that can be a significant ‘hidden obstacle’ if not checked properly.
We will be using the 50 EMA as a form of ‘dynamic Support and Resistance’ (touched upon later in the strategy). However it is very important to note that the 50 EMA is not to be traded on its own, purely used as added confluence to our trading.