Timing your trades on the trend

AS part of the inaugural City A.M. Active Trader conference held at the end of last month, we hosted a panel of charting experts to guide attendees through what can often be a confusing world of Ichimoku clouds and bearish engulfing candlesticks. But what are the technical indicators that you should pay attention to, and what simply muddies the waters of your charts?

Alejandro Zambrano, market strategist for FXCM, spoke at the conference and gave his views on what to pay attention to – helping you know when to get into and when to stay out of the markets.

According to Zambrano, first of all it is important to understand what a trendline is: “An uptrend simply means that we are seeing higher highs and higher lows. Nothing more. Similarly, a downtrend means that we are seeing lower lows and lower highs.” (See chart, right). In a downtrend, it is the highs that matter and in an uptrend, it is the lows that matter. “In a downtrend, the lows can form a double bottom, but for me that is irrelevant. It is the highs that matter, as those are what I trade from.” Zambrano adds: “For me, it is the patterns that matter. I don’t use trendlines.”

Following this, it is the overall trend that gives us our bias, and you should only enter long positions in an uptrend and only enter short positions in a downtrend. Though you may be tempted to jump in and out of the markets, it is important not to trade corrections in the trend that run against the grain – you want to always trade in the direction of the trend.

Of course, you are not fixed to one particular time-frame. And this is where multiple time-frame trading comes in. Within a 30 minute and a 5 minute time-frame you may see a trend within a trend. For example, you might see a correction, before the price action resumes its trend. But taking the example of a downtrend with a correction to the upside, when do you take the decision to go short? Zambrano points to his rule that you should not trade corrections in themselves, but should only enter the market when the correction falls in line with the trend (in this example a breakout to the downside.)

When you are in an uptrend, you expect lows to hold and new highs to be created – making it easy to trade with the 1:2 risk-reward ratio that you should be aiming for when trading, meaning that you risk £1 for every £2 that you could earn. When you don’t see prices creating higher and higher lows, it is time to exit the market. By using multiple timeframes, you can combine the short-term trend with the long-term trend to ride it as long as possible – even if the speed of the trend changes.