In analysing the markets we rely on our “Trend Recognition Approach”. This approach allows us to recognize the prevailing market trend and to define a trading strategy based on the trend recognition. The approach is dynamic because it depends on the market conditions (trending or consolidative environment) as well as the key price levels are often obtained as a result of calculated Fibonacci levels (using both corrections and projections techniques – internal and external). This approach allows us to follow the market trying to predict the turning points where the trend “might” end but we do not force a particular analysis that we believe the market needs to follow. In other words we try to be as much objective as possible in assessing the market conditions and never have a preconceived view about its direction.
Our approach is based on the following
I. Trend recognition: Here we try to identify the status of the market trend. The market trend can be classified in 5 different categories:
o Uptrend o Weak Uptrend o Sideways Consolidation o Weak Downtrend o Downtrend
We identify the market trend in the following time intervals (degrees):
o Long-Term Trend – the trend on the Monthly chart (this trend usually lasts several years and decades) o Medium-Term Trend – the trend on the Weekly chart (this trend usually lasts several months to a few years) o Short-Term Trend – the trend on the daily chart (this trend usually lasts several weeks to several months) o Very Short-Term Trend– the trend on the hourly chart (this trend usually lasts several days to a few weeks) o Intra-Day Trend – the trend on the 5-min chart (this trend usually lasts several hours to a couple of days)
In identifying the trend we use the following techniques:
o Where is the price in relation to its 21-period and 100-period exponential moving averages (EMAs) and what direction these moving averages are trending. o Chart Pattern recognition o Identification of important chart levels (support and resistance) as well as levels resulted from a proprietary External Fibonacci Projections Techniques. o The conditions of a few oscillators (MACD, RSI, Stochastics) o Elliott Wave count – using the Neely Method – we label waves only on larger time frames (monthly, weekly and daily chart). We do not apply the Wave Principle on the hourly charts.
Watch this video to see how we define the trend in real time:
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II. Defining a Trading Strategy:
1. Defining the direction of the trading strategy: depends on the status of the trend:
o Uptrend – we favor longs at market levels or on any dips; o Weak Uptrend – we favor shorts on rallies, and longs on weakness. o Sideways Consolidation – here, one can try to either 1.) sell at upper limit of the range, or 2.) buy at the lower limit of the range, or 3.) act on break of either side. o Weak Downtrend – similarly to the “weak uptrend”, we favor shorts on rallies, or longs on weakness. o Downtrend - we favor shorts at market levels or on any rallies
2. Determination of entry levels, stop levels and targets.
It is important to understand that we do not formulate trading strategies all the time. We try to spell a strategy only when the chances of success are in our favor and when the risk/reward ratio is strongly favorable. That may result in missing out some big moves. We may have identified these big moves in our analyses, but may have decided not to spell out a trading strategy for them because the odds of success have not been strongly in our favor. And finally, it is always upto the trader to decide when exactly to act or not.
