In this article I’m going to show you how to spot a downtrend early and identify whether or not a market is still genuinely uptrending. The first thing you look at is whether or not the price is floating above the 200 period EMA – sure, but how do you know if it’s started to downtrend, inspite of this? I share this secret below.
Spot a downtrend early – the highs and lows of the trend
The highs and lows of a trend really are the trader’s bread and butter. Without identifying these there are multiple things that can go wrong with the trading set up. New traders should really slow right down and take some time to identify these – they are critical to success. You will make a lot more money trading by spotting the highs and lows and avoiding bad entries where the market has just started to reverse to the downside.
Let’s take a look at some examples. Let’s consider the market of Gold as an example, on the 10 minute timeframe… take a brief look at the chart below, and try to decide whether it’s uptrending based on recent activity, before continuing to read on…….. did you do it?
OK, let’s consider my answer to this question. It’s above the 200 period EMA – GREAT! However, let’s now look at the highs and lows. You can check exactly where the highs and lows are and use these to spot a downtrend early, on the basis of the ‘swings’ of the MACD indicator and this is one of the practical ways the MACD can really help you in your trading – aside from giving you entry signals:
As you can see, at first glance the market does look like it’s now uptrending, but when you look closely, low 3 is now lower than low 2. In an uptrending market, the market makes ‘higher highs’ and ‘higher lows’. The pattern of uptrend has been anialated at the point of low 3. It starts again at that point – you can wait and see if it starts making higher highs and higher lows from that point onwards… a bit like this:
OK, so the pattern has started again at the original ‘low 3’ which I now refer to as low 1. As you can see it did go on to make higher lows again at low 2 in the above chart. You need the confirmation of it forming new highs and lows before placing a trade!
How this can help or hinder your strategy
Let’s consider what this could have done to your trade set up and win rate and profits/losses, if you ignored this break of pattern…
Let’s say you wanted to get in at the MACD cross over as your entry signal. (To understand more about this please see my strategy that I teach on Patreon, here:
https://www.patreon.com/collection/485557?view=expanded
You can also see my other article about how the MACD indicator works, and what it does, here:
Let’s further suppose that you entered the market at the MACD cross over at the low which was previously referred to as low 3, here:
You set your stop just below the low of the trend at the level which is shown in line with the bottom of the trade set up diagram applied (2370.33). As you can see, because the market was making lower highs, it went on to chop down into the stop loss before recovering. This loss would have been something that could have been completely avoided had the trader taken the time to spot a downtrend forming by identifying the highs and lows. Consistency in the pattern is key, before entering the market!
I have seen this help me avoid bad entries on many, many occasions. It does mean that you end up ‘avoiding’ placing trades and you place fewer trades, but with trading, less is more!! You will make more money trading, by placing fewer trades.
I hope you found this article helpful.
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