How to define the trend?

UPTREND versus DOWNTREND

27th September 2013, 06:06 PM

In previous lessons we have talked about what Supply and Demand trading is and how
it can help us to achieve success in the markets. We talked about imbalances, which
manifest themselves as either peaks and valleys (swings) or in continuation patterns.
These structures will help us pin point “potential” areas of interest and turning points
in the markets. You've also learnt how to draw bases on the most important Japanese
candle stick patterns so you are able to define – providing other criteria is met that you
will learn in later lessons- potential entry zones.

In this lesson we're going to start dealing with a key concept in any methodology
– the Trend. You might have heard the saying “the trend is your friend - until it ends”.
But how can we define the trend and when will we consider its end? This is what I am
going to show you in this lesson.

As you will learn in future lessons the methodology rests on a concept called the
sequence and realignment by using multiple time frame analysis to make trade
decisions. The concept of identifying trend is the backbone of it. I therefore urge you
to go through this lesson several times so you understand it inside out. A wrong
application will lead you to many losses. So lets start...

WHAT DEFINES AN UPTREND AND A DOWNTREND?

When you open Metatrader platform or any other charting software and switch
through the time frames of any instrument you will realise that sometime price goes
up, sometimes it is in a clear down trend and sometimes price is just flat. Each
timeframe can have a different trend because Price is fractal. The term fractal means,
that there are price structures within price structures and these structures/patterns
repeat themselves over and over on all timeframes.

Sometimes you stare at a price chart and you first believe it is up, then after looking
again you think it is flat. Why is this you might ask? Because depending on where on
the chart you reference the last candle with the beginning you might get a different
outcome. In this lesson you will learn the rules on how to exactly define the trend so
that there is no subjectivity left. You will never have any doubt what the trend is,
which is what we seek, clarity and objectivity.

Therefore I urge you again to read the lesson several times, watch the videos and
practice, practice, practice!
WATCH THIS VIDEO:

You might ask how can I make a trading decision trade if each timeframe has a
different trend? Isn't that a mess? It may look like a mess but this is why we need to
make a top-down multiple timeframe analysis so we align as many timeframes as
possible in the direction of the bigger picture's trend. This concept will be taught in
later lessons.

To define a trend or for that matter a consolidation in a mechanical and methodical

way, we use supply and demand imbalances as well as trend lines.

Just one word of caution upfront which is very, very important! Since we are
primarily working with supply and demand imbalances, price making a higher high or
a lower low does not necessarily mean that we have a trend. Also remember that so
far we have not qualified proper supply and demand imbalances. We have identified
“potential imbalances” in lesson 2. So when you look at the explanations or when
watching the videos remember that these imbalances I am referring to are in fact
proper supply and demand zones. Again, you will learn how to qualify those in later
lessons.

So lets get started. We basically have 4 stages:

1. An uptrend
2. A broken uptrend to the downside a.k.a Bullish consolidation
3. A downtrend
4. A broken downtrend to the upside a.k.a Bearish consolidation
▲ UPTREND ▲

What we look for in an uptrend is that identified demand areas underneath

current price are respected (are held) and in the process of the price moving
up has taken out supply zones (broken through even if it was just by one PIP
pinch). Demand areas are respected, supply areas are taken out

We define an uptrend as follows:

Possibility 1
• We were able to draw an uptrend line, which is respected AND
• at least one opposing zone of supply was/is taken out
SP500 WEEKLY UPTREND
• Weekly uptrend [1] is eliminated by W DZ [2] and a bullish trendline
connecting last two peaks is possible, therefore there is an official uptrend.
• All time highs scenario after that with new W demand zones being created at
[3] [4] and [5] with nothing to the left to be removed at all time highs. We must
always connect the latest two valleys.

Possibility 2
• At least two opposing supply areas taken out, no possibility to draw a bullish
TL
The reason for the second possibility is that it sometimes is not possible to draw a
trend line based on the rules. Again you will learn this in another lesson just accept
this definition as it is for now. Later on it will become clearer.

As described a bit further above we can only consider valid demand and supply zones
when applying these rules therefore you should always ask yourself: what has this
imbalance and potential demand zone accomplished? Has it taken out an opposing
supply zone?

Level on top of level: Sooner or later you will come across situations where you
identify supply or demand zones that sit right on top of each other or are very very
close. This is called a “level on top of level” situation.

Let’s assume for a moment that price was moving down, price reversed up and it
broke two supply zones that were sitting right on top of each other. Does this mean
we are now in an uptrend? No, it does not! In these situations we are in a bullish
consolidation stage.
WATCH UPTREND VIDEO:

▼ DOWNTREND ▼

What we look for in a downtrend is that identified supply zones above current price
are respected (are held) and in the process of the price moving down has taken out
demand zones (broken through even if it is was just by one PIP pinch). Supply areas
respected, demand areas taken out.

We define a down trend as follows:

Possibility 1
• We were able to draw a descending down trend line, which is respected AND
• at least one opposing zone of demand is/was taken out
TRIP ADVISOR WEEKLY DOWNTREND
• Clear example of weekly downtrend on TripAdvisor, new bearish impulses and
demand being removed. Some demand zones can't be seen on the chart, they
are further to the left.
• Every time there is a demand zone removed and two new peaks the weekly
downtrend is renewed.
• For instance, W DZ [1] is removed by W SZ [2] and a new bearish trendline
can be connected once price removes W DZ [1] at [3]. Then two new bearish
impulses happen allowing us to connect newer bearish trendlines connecting
last two peaks.
Possibility 2
• At least two opposing demand zones were/are taken out
As before please do not forget the level on top of level situation

AUDCAD TWO OPPOSING DEMAND ZONES TAKEN OUT

Two opposing weekly demand zones taken out but there is no possibility of drawing a
bearish trendline to connect two peaks. Two opposing demand levels taken out =
downtrend. Downtrend is official once price makes a lower low than DZ #2 at #3
WATCH DOWNTREND VIDEO

◄► CONSOLIDATION ◄►

Bullish and bearish consolidation: There are times where price is not clearly moving
in any particular direction, steam has been lost and price starts bouncing off opposing
imbalances like a ball on a tennis court. This is where most traders get confused and
lose the money they potentially made in trending markets. This is the time when the
trader asks himself why his mechanical trend following system does not work
anymore, where every trade he or she makes turns into a “brown, smelly mass”. I am
sure you know what I am talking about : - ) This is also the time where the trader is at
greatest risk to loses confidence in himself and the methodology he is trading”

A bullish consolidation happens when either

• An ascending uptrend line is broken by one full candle (the
open/high/low/close) is fully under the trend line OR
• The last valid demand zone – irrespective if it was a CP or Valley - underneath
price is broken. (Even if it is just by a one pip pinch) OR
• All of the above
When any of these three scenarios happen, you are not allowed to take any longs
(buys) in the direction of the previous uptrend line until
• Price makes a high that is higher than the previous high (price resumes
uptrend) OR
• Price hits a demand zone of 1 higher time frame below it, also known as
realignment (further lesson)
IMPORTANT: Please do not stress out over the last point yet. You will learn this in
a later lesson. For now just learn and accept this rules until it becomes second nature
to you. The last point is the concept of the realignment and sequence mentioned
earlier.
AUDCAD BULLISH CONSOLIDATION
Clear weekly uptrend with new demand zones being created and bullish impulses. But
suddenly price drops and takes DZ #2 out. Once that demand is taken out at #3 rules
state there is bullish consolidation

A bearish consolidation happens when either

• A descending down trend line is broken by one full candle (the
open/high/low/close) is fully above the trend line OR
• The last valid supply zone – irrespective if it was a CP or Valley – above price
is broken. (Even if it is just by a one pip pinch) OR
• All of the above
When any of these three scenarios happen, you are not allowed to take any short
positions (sells) in the direction of the previous downtrend line until
 • Price makes a low that is lower than the previous low (price resumes
downtrend) OR
• Price hits a supply zone of 1 higher time frame above it
As mentioned before you will learn this concept, so do not go over it just yet, as it will
only confuse you at this point.

A bullish or a bearish consolidation is what the name says. It is a consolidation of

the last trend, a pause so to speak. You are not in a new trend!

AUDNZD WEEKLY BEARISH CONSOLIDATION

Weekly downtrend connecting latest two impulses down at #3 and #4 was broken by a
bullish impulse causing the break of the trendline. Once the trendline breaks with
more than one full OCHL candle creating demand is created at #1 and the weekly
trend becomes bearish consolidation. Price retraces to previous SZ at #2 and reacts
from it. This is the picture of bearish consolidation.
USDZAR DAILY CONSOLIDATION STAGE.
Daily chart is consolidating because we are seeing new supply and demand
imbalances, neither of them is being removed. Price is bouncing back and forth from
opposing imbalances at [1] and [2].

What to do in consolidation? Both longs and shorts are allowed as confirmation at one
timeframe lower, that is, at newly created imbalances, in this case H4.

In this scenario, we have demand [1] used up with three retests, whereas supply [2]
has been tested only once. It's advisable that we trade in the direction of the weakest
imbalances, in this case shorts against demand at [1].

WATCH VIDEO ON CONSOLIDATION:

NEW TREND:

Having just explained what a trend and consolidation is and what criteria need to be
fulfilled let’s now look what needs to happen so we can clearly say that a new trend
has started.

Newton's First Law of Motion states: Every object in a state of uniform motion
tends to remain in that state of motion unless an external force is applied to it.
It's pretty simple, a trend in any given timeframe will continue in the same direction
unless an external force, in our case, a bigger timeframe, is applied to it. A trend
change in any given timeframe usually happens (not always) when a bigger timeframe
gains control.

In order to have a new downtrend after an uptrend either one of the following
scenarios has to happen:
• A new bearish trendline can be drawn AND at least one demand zone is
taken out.
For instance: current timeframe was in an uptrend, bullish trendline is broken.
Furthermore at least one demand zone has been taken out... if we can connect
two new peaks with a bearish downtrend line. timeframe will now be
downtrending. The difference between a bullish consolidation and a downtrend
is the possibility to connect two peaks where the second leg of the second peak
makes a lower low than the first peak's second leg
• Two demand zones were taken out. For instance: there are times when price
sells off so fast that drawing a bearish trendline connecting the latest two peaks
is just not possible. However due to the strength, price managed to take out two
demand zones. When that happens, two opposing demand zones taken out, that
chart will be in an official downtrend.
In order to have a new uptrend after a downtrend either one of the following
scenarios has to happen:
• A new bullish trendline can be drawn AND at least one supply zone is
taken out.
For instance: current timeframe was in an downtrend, bearish trendline is
broken. Furthermore at least one supply zone has been taken out... if we can
connect two new valleys with a bullish line. timeframe will now be uptrending.
The difference between a bearish consolidation and an uptrend is the possibility
to connect two valleys where the second leg of the second valley makes a lower
low than the first valley's second leg
• Two supply zones were taken out. For instance: there are times when price
rallies so fast that drawing a bullish trendline connecting the latest two valleys
is just not possible. However due to the strength of the move price managed to
take out two supply zones. When that happens, two opposing supply zones
taken out, that chart will be in new and official uptrend
Please keep in mind the level on top of level scenario mentioned earlier
EURUSD WEEKLY CHART NEW TREND EXAMPLE

Example of a new weekly uptrend. Weekly supply at #1 is valid because it took out W
DZ on the left (not seen on the chart). We must score the level and ask questions like:
did it consolidate away? (yes) Did it make 2:1 RR? (no). Confirmation is required
since it's not a 2:1 imbalance, W SZ #1 is valid but not tradable, confirmation needed.
Once W DZ #2 takes W SZ #1 an uptrend is created connecting last two valleys + one
opposing W SZ #1. Official W uptrend when highs at #3 are traded through.

OVER-EXTENSION

Now that we know how to define a trend or a consolidation we have to look at the
concept of over-extension. As you might have already picked up in this lesson we can
draw two types of trendlines.
• Downtrend line by connecting two peaks or
• An Uptrend line by connecting two valleys
There is a more detailed lesson dealing with over-extension which contains further
explanations and a few chart examples. Read the over-extension lesson here
Why do we have over-extension?

Market participants can get ahead of themselves a lot of times and fall into the trap of
greed and mania as well as fear. These irrationality is what makes prices to look
overextended on the charts. However there comes a time where simply market
participants get exhausted and the buying and selling pressure eventually subsides.
This is shown as a pause or a pullback on the chart. Price will eventually revert back
to the mean – a state of normality. I am sure you have been part of such an irrational
move before yourself. How often in your trading career have you found yourself
desperately wanting to get out of a trade when you saw price falling like a rock?

I am sure you have realized by now due to you practising on correct level drawing that
peaks and valleys are frequently not there. All we have are little pauses, which reveal
themselves as continuation patterns (CPs). The issue now becomes as follows, if you
do not have peaks or valleys and thus are not able to draw a trend line how can we
make sure we can still accommodate for this?

The answer to this is to draw an “aggressive trend line”. The break of such a line has
the same consequences than that of regular trend line. You do not have to use them as
the rules above stating the break of 2 demand / supply levels already accommodate for
this. However drawing a trend line makes things visually easier, especially if you
decide to analyze and trade on 20+ currency pairs.

So when are we overextended and thus are able (and only then) to draw an aggressive
trend line? We consider over-extension when we clearly see that price has been
moving in one direction non-stop by:
• Creating 3 or more clear CP patterns
• Visually strong up or down moves with huge candles covering a huge price
distance in a very short time compared to other candles
• Price rallying indefinitely creating a series of CPs and valleys/peaks. (Note: We
need to analyze each case in particular. When this happens it's recommended to
keep on trading in the bigger picture's direction while applying the realignment
and sequence rules, once you get a loss on a clear level, you should stop trading
in that direction until price realigns itself with a higher time frame demand
level (uptrend), higher time frame supply level (downtrend) or you trade on
confirmation. Confirmation trades is discussed in more details in later lessons
so do not concern yourself with this aspect
• NOTE: When 3-4 CPs happen in a row, over-extension may start happening
and it's very likely that price will return to the origin of the whole move to 1
HTF valley/peak or HTF bullish/bearish engulfing pattern; moreover is a HTF
opposing zone has taken control
Please keep in mind that there is no rule that will turn a CP into a valley/peak or
vice-versa to make things easier. The structure of an imbalance can't be changed once
the structure has been created.
EURJPY D1 OVER-EXTENSION

In EURJPY D1 chart example below we can draw a more aggressive bearish trendline
connecting the last three CPs. Over-extension is great for counter-trend trades. The
break of an aggressive TL also creates an imbalance at #4.
Exceptions and resets

As you have read above when we identify over-extension we can draw an aggressive
trend line and once this trend line is broken we need to realign (3 rd point above).

Through extensive testing I have come to realize that an over-extension and thus an
aggressive trend line can be ignored when
• A level (CP) that is part of that over-extension has caused an important
accomplishment such as breaking a supply or demand level of a higher time
frame OR
• When we have formed a new valley or peak as a valley or peak is considered a
pullback and thus a reversion to the mean.
What we do when any of these two exceptions occur is to simply resume trading in
the original direction until we have a loss. Once we the loss we will wait for a
realignment in a higher time frame zone as described above

The significance of trend lines and its correct application

So far we have discovered the rules to objectively determine when price is trending,
when price is consolidating and when a new trend has begun. Trend lines are a visual
aid that guide and help us to stay objective. They help to determine if we are working
within the rules that we have given ourselves to survive in a market that hardly has
rules. If we do not lay objective rules upon ourselves than our trading endeavour will
be short lived.

The break of a trend line signifies a change of dynamics, nothing more nothing less.
This change of dynamics is usually the result of a reaction to a higher time frames
supply or demand area.

Correct application of trend lines

• Regular trend lines: A regular trendline is applied when price is in state of
normalcy, printing clear and obvious valleys and peaks
• Aggressive trend lines: An aggressive trend line is applied when price is over
extended. The criteria for these situations was discussed in the last section of
this lesson
• A regular up trend line should be drawn between the penultimate valley (its
lowest point) to the last valleys lowest point.
 • A regular down trend line should be drawn between the penultimate peak (its
highest point) to the last peaks highest point.
• An aggressive up trend line, we need 3 CP's or more so trendline should be
drawn covering at least the latest 3 CP's or more
• An aggressive down trend line we need 3 CP's or more so trendline should be
drawn covering at least the latest 3 CP's or more
IMPORTANT: Please note that it is not allowed to connect Valleys/Peaks to a CP or
a CP to Valleys/Peaks. There is a simple reason. Price is either in a state of normalcy
or overextended. It cannot be both!

Any break of a trend line signifies a change of dynamics, nothing more nothing less.
This change of dynamics is usually the result of a reaction to a higher time frames
supply or demand area. For now keep the following things in mind:

OVER-EXTENSION VIDEO:
16th April 2014, 08:29 AM
The screenshots below show examples of what an uptrend, a downtrend and a
consolidation stage look like in any given instrument.
• Remember that having a break of a trendline does not necessarily mean that we
have an opposing trend, the dynamics of the market might be changing, price is
losing steam, potential consolidation stage happening
Screenshots below are from USDJPY D1 chart December 2013
#3
4th July 2014, 06:25 PM
IMPULSES versus CORRECTIONS

Before going deeper into understanding how impulses and corrections help us define a
trend, let me remind you of this. Supply and demand imbalances are made of
impulses but not all impulses are imbalances.

Each timeframe has its own trend, this is why it's mandatory that we make a
multiple timeframe top down analysis in order to decide in which trend direction we
want to trade. The bigger the timeframe, the higher its reliability.
A trend is composed of impulses and corrections:
o Impulses
• The impulses are the moves in the direction of the current trend, the
direction in which we should be trading.
o Corrections
• Corrections can be seen as the pauses in the trend, or small retracements
reverting to the mean before the current trend is resumed. Corrections
 together with supply and demand imbalances give us the opportunity to
trade in the direction of the main trend before the new impulse happens
Anatomy of an Impulse:
• Fast moving prices. Violent moves that cover large price moves in a short
period of time
• ERC candles. They tend to have larger candles, even gaps in the direction of
the trend
• If seen in the opposite direction of the main trend, it may be giving us
information of a potential change in the dynamics of the current trend
• Impulses in the opposite direction to the main trend usually happen when a
bigger timeframe opposing imbalance gains control
Anatomy of a correction:
• Price moves slower and covers less price action. Price takes much more time
to cover the same price action covered by an impulse
• Riskier to trade, you will probably be on the wrong side of the new potential
impulse
• Corrections can be easily measured by supply and demand imbalances on the
timeframe where they have been located. 20 EMA and trendline rules can be
applied in order to learn where the next impulse is most likely to happen

Charts below belong to EURUSD D1 timeframe, first months of 2014

21st March 2017, 08:59 AM
A TRENDLINE CONNECTING TWO VALLEYS OR PEAKS DOES NOT
NECESSARILY MEAN THERE IS A TREND

We use trendlines in Set and Forget to connect the last two obvious impulses (valleys
and peaks) and detect potential imbalances if these trendlines are solidly broken with
full OHCL candles. Many traders struggle with this way of drawing trendlines and
how trendlines can tell us about the trend in a specific timeframe. The fact that a
bullish or bearish trendline is connecting the last two impulses does not necessarily
mean there is a trend.

As supply and demand traders, we must take into consideration opposing imbalances
and ask ourselves (or the charts) what is happening with those imbalances. Are the
opposing imbalances being eliminated or being respected? If the answer is respected
then drawing a bullish trendline will not result in an uptrend, the TL will be used to
detect potential supply zones if it's solidly broken.

Remember, a trendline connecting the last two valleys or peaks does not
necessarily mean there is a trend, we also need opposing zones to be eliminated
AUDUSD WEEKLY BULLISH TRENDLINE IS NOT A WEEKLY UPTREND

A bullish weekly trendline connecting last two valleys does not necessarily mean
there is an uptrend. An uptrend requires at least one opposing supply to be eliminated,
in this case Weekly supply at #1. If this supply is taken out, AUDUSD will have an
official uptrend and create a new W demand zone at #2.
AUDNZD MONTHLY BEARISH CONSOLIDATION, NO UPTREND

Being able to draw a bullish trendline connecting 2 valleys does not necessarily mean
there is an uptrend. Trendlines like [1] can be used as confluences to locate new
imbalances when broken but not to assess current trend. An uptrend also needs an
opposing supply imbalance eliminated and there is none overhead and left at [2].
Currently there is bearish consolidation since M DZ [4] removed M SZ [3] but on the
new two valleys at [1] no opposing supply has been taken out.
NZDUSD MONTHLY BEARISH CONSOLIDATION, NO UPTREND
We can draw a bullish trendline at [1] on NZDUSD monthly chart but no opposing M
SZ has been taken out, currently M SZ [3] has been tested and not eliminated
therefore there is no uptrend. Current valid trend is bearish consolidation by using
bearish trendline [2], monthly is ranging. Bullish trendline [1] can be used to locate
potential supply zones if broken with at least a full OHCL candle.