As technical traders, the first thing we are looking for is a trend. This may seem a simple concept, but it is one of the most important elements in any strategy. In essence, we want to go with the flow. Identifying the trend allows us to see where the momentum of the market is currently at, and to trade in that direction.
A mistake novice traders commonly make is to look at one timeframe only, and to restrict themselves to only trading that timeframe. However, when searching for strong, long term trends, we need to look at higher timeframes as well. For example, a strong downtrend on a 4 hour chart may actually be a pullback in a strong up trend on the weekly and daily timeframes. Today we’re going to use the Soybean market to illustrate how trends can be used to guide our decisions. I’m going to take a top down approach, meaning starting at the highest timeframe and moving down the timeframes.
Let’s start with the monthly chart. Here we can spot a clear series of lower highs and lower lows, confirming a down trend on this timeframe.
Now let’s examine the weekly chart. We can see the same pattern here, with a clear series of lower highs and lower lows.
Finally let’s take a look at the daily chart. This timeframe is also in a confirmed down trend. So now I have three timeframes all in agreement, all confirming strong downward momentum.
A closer look at the daily chart shows that price action is currently over extended from the sell zone which is the area between the 10 and the 20 period moving average. After a strong move lower, we do expect to see some release of this selling pressure, and indeed, the market is currently in the process of pulling back towards the sell zone.
The next important question is, now that I have identified a strong downtrend on multiple timeframes, where can I find a potential area to join this trend.
Let’s zoom out on the daily chart. Here we can identify the resistance area around 960, which had multiple touches in the past forming a S/R level. We can also see that this level currently sits in the moving average sell zone.
Should the market pull back to test this level from below, I’ll be looking for a confirmation that the pullback is over, and that this S/R level is holding. For example, I would want to see a bearish rejection candle at this level. If this eventuates, then a new wave of selling could be on the way offering traders the potential opportunity to join this well-established longer-term down trend.