A Simple Indicator Configuration to Confirm a Tradable Trend

Welcome to this third monthly blog sponsored by the Trendline Mastery home-study course and membership service, available exclusively from Forexmentor[1]. My name is Frank Paul, developer and co-presenter of the Trendline Mastery course, along with my project collaborator Peter Bain, who is one of the founders of Forexmentor.com, and the person from whom I first learned about trend lines more than ten years ago now.

On to this month’s topic…

Through proper application of Top-Down Trendline Analysis, it is an option, but not a specific obligation, to trade completely without indicators, if you prefer.

If you’ve had the chance to check out any of the members-only or public webinar presentations Peter and I have hosted since we launched Trendline Mastery in August of last year, you would very likely have heard either or both of us make the claim that proper application of Top-Down Trendline Analysis tools makes possible a trading approach that bypasses technical indicators altogether.

We’ve never stated that you should specifically feel obligated to do so; only that if you happen to feel frustrated with indicators, or just don’t like using them for whatever reason, or are curious about another option, then your best bet for reading directional bias correctly is drawing trend lines across multiple timeframes. But I think it’s also fair to say that we’ve always tempered that advice by acknowledging that when an indicator is giving clear and unambiguous readings that agree with TL analysis, you can easily integrate or combine both elements.

To summarize: Taking the time to become really adept at the TL-based methods we talk about here allows you the choice of whether you want to continue using indicators in your trading, or delete them from your charts for good. You can make do without if you please, but you don’t specifically have to. Ultimately, the choice is yours, and it all comes down to comfort level.

All of that said, for this month’s blog article, we’re going to specifically pursue the contrary point of view, and consider how one might make use of a really simple multi-timeframe indicator configuration that accomplishes two objectives:

  1. Confirming that not only the higher-level trend conveyed by TL analysis on the four upper timeframes (Monthly, Weekly, Daily and 4hr) suggests a longer-term directional bias, but also that the intraday trend is in alignment with it – together, these two criteria represent a high-probability trend-trading scenario.
  2. Being able to use mechanical, rules-based market screening logic (which can be embedded within automated screening tools like the ProScreener utility available in the ProRealTime charting platform) helps you further prioritize your efforts among multiple pairs, since it is not necessarily the case that a top-down trend on the four upper timeframes is going to be specifically tradable right at the point in time you happen to be looking at your charts searching for a trade.[1] To find out more about the Trendline Mastery foundation course, please visit our public FAQ page via www.forexmentor.com/trendline.  And to find out more about the Trendline Mastery Trader’s Club, please visit www.forexmentor.com/trendline/club.php.

The reason why we’re kind of disagreeing here with our own previously stated logic when it comes to indicator usage in relation to Top-Down Trendline Analysis, is that many people simply won’t trade without them. And many traders have spent a lot of time and effort studying indicators – particularly in terms of how they can be used within the context of a personalized trading methodology – so those traders might not be quite so willing to part with them. It is to those folks we are devoting the discussion in this month’s article.

In so many words, what we want to do here is say that: IF you plan to continue using indicators in your trading, but would maybe like some guidance or suggestions in terms of how to go about that task, then hopefully the suggestions you’ll read in the following paragraphs will be helpful.

Three simple indicators plotted on three specific timeframes can work well to confirm a market trend that is actionable in real-time

What I’d like to do to kick off our description of this adaptation of the overall Trendline Mastery approach is list the indicators you can use for the task.  They are as follows:

  • 10-period Exponential Moving Average (10EMA) on the Daily chart.
  • Smoothed Stochastics with custom settings of (9,3,3) on the 4hr chart.
  • MACD (12,26,9) default configuration on the 60m chart.

These are all conventional, widely discussed and used “off-the-shelf” indicators that can be found on virtually any quality charting platform. You should not, therefore, have any difficulty in sourcing these indicators and/or plotting them within your own personal charting templates. You don’t need any of those custom or proprietary “Holy Grail” indicators that are pitched on the Internet (for a hefty charge, of course) – just the stock indicators that have been around for decades. They’ll do just fine for what we have in mind.

(Lest we forget, it’s worth citing the pioneering efforts of the two gentlemen who invented two of the above mentioned indicators and shared them with the rest of us to use – Gerald Appel for MACD, and the late George Lane for Stochastics).

Now, how do these indicators relate to Top-Down Trendline Analysis in a way that is going to be specifically helpful?

Well, firstly, let’s return to the mechanical definition of the term “strong trending market” that we have been using in the bi-weekly Forecast Pack reports that we post Tuesdays and Thursdays at the member’s site for the Trendline Mastery Trader’s Club service (which you can learn about here: www.forexmentor.com/trendline/club.php).

What we look for in this scenario is the same bias of trendline analysis on all of the Monthly, Weekly, Daily and 4hr charts simultaneously. Again, what we have in mind here is not the only potential definition of a trending market that might be conceivably actionable, but certainly the strongest, and at the very least, the most visually obvious. That might mean various depictions of a Falling Resistance Trendline and/or pending break of a prior Rising Support Trendline on these timeframes for a downtrend, or the inverse for an uptrend.

But depending on when you happen to be looking at a top-down scenario like that, it might not be possible to simply jump in any old time. Throughout the trading week, price typically makes lower-level retracements (or consolidation or choppy market conditions) which could easily stop you out unless you either:

  • Pick correctly a top or bottom reversal on an identifiable Support/Resistance level with a Limit Entry order; or
  • Wait for the corrective action to run its course before looking to jump in.

To put it more simply, it’s the really, really small intraday retracements that we can sit through more easily that we’re interested in: Ones which come and go in as little as an hour or so (sometimes less) and are specifically small enough not to disturb an intraday trend reading. These short-lived detours provide trade setups into the larger trend conveyed by the so-called “Quad Screen” reading we referenced above.

So the indicator configuration we’ll be using here will do two things for us:

  • It will confirm that the trend on the Daily chart reflects the “Quad Screen” (if it doesn’t, then you might have a really big retracement on your hands, or possibly the onset of a trend reversal, in which case jumping into the market in the direction of the prior trend might be problematic); and:
  • It will tell us whether the intraday trend is in agreement with that higher-level trend. For example, say the TL-based Quad Screen is bearish, but a sharp intraday corrective rally is underway, and either or both of the MACD and Stochastics readings on the 4hr and 60m charts are biased in the opposite direction. Would you jump in short in a scenario like that at all, especially with a tight stop? In most cases, probably not.

So what we want to do with these indicators, basically, is achieve a mechanical confirmation that the lower level (or “intraday”) trend agrees with the higher level trend, because it is in a scenario like that where you will have the easiest time finding a high-probability and well-timed entry point with limited risk. Where the trend on the intraday scale agrees with that on the upper timeframes, you will typically have a greater likelihood of those kinds of breakout moves that really put up the pips in the open positions window in your dealing platform – always a fun and rewarding piece of market feedback to tell you that your latest trade decision was the right one.

Here are the specific criteria for our three suggested indicator configurations, which collectively comprise a “screening” condition in terms of intraday trend…

So, we still begin with the “Quad Screen” reading whereby we have the same-biased trendline analysis on the four upper timeframes. But to ensure that the shorter time horizon is in agreement, we look for the following screening criteria based on the three different indicators cited earlier in this article:

DAILY CHART EMA(10)

  • If the Quad Screen reading is bearish, we look for a bearish reading of the Daily chart EMA, whereby the EMA itself is sloping down (current value below value on the preceding bar, minimum) and price is closing below it.
  • If the Quad Screen reading is bullish, we look for a bullish reading of the Daily chart EMA, whereby the EMA itself is sloping up (current value above value on the preceding bar, minimum) and price is closing above it.

Screen capture #1 – Sample of a Daily Chart 10EMA Trend Reading

Sample of a Daily Chart 10EMA Trend Reading

The Daily chart for the EUR/AUD pair on February 22nd, 2016, showed a bearish 10EMA in agreement with a Falling Resistance Trendline as notated above. This represents lower-level confirmation of the higher level downtrend seen across all upper timeframes.

4HR STOCHASTICS(9,3,3)

  • If the Quad Screen reading is bearish, we look for a bearish reading of the 4hr STO, whereby the %K line is below the %D line and sloping downwards, but not from below the so-called “oversold” threshold of 20%.
  • If the Quad Screen reading is bullish, we look for a bullish reading of the 4hr STO, whereby the %K line is above the %D line and sloping upwards, but not from above the so-called “overbought” threshold of 20%.

Screen capture #2 – Sample of a 4hr Chart STO(9,3,3) Intraday Trend Reading

Sample of a 4hr Chart STO(9,3,3) Intraday Trend Reading

The 4hr chart for the EUR/AUD pair on February 22nd, 2016, showed a bearish Stochastics(9,3,3)  reading from the session open at midnight GMT, and onwards. This also represents lower-level confirmation of the higher level downtrend seen across all upper timeframes.

60MACD(12,26,9)

  • If the Quad Screen reading is bearish, we look for a bearish reading of the 60m MACD, whereby the MACD line is below the Signal line and sloping downwards, ideally with no evidence of MACD curling up to or through the Signal line from below the zero line.
  • If the Quad Screen reading is bullish, we look for a bullish reading of the 60m MACD, whereby the MACD line is above the Signal line and sloping upwards, ideally with no evidence of MACD curling down to or through the Signal line from above the zero line.

Screen capture #3 – Sample of a 60m Chart MACD(12,26,9) Intraday Trend Reading

Sample of a 60m Chart MACD(12,26,9) Intraday Trend Reading

The 60m chart for the EUR/AUD pair on February 22nd, 2016, showed a bearish MACD reading from well before the session open at midnight GMT, and onwards. This also represents lower-level confirmation of the higher level downtrend seen across all upper timeframes.

To tie it all together, you have a strong trend trade with a sell bias when you can combine a bearish Top-Down Trendline Analysis on the Monthly, Weekly, Daily and 4hr charts, with a bearish Daily chart 10EMA reading, bearish 4hr STO reading, and bearish 60m MACD reading. If any of the indicator readings in question go out of sync, then it will be harder to drill down to an even lower level timeframe (like the 15m or 5m)  looking for a trade entry signal of some kind.

Conversely, you have a strong buy bias when you can combine a bullish Top-Down Trendline Analysis on the Monthly, Weekly, Daily and 4hr charts, with a bullish Daily chart 10EMA reading, bullish 4hr STO reading, and bullish 60m MACD reading. Again, if any of these indicator readings go out of sync, then it will be harder to drill down for a reliable entry trigger.

One of the nice things about using an indicator overlay like the one we’re suggesting here to confirm the near-term viability of a higher-level trend reading is that it allows you to determine, literally at a glance, whether you should look for a trade opportunity for the pair in question.  As long as you’ve already done your top-down trendline annotations on the upper timeframes (for which our bi-weekly Forecast Pack report can be a useful supplement), then it takes literally no more than a few seconds to see if the indicator confirmation signals align or not. If they do, then you have one more green light to proceed. If not, then you can simply sidestep that pair and look at other pairs instead. (Another option would be to set one or more chart alarms to alert you to the fact that an indicator reading has “corrected” itself and thus the intraday trend requirement is satisfied; for example, a previously counter-trend 60m MACD bullish reading has yielded to a bearish crossover signal, in relation to a higher-level downtrend).

So, once we have that double-whammy of Top-Down Trendline Analysis and intraday indicator readings aligned in compatible fashion, what do we do next?

The simple answer to that question is: Look for a low-level corrective move of some kind, either on the 15m or 5m chart (whichever of those two timeframes on which it is most apparent), which is clearly counter-trend but not by a magnitude that is sufficient to disturb any of the indicator readings in question.

So, for example, price makes a Swing Point low and bounces slightly upwards from there on the 15m chart against a higher-level downtrend. Look at your MACD panel: Does the MACD line continue to show bearish Gap & Angle in relation to the Signal line?  How about the 4hr Stochastic? Is the %K  line still trending down below %D? And is the Daily chart 10EMA still trending down? If the answer is yes to all of those questions, then you can go ahead and make the assumption that the smallish rally you’re seeing on the 15m chart is a corrective move, and – just as importantly – when it shows signs of having run its course, where it resolves to the prevailing downtrend, is where you have potentially an excellent point of entry into the trade.  That signal might be achieved by a break of a low-level counter-trend trendline on the timeframe on which the corrective move is seen most clearly; or it might be confirmed with an indicator-based entry signal (e.g. a Stocastics 9,3,3 plotted on the 5m chart shows the %K line crossing down below the %D line from the “overbought” zone above the 80% level).  We won’t delve deeper than that into the subject of possible indicator-based entry signals, but hopefully you get the idea.

Screen capture #4 – Sample of a 15m Chart Corrective Trendline Break Entry Signal

Sample of a 15m Chart Corrective Trendline Break Entry Signal

The 15m chart for the EUR/AUD pair on February 22nd, 2016, showed a low-level corrective trendline forming just around the London session open. When price broke that trendline – into the directional bias conveyed by both upper level and intraday downtrend readings – a strong entry trigger materialized. Note that the optional Stochastics(9,3,3) on this timeframe also signaled the continuation move, with %K crossing down through %D.

As a rule of thumb, a break of a low-level corrective trendline on the 15m or 5m charts that is occurring specifically in opposition to both the intraday trend and the higher level trend (both of which are in complete agreement with each other), and covering not enough distance to materially disrupt the indicator readings in question, is a generally high-quality entry trigger for a trend trade.  By bridging any gaps in terms of higher level and lower level trend analysis through the judicious use of a few simple indicators as we’ve suggested here, the astute trader can spend more of his/her time and energy on a single-minded focus of looking for a trade setup into the prevailing trend.

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In conclusion, we’d like to thank you for joining us here today. We sincerely hope that this blog article has provided you some useful insights into the topic of trendline analysis for Forex trading. If we can ever answer any questions you might have, please see the Member’s Forum available at the Trendline Mastery membership site (www.forexmentor.com/trendline), or send us an email message (with the subject header “Question on TL Analysis”) to: info@forexmentor.com. Please also be sure to follow our Twitter feed (@fxmtrendline).

Good Trading!

About ForexMentor

Frank Paul

Frank Paul at Forexmentor.com

Frank Paul at Forexmentor.com

I am well known for my ability to deliver clear and concise explanations of complex trading topics.   I am the force behind a series of comprehensive, yet practical, forex courses and training programs at Forexmentor.  (Forexmentor links to www.ForexMentor.com.)

“…purchased at least two of your courses and I must say that I greatly appreciate your methodology and willingness to share with others. One of the things I appreciate most about you is that you are not like some of those money grabbers out there who is so quick to sell you a system for huge bucks. I believe you are a very genuine person who would want to see me or anybody succeed in their Forex Trading career. Thanks again, Omar.”

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