Trend is your friend, but truth is more precious

Trend is your friend, but truth is more precious

We build a combined trading system taking into account the basic principles of technical analysis and trading

When a novice trader enters the market, he has a natural desire to buy what is cheap and (or) sell what is expensive. But more experienced colleagues advise using the principle of “ trend is your friend, follow the trend ”, analysts give recommendations within the framework of the current trend, and market-sharp participants in market battles compare the desire to go against the crowd with an attempt to stop a moving tram with your nails or catch falling daggers on the fly.

Essentially, a newcomer is offered to work on the principle of “ buy what is expensive and sell even more expensive ” in a “bullish” trend and “sell what is cheap, and then close the position when the asset becomes even cheaper” in a “bearish” trend. How to be? Forget about your perception of the market and follow the tips? Or decide that you have your own, different from others, path? The answers to these questions can be given by a trading system based on the use of reversal patterns for trend trading.

Under the trend is understood to be a series of rising highs or falling lows. Moreover, any trend can be both short-term and medium or long-term. The first of them is nothing more than a correction to the second, the second to the third. If we use reversal patterns as part of a short-term trend, then essentially no deviation from the principle “trend is your friend, trade according to the trend” will not occur. The main task will be to find points of depletion of the corrective movement. A typical example is the work of the Three Indians model on pullbacks. 

Let me remind you, we are talking about three rising highs in the bull market or three lowering lows in the bear market. The inability of buyers (sellers) to push quotes higher (lower) is the first sign of their weakness. As a result, the probability of a reversal increases. It should be remembered that a clearly defined trend is a prerequisite for the operation of the system. For example, in the case of the GBP / USD pair, there was no doubt that the bears would dominate this summer. The appearance of the “Three Indians” pattern on the hourly chart in August could signal the opening of a short position. 

Three Indians on correction on GBP / USD chart

An aggressive approach involves entering the short at the minimum level of the previous Indian (the bar on which the previous peak is fixed), and the conservative approach – at the breakthrough of diagonal support built through correction lows. A protective stop is placed just above the third Indian. It is recommended to exit the position taking into account harmonious trading models. In particular, in the example with GBP /USD, the “Shark” pattern was played: when its target reached 113%, the short position was closed. 

Strategy based on the Three Indians pattern

For greater confidence in the need to conclude a transaction, a trader may need additional confirmation signals. In combination with the Three Indians, divergence on trend indicators works well, in particular, on MACD. The discrepancy in the dynamics of the currency pair and the calculated indicator served as the basis for sales of the pound against the US dollar.

Three Indians and MACD Divergence

Thus, do not immediately panic and say that the important principles of trading contradict each other. Using technical analysis tools, you can always find a compromise and build on its basis a unique trading system that will bring stable positive financial results. Do not be afraid to experiment!

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