Optimizing Trend Trades

Price action over the past week was not the greatest. While I didn’t notice any strong signals nor did I make any major plays, I think there’s an opportunity here to talk about how I can go about optimizing this trend trading strategy.

The entry signal on the H1 timeframe is largely dependent on the price action observed on the daily timeframe. Just because price crosses above a trend line on the H1 timeframe, that does not necessarily mean it’s a valid entry signal.

I’ll use the AUDCAD pair as an example to show what I mean. Below is a chart of AUDCAD across two different timeframes - Daily on the left and H1 on the right.


AUDCAD

There are a few things happening in this chart. Let’s start with the H1 timeframe on the right-hand side.

  1. Price crosses above the descending trend line (DTL), which signals that upside momentum is resuming.
  2. EMA20 is expanding away from EMA60, which is another indication that momentum might be ramping up.
  3. Price is crossing above EMA20 from below, which is confluence for an upward trend.

These observations on the H1 timeframe show confluence with the daily timeframe.

  1. Price is above EMA20.
  2. EMA20 is above EMA60.
  3. Price is trying to break through a key level.

Using the EMA20 and EMA60 combination is a great way to identify trends and enter in the direction of the trend when the counter-trend move is over.


However, not all trend trades are the same. The vertical dotted line shown below provides a clearer indication of what to look for on the daily timeframe.


AUDCAD

I realized very recently that the daily candle matters a lot. If the H1 signal exists where the daily timeframe is showing a string of bearish candles, then it’s not ideal to enter based on the H1 signal.


In this case, the bearish bar is an inside bar. This is good to see as the intraday should show a ranging behavior. If price breaks the high or the low of the inside day bearish bar, that will help determine the momentum.


Here’s an example of a sub-optimal signal.


AUDCAD


The vertical dotted line shows an inside bar. If you were to try and trade with overlapping bars present, it’s very likely that the H1 timeframe signal won’t be strong.


This is something I’ll be more conscious of as I do my scans to take fewer trades, focus on one trade at a time, and really focus on clean and strong signals.