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How-to-use Continuous trend indicator

Learn to use the indicator on a chart, using single and multiple time-frames and how to use the indicator in a trading strategy

“Trend is your friend”, is a popular adage. Trading in the direction of trend is equally popular too. In fact a vast majority of the Commodity Trading advisers (CTAs) have publicly acknowledged that they use trend following strategies. Trend determination, however, is another matter.

Ask any two traders, what the current trend is, and chances are that you would get two different answers. To make matters worse, there are hundreds of methods, proprietary indicators, and philosophies about trend determination or measurement. It is therefore, easy for a trader to get confused by the various interpretations of market trend.

To trade trend following strategies successfully, traders must filter out the noise, and find a consistent set of rules to determine market direction or market trend.

One such method is both a classic and the oldest i.e. it has withstood test of time for over a century. It is quite simple too. In this method, you draw a line joining two or more lows, and then draw another line joining two or more peaks. The direction of these lines will indicate market direction or trend, as shown in the picture below.

Once the trend is known, you can determine the direction of your trade at the next opportunity.

This has worked great for most people, and me too. However, I have come across some limitations. I had to

• Ensure that I do not miss any peak or lows in drawing lines
• Train myself for hours to get the trend determination correct
• Retrain, after costly mistakes ( incorrect trend direction )
• Ensure I am at my peak with attention and focus to not make any mistake when drawing trend lines
• Remember to updates trend lines every day or intra-day as price action during the day may have changes the direction of market

For the trader in me, these are too many decisions, and expenditure of focus away from trade execution. And the programmer in me, wants to automate trend determination as it is repetitive and prone to human errors, which are sometimes very expensive errors.

To address these challenges, I developed, a trend indicator, Continuous Trend Indicator, which is based on the classic definition of the trend. See the below picture with hand drawn trend lines and the Continuous Trend Indicator on a candlestick chart.

I have been using for Continuous trend indicator for the trend analysis in my trading for past three years. Now, I am making this tool available to everyone.

As you can see, the indicator is created with following rules:

• A series of higher highs and higher lows, indicate uptrend
• A series of lower highs and lower lows, indicate down trend
• Rest of the time trend cannot be determined, or it can be called neutral, sideways, consolidation or distribution etc.

In the following sections, we will explain on how to apply the Continuous Trend Indicator on charts, and use the color changes to understand trend changes.

Applying indicator to a the chart

Assuming that you have subscribed to Continuous trend indicator on Trade station App store, and you have used Trade station indicators before, you should be able to follow these instructions easily.

If you have not subscribed to the indicator, please do so by visiting Trade Station App Store. If this is the first time you are using Trade Station platform or first time using an indicator on Trade Station, please use help section on Trade Station to learn about how to apply a indicator on a chart.

• Open a chart. In the example picture, we have used E-mini Dow Future symbol YM. You can choose any symbol among Stocks, Futures or Forex markets
• Select the interval (time frame) for the chart . In the example picture, we have picked a daily time frame
• On the Trade Station menu select as follows: Insert->indicator. You will be presented with a window: Insert analysis technique, with indicator tab selected
• Select Continuous Trend Indicator among all the indicators (See highlighted text in the image below)

• Ensure that the check-box, “prompt for format “ is checked ( see image above)
• Click OK button. This will open up Format indicator window ( see image below)
• You can modify the inputs of your choice. For details on what each of them mean, please refer to the Input format table. If you are unsure, you can leave them unchanged

 

Click OK, and you will see you chart with Trend plotted below the bars on your chart. (see image below).

If you have not changed the inputs for the colors, green color plot shows an up trend; magenta color plot indicates a down trend; and the white color of the plot indicates that there is no particular market trend present.

How to read market direction/ trend using Continuous Trend indicator

As you have seen, Continuous Trend Indicator uses high and low swings to determine the peaks and lows in the chart. In order to understand how the indicator analyzes and determines trend using the swing points and price action, please add two additional “Show-Me” studies on the chart, “Pivot high” and “Pivot low”. These are free studies provided by trade station platform. For a good comparison, please ensure that input left strength and right strength on these show-me studies matches with that of LowStrength and HighStrength inputs on the Continuous Trend Indicator.

Following picture show show-me studies and along with Continuous Trend Indicator on a chart. Each magenta dot on this image, indicates a swing high, and cyan dot indicates swing low. We will now use these dots to analyze trend direction and understand how Continuous Trend Indicator uses them to determine trend.

At the top left of the above image, you can see two magenta color dots, from the “Pivot high” study and two dots in cyan color from the “Pivot Low” study. As you can see that these dots show the pattern we are looking for an uptrend i.e. a series of higher highs and higher lows. Therefore the plot of Continuous Trend Indicator continue to be of green color on subsequent bars ( past the second magenta color swing high plot).

As we move further, a large red candle break below both the swing lows. This price action forms a new low, and therefore,market  trend is no longer an up trend. Even though, we do not have series of lower lows and lower highs, the trend can be called down trend. The change in trend direction is shown with plot color change from green to magenta.

Subsequently, you can see two lower high ( magenta dots), and lower lows ( cyan colored dots), as indicated by hand drawn white lines joining these swing points. The trend plot therefore, is shown in magenta color indicating down trend.

Next, a green bar break above one lower high only. This does not match with either uptrend or down trend definition. Therefore, we no longer know the market direction. This is indicated by the white color of the trend indicator plot.

As we move right, we now have two higher highs and two lower highs ( see white color line drawn to join the swing points). This meets our up trend definition of up trend. The color of the Continuous Trend Indicator now change from white to green.

Using trend indicator in a strategy

As you know the continuous trend indicator by itself is not a trading strategy or trading system. However, it can be used as a filter in trading strategies.

To understand how Continuous Trend Indicator could be used in strategy, we will use following example strategy, which is fairly common among traders. The main objective is to find a trade in the direction of the trend. ( This does not indicate an endorsement of this strategy as a successful trading strategy)

Following are main setups (entry-exit-stop ) of the strategy:

• Up trend- break out
  1. Long entry-when trend changes to uptrend as a result of price break-out of swings highs
  2. Exit when the up trend changes to neutral or down trend
  3. Use a custom stop loss strategy based on the percentage of the equity of risk or below a swing low or both
• Uptrend- swing retest:
  • Entry- When trend is up and the price retests a swing low, enter long
  • Exit when aswing high is tested
  • Stop loss below the swing low
• Down-trend – trades break out
  • Entry-when trend changes to down as a result of breakout of swings lows, enter short. (This can occur intra-day or during the candle interval)
  • Exit when the down-trend changes to neutral or up-trend
  • Use a custom stop loss strategy based on the percentage of the equity of risk or price based or both
• Down trend- swing retest:
  • Entry- When trend is down and the price retests a swing high, enter short
  • Exit when the swing low is tested
  • Stop loss above the swing high

You can see a few possible trades shown on the following image of the chart. This is an e-mini Dow futures chart.

Using trend indicator with multiple time frames

If you want to calculate trend using Continuous trend indicator on daily time frame, but want to use a 60 minute time frame to trade, you need to use following trick to make this happen on trade station.

• Bring up your favorite time frame chart for a symbol, i.e. 60 minutes or any other time frame

From menu bar, select: insert → symbol . This will bring up a insert symbol dialog window.

• Make sure that the prompt for format check-box is selected as shown below
• On the format window, select general tab
• Select daily or any interval you want to use for trend calculation, as show in the below image

•  On the format window, select “scale” tab
• Select hidden the drop down box, sub-graph. This will ensure you that daily chart is not shown on the 60 minute chart

• Now use the steps of inserting Continuous trend indicator shown in the “applying indicators to chart” till the point the Format input window is shown
• On the Format input window select the General tab, and select the daily chart from the drop down “Base study on” as shown in the image below-

• Now select scaling tab, Select sub-graph 1 from the drop down as shown below.

• Now you should see a higher time frame (daily) continuous trend indicator on a smaller time frame (60 minute) chart.

You can of course, experiment with various other time-frames or intervals to meet your needs.

Limitations/ precautions in using the trend indicators

Continuous trend indicator is not a trading system or strategy by itself. It can helptrading strategies with automatic analysis and using consistent a set of rules for trend determination.

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