Trend Trading: Trend > Level > Price Approach

Over years of antifragile trend trading, I’ve developed what I call The Trend > Level > Price Trading Approach.

This approach and its variations form the basis of the highly prolific Intraweek Trading and Microtrend Trading Systems.

Trend Trading
Financial data analysis graph over world map. Horizontal composition with selective focus and copy space.

It’s basically a way to determine the ruling trend. Using this approach allows you to identify signaled and confirmed trend changes on a market and time frame of your choice.

The Trend, the Level, and the Price are three conditions. These need to be met before the market confirms the trend change. Below I discuss each of the three conditions separately.

I summarize the gist of this approach as follows…

If the market meets all three conditions for a change in the trend, you can take a position in the opposite direction of the move that just ended.

I have tested this mainly on stocks and stock indices, and on the daily, 4h, 1h, 15m, and 5m charts.

Trend Trading: Before We Start

I use the term ‘break’ quite a bit in what follows. What does this mean? How does the market or a candle ‘break’ a line or level?

I’m assuming that you know how candlestick charting works.

If you don’t, don’t worry. It’s really simple, and you’ll find many videos on Google that will get you up to speed in no time.

Very simply, a candle on a chart indicates four important price levels for the relevant period — the Open, High, Low, and Close (OHLC).

Trend Trading: Candlestick Charting

Time Frame

The period (or time frame) can be any duration of time for which your trading platform provides data. The most important periods are daily, 4h, 1h, 30m, 15m, and 5m.

The high is the very top of the upper wick of the candle. Take the 11:45 candle on a 15-minute chart as an example. The very top of the wick indicates the highest price that the market traded at between 11:45 and 12:00.

Similarly, the low is the very bottom of the lower wick.

The body indicates the open and the close. For a green, bullish candle, the open is the bottom of the body and the close is the top.

The green color indicates that the price moved up during the relevant period.

And for a red bearish candle, the open is at the top and the close at the bottom of the body. The price moved down during the period represented by the candle.

For a break of a line or a level, we need a candle to close on the other side of that line or level as the prevailing trend when the candle started.

You need to understand where the Close of the candle is for the candle you are inspecting. For instance, in a downtrend we need a green candle’s top of the body above the line, i.e. the close is above the line.

And vice versa of course.

Now that you understand how a line or level is broken, let’s look at the three conditions that I use in the identification and trading of market trends.

Trend Trading Condition 1:

TREND — Trendline

For trend identification, I use the simple, and humble trendline. It is one of the oldest tools in the trader’s toolbox, and still one of the best.

But be warned, while it looks simple when drawn on a chart, the drawing of a trendline is an art and a science.

I have spent thousands of hours working with retail trader coaching clients. I spent most time drawing and explaining trendlines and the resulting trend channels.

When drawing trendlines, I follow the following approach:

A trendline is a diagonal support line below an uptrend. Or a diagonal resistance line above a downtrend.

The price pulls back to the trendline. Buyers or sellers then tend to move it further along in the original direction of the prevailing trend. That is, of course, until the trend changes.

In our case, this happens when the market breaks the line. We get formal trend change confirmation only when the market meets all three conditions of the Trend, Level, Price approach.

How to Draw Trendlines

You should only ever draw trendlines between an identified high and low point on a chart. Don’t take into account any price action that falls outside the identified range.

For instance, don’t draw your line below the price action that comes after the high in an uptrend. This might be part of the new downtrend, and you need to see if your line holds.

The way I interpret a trendline is to take all price action into account. I think it’s a little old school, but some traders draw trendlines below the bottom of the candle body instead of below the candlewick for an uptrend (vice versa for a downtrend).

I prefer taking all price action into account by drawing it below wicks. Otherwise, the choice of time period plays a larger-than-wanted role in where my market orders end up being.

Also, as mentioned, the market didn’t change trend unless all three of my trend identification conditions are met.

An Example of Moving Trendlines

For instance, consider this example:

Trend Trading: Trend Lines on the Daily Chart of MNQ

The image shows the an up-move on the Micro E-Mini Nasdaq-100 Index Futures ($MNQ). The first condition — or TREND part of the TLP approach — of a broken trendline was met at points A, B, C, and D.

These points are indicated on the graphic. Apologies if it’s a little small!

The market didn’t meet either of the other two conditions — LEVEL or PRICE — at any of these points.

The market then continued in the original direction (up) and made new highs. The trendline was be moved to incorporate all price action between the low and (new) high.

The lowest, least steep line is the ultimate trendline that was in force when the other two conditions were eventually met for a short entry. The relaxing of the trendline indicates that while the market is still moving higher, it has lost some momentum and speed as the trend matured.

Please note, the trendline can also be tightened as the rate at which a price increases picks up momentum or speed. This is actually more common than a relaxing trendline.

Okay, now that you have a basic understanding of trendlines, let’s look at the second condition.

Trend Trading Condition 2:

LEVEL — An Important Level on the Chart

The Level part of TLP serves as the second condition that I use to identify trends, or changes in trends. This refers to some important horizontal chart level.

Trendlines are diagonal and take into account the direction and momentum of a market move. Consequently, a trendline can break even if the market just stops moving.

As time passes the price level will move horizontally and break the line when one of the candles eventually closes on the other side of the line.

So, we need to identify some very recent horizontal level on the chart that the price needs to move and close beyond — break — to confirm the change in direction.

This needs to be some form of a fairly significant level, like a price low or high of a certain period, or a place where market buyers or sellers showed a willingness to commit.

One (pretty fast) option is the Low of the Highest Candle (LOHC) of an uptrend or the High of the Lowest Candle (HOLC) for a downtrend. We often use this for faster trend changes or intraday trading.

I used that for a few years (and I still do for some systems). But the following seems more useful today…

Moving from HOLC LOHC to HOPS LOPS

A slower option is to use the Low of the Previous Swing (LOPS) of an uptrend or the High of the Previous Swing (HOPS) for a downtrend. This is similar to using the LOHC or HOLC, while attempting to ignore the time frame used for candlestick charting.

A third option is just to identify some level on the chart where the market showed some resistance to moving further up or some support for a falling price. Maybe something like a previous swing high in an uptrend, which indicated that sellers were willing to get involved in the market at that level (and that is why the market turned around there).

So, after the market breaks the important diagonal and horizontal level, we need further (final) confirmation before we can say, with certainty, that the trend has changed.

Let’s now consider this final Price part of the TLP approach.

Trend Trading Condition 3:

PRICE — Price action adjusted for volatility

The Price Condition allows for some price action.

It’s almost like you have drawn two lines in the sand, and the market has crossed them. But before you can believe it is serious about moving, you need to see it walking away from those lines…

Trend Trading: Volatility
Financial chart on digital display

And you do this through placing your trade entry order a certain distance away. If you are waiting for confirmation, use a stop order — not a limit order. If your order is filled, the price action has confirmed that the market wants to move.

It seems serious about moving in the direction of the new trend.

This also gives us a great chance to adjust for volatility. I use the Average True Range (ATR) for 14 chart periods as a measure of volatility. No surprises there…

So, you take the extreme of the candle that meets the second of the first two conditions. Or that meets both simultaneously.

In an uptrend, this will be the low of a candle. In a downtrend, this will be the high of a candle.

Your entry order (or stop and reverse order) is now placed X times ATR beyond the candle extreme. Normally X is somewhere in the range of 0.5 to 1.5.

For each market we trade we test the appropriate level of X, the ATR Multiplier. This ensures we are placing orders at a safe distance to confirm the new trend.

X tends to be higher in more choppy markets, like Forex markets, and lower in more trending markets, like stocks or stock market indices.

Use this Trend Trading Approach On the Market

So, there you have it! I described it briefly, but that is the gist of the Trend > Level > Price Trading Approach. This approach formed the basis of many trading systems that brought many traders much happiness and prosperity.

Use it, and allow it to do the same for you!