What is the Directional Bias Strategy?
The Directional Bias Strategy is a trading technique that involves establishing the direction of the market price and conditions which confirm the direction, then placing trades in that direction.
Identifying and confirming such a direction of the market price can be done using various ways like analyzing price action, chart study, support and resistance levels, and the use of technical indicators.
The Dow Theory states that the market will continue to move in that same direction until an external force equal or greater causes a reversal or a break in the trend. Therefore, once you have established and confirmed such a direction, you place trades in the same direction based on the directional bias but not an emotional response.
The issue of whether you should Buy or Sell at a particular time is addressed by the Directional Bias Strategy.
This is because Directional Bias will address both trend continuation and trend reversal hence helping you to spot and confirm the direction of the market price trend.
Once you have identified and confirmed the trend direction, you can easily transform that into profits, can’t you?
But how can you do this as a beginner?
Imagine having studied the charts, technically analyzed the price, and even observed the price action identifying confirming and the direction of the price. Won’t you place trades in the direction you have established with more confidence without having to react to fear, greed, and overconfidence?
Of course, you will, and that is the benefit of employing the Directional Bias Strategy in your daily Fixed Time Trading.
Establishing the Directional Bias in Olymp Trade.
As we have repetitively mentioned in the introduction, developing a Directional bias involves two steps;
- Identifying the direction of the market price.
- Identifying the conditions and rules which confirm the price direction.
Have you just identified that the market price is moving upwards? That’s right, but is it enough for you to begin entering Buy positions? Definitely not.
You need to go a step further to confirm if the price is really moving up. This you can do by bringing into play the rules you have developed for trading in your strategy. The rules you may have developed are based on several factors as we mentioned. Like the behavior of technical indicators and price action.
Never go for that trading opportunity before confirming the price direction. Trend confirmation increases your success rate and spares you the painful consequences of trend reversals you would have identified and escaped.
Use this strategy to not only identify the market direction but also confirm such a direction to ensure that you place trades under the right conditions to boost your profits.
We earlier mentioned that establishing a Directional Bias can be done using various ways like analyzing price action, chart study, support and resistance levels, and the use of technical indicators.
We shall pick the three most common ways of establishing directional bias and discuss them in detail. These will be;
- Establishing Directional Bias Using Moving Averages.
- Identify Directional Bias Using Price Action.
- Establishing Directional Bias Using Momentum Indicators.
1. Establishing Directional Bias Using Moving Averages.
You can easily use the Moving Averages to establish the direction of a trend.
Moving Averages are technical indicators which show the trend direction by predicting future price based on a number of past periods. They are therefore significant trend-following tools.
Moving Averages are of different types.
Exponential Moving Average, Simple Moving Average and Weighted Moving Average. Any of the three types is applicable in establishing Directional Bias, but Exponential Moving Average (EMA) is preferred because its calculations are based on the most recent data.
One of the most powerful and commonly applied Exponential Moving Averages is that of 20 periods. We shall apply it here to establish directional bias.
A 20-period Exponential Moving Average is applied on the chart and its behavior together with that of the price observed. If the price crosses the 20 period EMA from below upwards to begin trending above the EMA, then that is an upward price trend. Conversely, if the price crosses the 20 periods EMA from above downwards to begin trending below the EMA, then such is a downward price trend.
You will only qualify to call it an Upward or Downward Directional Bias after confirming those upward or downward price trends. One way to confirm them is when the price stays on the side of the EMA it crossed for more than four candlesticks. You can apply other own developed rules also.
How do you trade a Moving Average Directional Bias on Fixed Time Trades?
Trading Moving Average Directional Bias is quite easy. As mentioned above, when the price crosses to trend above the 20 periods EMA, such becomes an upward directional bias, and when that happens so that the price trends below the EMA, such is a downward directional bias.
Do not enter a trade immediately the price crosses to either side. Wait for the price to trend on the side it crossed to for about five candlesticks then enter a position.
That is one way of confirming an identified trend direction – ensure you confirm all price directions in Directional Bias.
If the price crossed to the upper side of the EMA and has remained there for about five candlesticks, enter a Buy Position. If the price crossed to the lower side of the EMA and has been there for about five candles also, enter a Sell position.
The trade duration should be 3 to 5 times the candlestick time frame.
This is to allow the price enough time to move without time restriction.
You realize that the price sometimes goes against you while still in the trade but will eventually go to the predicted direction if the trade duration was long enough? That’s the essence of having longer time frames.
2. Establishing Directional Bias Using Price Action.
Price Action is a very simple way of establishing Directional Bias too. You only need to observe how the price is behaving and that’s all.
When the price keeps moving higher and higher making both higher highs and lows, then such is definitely an upward price trend. Conversely, if the price keeps moving lower, making lower highs and lows, doesn’t that point to a downward price trend? Sure it does.
Remember you are not yet qualified to call it an Upward or Downward Directional Bias because you just identified a trend direction but haven’t confirmed it.
One way of confirming this direction of the market price is the use of a technical indicator like a Momentum Indicator. You can always apply other ways you have developed on your own as a trader.
How to Trade a Price Action Directional Bias on Fixed Time Trades.
Trading is as easy as establishing the bias. Where the price keeps moving upward, we identified an upward price trend, and where the price keeps moving downwards, a downward price trend.
Once you have identified such a price direction, refer to your confirmation rules or indicators like momentum indicators. If they confirm the price trend then enter that position.
In the case of an upward price trend, confirm if the momentum indicator shows increasing price momentum. If yes, then enter a Buy position.
Conversely, in the case of a downward price trend, confirm that the momentum indicator shows a decrease in price momentum. If it does, then enter that Sell position.
Remember to set your trade duration 3 to 5 times the candlestick time frame.
3. Establishing Directional Bias Using Momentum Indicators.
We mentioned the use of Momentum Indicators as one of the ways to confirm the upward or downward price trend while observing Price Action. The use of Momentum indicators is thus a confirmation tool in order to complete an identified price trend using Price Action, qualifying it as a Directional Bias.
An upward price action forming higher highs and lows should be backed by the momentum indicator showing a rise in value from the previous average value. That way, the upward price trend has been confirmed as an upward Directional Bias and you can then proceed to enter a Buy position.
A downward price action forming lower highs and lows need the backup of the momentum indicator showing a fall in value from the previous average value. This will confirm the downward price trend as truly a Downward Directional Bias after which you can proceed to Sell.