As an expectation for the direction of a given asset.

A bias can be formed based on a clear set of rules or it can be formed mainly by subjective impressions. Either way you have a bias, but only a structured one gives you an advantage in the markets. The other has the risk to misguide you.

In my last article we looked on the relative strength index and how it can be applied it in our trading. This post touches a different aspect of trading, which in my opinion is of very high importance.: Directional Bias. Having a structured approach to determine the direction of my bias helps me filter out a lot of noise and sharpens my execution in trading. But first and foremost let us start with the basics.

What is a directional bias?

As in most aspects of life we favor something over something else, we have preferences or even prejudices against things, persons, believes and many more things in life. This either comes with a clear reasoning for it or most often without a clear one at all. We just have the feeling that something is better or will develop in a certain direction and not the other.

Same applies to the markets. You all know Bitcoin maximalists who are full bull on Bitcoin’s price and its impact on the world. Their directional bias is bullish all over the place. Contrary there are people with a directional bias to the downside, in the extreme case that it will go to zero. Of course, these are extreme positions, but it shows more clearly that people are always biased to some extent, some more drastic and inflexible then others.

Does it mean a directional bias is bad? No, not at all. The opposite is the case. In my opinion and those of many other traders, many of them much more experienced than me, it is of high advantage to have directional bias for an asset or a market. But it should not be carved in stone for all times. It is much more important to have a system in place to determine what your directional bias at the moment should be. Your directional bias should be fluid based on set of criteria and the asset you are looking at. Being flexible about your bias is a key trait here. As markets change in trends. Stubbornness on the opposite is your downfall.

In the following lines I will present you some widely applied strategies to determine the directional bias and will also show you some of my favorite systems that I developed together with other traders.

The directional bias helps us to enter trades and counter trend trades with the clear awareness of their nature.

Directional bias should be an essential part of a trading system. It helps you getting a clear understanding for the current market situation. You can filter down to those assets, coins or markets that are worth a closer look. It also helps you to understand whether you trade with or against the general trend. This might affect your risk management and trade selection.

Now let us dive more into the different aspects of the directional bias, discover some common approaches and also have a look at time frames.

How can you determine the directional bias?

So far we learned what a directional bias is and that it is an important component of any trading strategy. Now, we should focus on how we can determine a directional bias. Always have in mind, everything I try to explain about the directional bias is solely based technical analysis. For example, you could also derive your bias from fundamental aspects, this is not part of this post and also not part of my expertise.

I will not try to teach anything I do not have a proper knowledge and experience about. The list of ways to determine a directional bias I will present in the coming lines are from complete, there are many more around and each method has it rights to exist and probably helps a trader somewhere around the world to follow his or her system successfully.

It is on you to find the one that suits best and that makes you feel comfortable to trade with.

Different approaches

Now let us get to some of the most common concepts to determine the directional bias of an asset. I will cover the usage of moving averages and their crossover, as well as basic market structures and momentum indicators.

Moving Averages

The application of moving averages is probably one of the most discussed topics around and many traders use them on a daily basis. Whether it is as a dynamic line of support and resistance or some sort of crossover of two or even more moving averages. There are also different forms used, like the simple moving average (SMA), the exponential (EMA) or weighted moving average (WMA) and for example the hull moving average (HMA).

On moving averages alone, I could write dozens of articles and wouldn’t cover all different variants and ways of applications. For this post I decided to focus on one of the most famous ones, the Golden or Death Cross and one less known in my opinion, the Hull Moving Average.

Crossovers

The golden cross is pattern in which a shorter moving average crosses above a longer moving average. For our example let us use a short MA with the length of 50 and long MA of 200. So once the MA(50) crosses above MA(200) we derive a bullish directional bias from it, the so called golden cross. The opposite would occur, once the MA(50) falls below the MA(200) and we change our bias to a bearish direction. This event is called death cross. In the screenshot below I used the mentioned moving averages (50/200) and the directional bias is highlighted in green (bull) and red (bear).

You apply this approach to basically each lengths for the moving averages, as long as one is shorter than the other. Popular pairs for moving average crossovers are:

• 10/20

• 20/50

• 50/100

• 50/200

• 100/200

You can apply those no matter if you use a simple moving average (SMA) or an exponential moving average (EMA). 

Price to Moving Average

Other combinations are of course possible, as well as the application of different variants of moving averages, e.g. the exponential moving average (EMA). A type of moving average I frequently use in my trading. Especially the EMA(200) as a general directional bias indicator, if the price lives above the 200 EMA on a give time frame I tend to look at the assets as more bullish. A price below the moving average gives me a more bearish perspective on the current situation. For this example, i will omit a screenshot. I think the idea is clear and I encourage you to look at it yourself.

Hull Moving Average (HMA)

One moving average you probably do not hear about that often is the hull moving average (HMA). Named after Alan Hull how developed, is a rather fast and smooth moving average that is based on the weighted moving average. For Bitcoin for some reason the HMA with a length of 80 periods works remarkably well as a directional bias indicator (DBI). As you can see below, once the price of Bitcoin climbs above the HMA(80) we can assume a bullish bias (green) and vice versa once the HMA is lost by the price for a Bitcoin we have a bearish (red) outlook on the market. In my example and based on my own back testing I like the Hull with a length of 80 the most for Bitcoin and other cryptos, but I would like to encourage you to play around with other options as well. Maybe other lengths sharpen the results even better and give you a much better directional bias. If so, give me a hint ;) The hull moving average is available in tradingview as a standard indicator, just look it up. Same for all other types of moving averages and indicators I mentioned in this article. Sometimes I will come up with my own indicators, if so I will highlight this aspect. If you want to learn more about them, just read through my other post or drop me a message.

In comparison to Golden or Death cross based on the 50/200 pair this moving average works solely on one indicator and whether the price is below or above the the moving average. It also reacts much quicker, which makes it extremely handy if it comes to volatile markets like cryptocurrencies. Quick reaction has its pitfalls, especially in ranging markets or weak trending phases these DBIs tend to create false signals and your bias might flip often without having a clear direction. Therefore, test the different approaches yourself and learn where their strengths and most importantly their weaknesses are. There is not one perfect indicators, I cannot stress this enough.

As you can see moving averages cannot only be used to trade on them directly, but they can help you determine the directional bias of an asset.

Market Structure

Market structure is representation of the price action of a give assets over given time frame. The price moves up, the price falls down or it moves sideways without any clear direction. After a certain time we have the possibility to recognize certain patterns in the individual candles. These can be bullish, bearish or indicate a ranging market.

A bullish market bias usually is characterized by higher highs (HH) and higher lows (HL). This happens if the price for an assets starts to increase and climbs higher over a period of time. Also, markets tend to move in waves and not going up in straight lines.

This gives us the chance to evaluate the tops and set backs in price. If the top of a wave is higher than the top of the wave before, we have a higher high. Is the bottoms of the wave higher than the bottom of the one before, we have a higher low.

As long as this pattern is in place, a HH follows a HL we can derive a bullish directional bias from it. A new trend is established once we have a HH and a HL (see the example on the right).

Bearish directional bias based on the market structure can usually be determined by lower lows (LL) and lower highs (LH). The approach works exactly opposite to the bullish market structure. The market only reaches lower highs and the lows are also lower. The overall price action points to the downside.

As well as above we can determine our directional bias based on the general market structure. In this case we would have bearish outlook on the market and probably look for short positions. Experienced traders might also look for quick long scalps, but would be cautious by doing so as they are aware of the directional bias they currently hold.

In the case that no clear structure can be determined. For example, a new high is followed by a new low, then a lower high is reached, followed by a higher low. We can assume that the market currently has no clear trend and is maybe moving sideways or in a range. Our directional bias would be neutral.

Momentum

Beside the already mentioned options of using moving averages or market structure, you can also use momentum indicators for determination of your directional bias. For this article I will only briefly touch the momentum section. In my first article I did a deep dive into the application, structure and use case of the relative strength index and also touched the directional bias in there.

To wrap it up the RSI could help you determine the directional bias based on the following rules:

• A bullish trend is an RSI between the levels of 80 - 40.

• A bearish trend is determined by a RSI between 60 -20

For more content on the RSI, its key levels and application, check out my article.

There are many more momentum indicators like the Stochastic, that I will not cover here.

The role of time frames

Which time frames you use to apply your directional bias depends on you. Are you a high time frame trader or a low time frame day trader or scalper. Generally speaking the high time frames usually have a higher significance. Also most traders will check the Daily most often and derive their DB from it.

This is also true for me, I use the daily time frame with a weekly confirmation to support bias. Depending on how strong the bias is towards one direction I will go lower in the time frames. For example, strong bull trend on the daily will bring me down to the four hour time frame to find entries. If we are in a parabolic market I would even go lower, to the one or two hour time frame and look for entries.

A little bit of everything and mixed for crypto (My Approach)

Directional bias is an important part of my trading and a continuous process of optimization. My current approach is based on a combination of different indicators from the momentum and the moving averages section.

First I use the the 8 EMA and the 34 EMA and combine it with a several momentum indicators and apply moving averages on them, like the 9 SMA and 45 EMA on the RSI. Last but not least there is the FSR, a variant based on a short RSI and a simple momentum indicator. If you want to learn more about, just give me shout via DM and I will let you know.

Final Considerations

Directional bias should be part of your trading system. No matter what directional bias framework you choose or how you determine it, the most important aspect is, it should fit to you and your general approach to trading. It should be a supporting instrument to improve your trading and not an additional burden without an effect to your trade selection and performance.

As with all indicators and systems none is fool proof and none will work 100% of the time. It is all about creating an edge over the long run and sticking to a certain system, follow and challenge it constantly.

A well chosen directional bias indicator will help you to filter for those setups worth a second glance. The additional confluence of a directional bias most likely will help you, but do not rely on it as a sole factor of success.

If you are new to trading and even if you are around for while. Remember to keep it simple. Over engineering often does more harm than good.

And now a few final words my own interest, I try to provide all my content for free and I will stick to it. So, if you enjoy reading my post and find the stuff helpful I would appreciate it if you spread the word and follow me on Twitter, Telegram and every where else. Cheers!