How to Recognize Trends in the Market

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Simply put, short-, intermediate- and long-term trends are the three kinds of trends that we see each day in our study of technical analysis. “A trend is your friend,” is just one of the sayings that have come out of the study of primary as well as secular trends. Some people try to identify trends by looking at averages. Given the understanding that the psychology of the markets actually moves the markets, we can acknowledge that psychology develops and ends the trends we are going to look at today.

Learning how to identify the trend should be the first order of business for any student of technical analysis. Most investors, once invested in an uptrend, will stay there looking for any weakness in the ride up, which is the indicator needed to jump off and take the profit.

Primary Markets
The bull and bear markets are also known as primary markets; history has shown us that the length of these markets generally lasts from one to three years in duration.

Chart Created with TradeStation

Secular Trends
A secular trend, one that can last for one to three decades, holds within its parameters many primary trends, and, for the most part, is easy to recognize because of the time frame. The price-action chart, for a period of 25 years or so, would appear to be nothing more than a number of straight lines moving gradually up or down. Have a look for a moment at the chart of the S&P 500 below. The chart shows the progress of the markets from the 1980s through the mid-2000s, showing the rise of the market leading up to the turn of the century.

Chart Created with TradeStation

Intermediate-Trends
Within all primary trends are intermediate trends, which keep the business journalists and market analysts constantly searching for the answers for why an issue or a market suddenly turns and heads in the direction opposite to that of yesterday or last week. Sudden rallies and directional turnarounds make up the intermediate trends and, for the most part, are the results of some kind of economic or political action and its subsequent reaction.

History tells us that the rallies in bull markets are strong and that the reactions are somewhat weak. The flip side of the coin shows us that bear-market reactions are strong and that the rallies are short. Hindsight also shows us that each bull and bear market will have at least three intermediate cycles. Each intermediate cycle could last as little as two weeks or as long as six to eight weeks.

Long-Term Trends
To determine the long-term trends that appear on the charts of their favorite stocks, veteran analysts will use a stochastics indicator. My favorite, however, is the momentum indicator called the rate of change (ROC) (which you can read about in Rate of Change):

The normal time frame for ROC measurement is 10 days. The ratio to build the ROC indicator is as follows:

Rate of Change = 100 (Y/Yx)

“Y” represents the most recent closing price, and Yx represents the closing price a specific number of days ago. So, if the price of a stock closes higher today than it did 10 days ago, the ROC value point will be above the equilibrium, thus indicating to chartists that prices are rising in that particular issue. Conversely, if the price in today’s session closes lower than it did 10 trading days ago, the value point will be below the equilibrium, indicating that prices are falling off. It is safe to say that if the ROC is rising, it gives a short-term bullish signal, and a bearish sign would have the ROC falling. Chartists pay great attention to the time period in the calculation of ROC. Long-term views of the market or a specific sector or stock, will use perhaps a 26- to 52-week time period for Yx and a shorter view would use 10 days to six months or so.

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You can see that, by changing the number of days or weeks as a time frame, the chartist can better determine the direction and duration of the trend.

The Bottom Line
Markets are made up of several different kinds of trends, and it is the recognition of these trends that will largely determine the success or failure of your long and short-term investing.

How to recognize a trend?

Welcome on the forextraderportal.com. In my lessons on Price Action, I often say: “Trade with the trend”, “opening positions with the trend increases the chances to succeed in the deal,” etc. But how to recognize this trend?

What is a trend?

Trend – is a general direction of the market. No market does move in a straight line, so we need to identify the general trend: upward or downward.

The opening of the trade in the direction of the trend helps to increase the chances of success. Of course, Price Action setups against the trend work out pretty good too, but when trading with the trend, we can be more relaxed since the risk of getting a loss is significantly reduced.

There are plenty of forex indicators, systems and theories to determine the direction of the current trend in the market. But trade by Price Action implies a rejection of indicators and monitoring of the situation on the market on the basis of the main indicator behavior – price. Therefore, when determining the trend, we will be guided only by the price, on the basis of the most classic interpretation of the trends in the forex market.

Uptrend

The uptrend is series of rising peaks (highs) and bottoms (lows)

On the basis of this rule, we determine whether there is a bullish market trend. When there is no presence of rising highs and lows anymore – we are looking for SELL opportunities.

On the upward market after the previous low breakdown possible trend change to bearish can be considered.

Downtrend

Downtrend – series of declining peaks (highs) and bottoms (lows).

From this, we deduce a rule:

We can think of a reversal of the downtrend when the market broke through the previous high.

I do not understand what trend is now, what should I do?

Quite an important point – if you can not understand what trend is now, and it is often the case in periods of consolidation when the market moves in a horizontal direction, then just do not do anything .

Many people make the mistake of believing that they always have to trade. No way. If you take only the “beautiful”, clear and understandable setups, this will be much more profitable than trying to grab each point. Be selective in your trades, if you don’t understand where the market is moving now – do not trade, wait for the situation clarification.

When to enter the market?

As we said at the beginning of this article, the market does not move in a straight line. There will always be setbacks and periods of consolidation. In such periods you should enter the trade, guided by the basic direction of the trend.

Yes, sometimes Price Action setups are formed on the pulse movements and work out well, but safer and more profitable are the entries on the pullbacks.

That’s all, thank you for your attention. And remember – “Trend is your friend” ��

Trading with the Trend – 6 Ways To Identify The Direction Of The Trend

Trading with the Trend – 6 Ways To Identify The Direction Of The Trend

Trading with the trend is trading with the flow.

When the prevailing trend is up, why would you want to look for short entries when buying might result in much smoother trades?

Many amateur traders, even when facing a very obvious trend can’t stop trying to predict reversals and burn their fingers going counter-trend, whereas they could have made so much more money by simply joining the trend.

But even if you are not a trend-following trader, you can combine the concept of trading with the trend and with momentum with your regular trading approach. Knowing where the price is going and which side of the market is stronger is an important trading skill.

To be able to correctly read price action, trends and trend direction, we will now introduce the most effective ways to analyze a chart.

Intro: The different market phases

Before we learn how to identify the trend, we should first be clear what we are looking for.

It may sound too simplistic first, but stick with me for now and you will soon see the power of this analysis approach.

Markets can do one of three things: go up, go down, or move sideways.

Of course, how fast (or how slow) and how long the individual periods last changes all the time, but the price can only do one of those three things.

The picture below shows you the three possible scenarios and how the market keeps alternating between the phases. We will shortly see how all price patterns and chart formations are also made up of those moves.

1. Trading with the trend: The Line Graph

Most tradersВ only use bars and candlesВ when it comes to observing charts, but they completely forget about a very effective and simple tool that allows them to look through all the clutter and noise:В the line graph.

The purpose of bars and candles is to provide detailedВ information about what is happening on your charts, but is this really necessary when it comes to identifying the overall trend? Probably not.

A trader should zoom out from time to time (at least once a week) and also switch to the line graph to get a better and clearer picture of what is currently happening. And since our only goal here is to identify the trend direction and become aware of the overall situation, the line graph is a perfect starting point.

2. Trading with the trend: Highs and lows

This is my personal favorite way of analyzing charts and although it sounds very simple, it is usually everything you need to understand any price chart.

Conventional technical analysis says that during an uptrend you have higher highs, because buyers are in the majority and push the price higher, and lows are also higher because buyers keep buying the dips earlier and earlier.

It works the same during a downtrend: lows are lower when the seller surplus moves price lower and highs are lower becauseВ sellers sellВ earlier and buyers are not as interested.

Chart example: Head and shoulders vs highs and lows

Highs and lows define all market patterns and chart formations. Below we see a Head and Shoulders pattern and this pattern is, of course, also made up of highs and lows. This pattern beautifully shows how transitioning highs and lows describe the shifting power between buyers and sellers.

We just need to follow the highs and lows to understand what the market is telling us.

Try it out and you will be able to describe all market patterns and conventional chart formations using highs and lows.

3. Trading with the trend: Moving averages

Moving averages areВ undoubtedlyВ among the most popular trading toolsВ and they are great to identify the market direction as well. However, there are a few things to be aware of when it comes to analyzing trend direction with moving averages.

  • The length of the moving average highly impacts when you get a signal when markets turn.
  • A small (fast) moving average might give a lot of early and false signals because it reacts too soon to minor price movements. On the other hand, a fast moving average can get you out early when the trend is about to change.
  • AВ slow moving average might provide signals too late. Or, it can help you ride trends longer when it filters out the noise.

In the screenshot below we used the 50 EMA which is a mid-term moving average. В You can see that during an uptrend, price always stayed well above the moving average and once price has crossed the moving average, it entered a range. In a range, price does not pay too much attention to moving averages because they fall in the middle of the range, hence average.

If you want to use moving averages as a filter, you can apply the 50 MA to the daily timeframe and then only look for trades in the direction of the daily MA on the lower timeframes.

4. Trading with the trend: Channels and trend lines

Channels and trend lines are another way of identifying the direction of a trend and they can also help you understand range markets much better.

Whereas moving averages and the analysis of highs and lows can also be used during early trend stages, trendlines are better suited for later trend stages because you need at least 2 touch-points (better 3) to draw a trendline.

I mainly use trendlines to identify changes of established trends; when you have a strong trend and suddenly the trendline breaks, it can signal the transition into a new trend. Trendlines during ranges are ideal when it comes to finding breakout scenarios when price enters the trending mode again. Also, trendlines can be combined with moving averages nicely because of the complementary characteristics.

If you want to learn more about trendlines, take a few minutes and watch our video here:В learn how to draw trendlines.

5. Trading with the trend: How to use the ADX indicator

The ADX is an indicator that you could use to determine the direction of the trend and for the strength as well. The ADX indicator comes with three lines: the ADX line that tells you the strength of the trend (we deleted this line in our example, since we only want to analyze the direction of the trend), the +DI line which shows the bullish strength (green line) and the -DI line which shows the bearish strength (red line).

As you can see in the screenshot below, the ADX signals an uptrend when the green line is on top of the red line, and it signals a downtrend when the red line is higher than the green line. When price is ranging, the two DI lines are very close together and hover around the middle.

The ADX can be combined with moving averages nicely and you can see that once the DI lines cross, price also crosses the moving average. In the video below we explain how to use the ADX in more detail with the other concepts.

6. Trading with the trend: The Trend Rider

The Trend Rider is our own proprietary indicator, developed by Tradeciety.com

The Trend Rider is based on momentum and price action studies with the goal to provide the most reliable trend signals and also to help with staying in trades.

The Trend Rider has 2 main components: The background colors in the chart section turn first and provide a heads up. When you see that the background color suddenly turns red, you should start looking for selling opportunities. The bars at the bottom are the confirmation that the momentum is truly turning. When the background and the bars turn red, you can often find great bearish trends.В The reason behind this two-step process is to provide a more robust approach and help traders understand the gradual trend change.

Especially if you combine the Trend Rider with conventional technical analysis, breakouts and pattern trading, you will be able to analyze the market very effectively.

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