How to identify the price trend in the market
Correct identification of the forex trend determines your trading success. How to do it right? How can you identify the trend by means of highs and lows? How do you construct Thomas DeMark trendlines? What do inside trendlines mean? Do moving averages really help traders? You will learn the answers to all these questions in this article!
How to identify the trend by means of highs and lows
One definition of an uptrend is the alternation of higher highs and higher lows. In fact, an upward trend is not broken until the previous relative low is not broken through. When it occurs, it is a warning that the trend may be broken. However, it must be noted that the interrupted sequence of higher highs and higher lows should be considered as one of the possible signals, rather than an absolute signal of a long-term uptrend reversal. The same is with a downtrend. Upward and downward trends are often marked with straight lines in the charts. An upward trendline connects a series of lows; a downward trendline connects a series of highs. The trend may continue for years. For example, the gold uptrend had been developing for almost a decade.
The following rules are applied to the trendlines and channels:
- A decline in prices approaching the uptrend line, and price increases approaching the point of a downtrend, are often an excellent point to initiate tradesin the direction of the main trend.
- Breakdown of the uptrend line (better if it is confirmed by the daily close price) is an alert for sale; breakdown of the downtrend line - an alert for a purchase. Confirmation of the breakdown is the minimum percentage of the price change or the minimum number of daily closures beyond the trend line.
- The upper line of the price uptrend and the lower line of the descending channel are potential zones of take profit for middle-term stock market traders.
Channels and trendlines are quite efficient in the market analysis, but their importance is often exaggerated. It is easy to overestimate the predictive power of trendlines when they are applied to the price chart after the fact. It is often overlooked that during the development of an uptrend or a downtrend, these lines need to be seriously adjusted.
The above example means that the trendline breakout is rather a norm, than an exception. An important fact is that the trendlines should be broken through during the process of their changing, and so, the trendlines are often adjusted when they are projected. This observation suggests the following conclusion: graphic analysis is far more efficient after the fact, than in real time, and the trendline breakout is often a trap for speculators.
Thomas DeMark Trendlines (TD)
The author of this theory correctly noted that drawing trend lines is a random process. In any chart, different traders will draw lines in different ways. And even the same person will draw the trendlines in the same chart differently at different times.
The reason for this ambiguity is simple. The trend line, as a rule, connects a number of relative highs and lows. If there are two dots, you can draw a line quite accurately. But if you connect 3 or more dots, as is usually the case, then you can draw accurate trend lines only in the case of strict linearity. In fact, the drawn trendline will exactly meet one or two relative highs or lows, missing the others. “Correct” trendline is only imagined by the trader, looking at the chart.
The author of the idea admits that to identify the trendline more or less clearly and accurately, it must be based on two points alone.
DeMark notes that you need two draw the line not not from left to right, but from right to left, as the current price action is now more important than its movement in the past.
Inside trend lines
Common trendlines, as a rule, are drawn through price highs and lows. But there is an opinion that the price extremes correspond to short-term movements, associated with excessive emotions among participants in the trading process, and therefore, these points may not correspond to the true market trend. Inside trend lines make it possible to bend the implied requirement of drawing trend lines through graphic extremes. Inside trendline is drawn near the majority of relative highs or lows and completely ignores the highest or the lowest values. Differently put, the inside trendline may be seen as an approximation of linear extreme points.
You can see the twin adjustment of the trendlines in the Paypal stock chart.
In fact, there are several ways to draw the inside trendline in the chart. But still, the experience has proven that inside trendlines are far more efficient than standard trendlines in identifying potential support and resistance zones. Analysis shows that the inside trendlines, as a rule, better indicate where the market would stand the drop and would stop at the price surges.
Certainly, this series of examples does not prove a clear advantage of the inside trendlines over the standard ones, since you can always find charts that can prove any theory, and such proof is not implied or suggested here. The comparisons, given in these charts, are described to explain the traders that the inside trendlines will better indicate the support and resistance zones.
If I believe that inside trend lines are far more efficient than common lines, it then it does not yet mean anything. Observation of a curious speculator cannot serve as scientific evidence. Taking into account the subjectivity of the inside trend lines, it will be difficult to test their reliability. But still, inside trendlines are worth the attention of a reasonable chartist. I believe that a speculator, reading the inside trendlines, will achieve better results than with identifying standard trendlines.
Reasons to identify the trend
Why do I need to identify a trend at all? Not all speculators ask this question. It is only important to make profits, and all the rest will be determined later. In fact, not everything is that clear. Traders do not always know why they need money. And if they do not have a clear and distinct answer to this question, then they had better not trade. There many speculator looking for a burst of adrenaline in the market. Only the speculator who really needs to make money will be able to identify the trend. If trading is just an entertainment, such a trader will always fail.
Three types of trend – bullish, bearish, sideways
How do you identify the price trend? If the price has been going up for a long time, the trend is upward. Bearish trend is when the price has been going down. But the trend can also be sideways, when the price has been moving up and down for a quite a long time, that is it isn’t changing in total. The sideways trend is usually thought to be the most difficult to trade due to its uncertainty.
Trends in the stock market
It may seem that the trend is the same everywhere. In fact, it is not really so. In the equity market, the trend may go on for months or for years. Many experts believe that the stock market is the easiest to make money on. Although, there are also some pitfalls and difficulties. An uptrend in the stock market is really the most reliable. The stocks go up especially well during the first two years of the bullish market, that is after a crisis.
Trends in Forex
The trend is the most difficult to pick up in the foreign exchange market. But still, forex is appealing for traders because there is a huge leverage provided. For examples, it can be as much as 1:1000! It can be so high in the stock market. More or less steady trend in the currency market can be featured by the currency pairs, where one currency is strong and the other is weak. For example, the pair of US dollar to the Turkish lira, or USD to the Brazilian real, and so on. But in these charts, you can also clearly see the strong market countermoves that may last for months and years. When there are such popular currencies as the US dollar, the Japanese yen, the euro are “fighting” in forex, then it rather hard to identify a strong clear unidirectional trend, as its seldom occurs.
Trends in commodity market
It is easier to earn on the commodity market than in forex, because trends there can be relatively long, but not so strong and directed as in the stock market. However, the trends lasted rather long in the markets of gold, silver, crops and some other commodities.
Identification of trend and emotional tension
When speculators are trying to pick up a trend they might have a nervous breakdown. To succeed, one needs not only to identify the trend correctly, but also to choose the right position volume. You need to have certain knowledge to identify the trend direction correctly. It is also important to utilize trend lines, oscillators, indicators and other technical innovations.
Position volume and trend strength
The trend strength will depend on the volume of your position, but if you choose the wrong lot size, the trend can destroy all your capital. Sometimes, a speculator enters with the maximum possible lot and it is picked up and supported by a strong trend. Furthermore, a trader can add to the position opened every day and increase his/her income exponentially. But such luck is not always the case.
Market trend and method of contrary opinion
If most traders lose their money, despite the fact that they use graphic analysis, then maybe it makes some sense to do everything in the way, opposite to your desire. Like it or not, but there is a category of speculators who oppose the majority opinion and make profits. Do such people need to identify the trend? It can well be so that, with the right approach to the trend identification, speculators increase their chances for success if they trade on the contrary.
Does everybody look for a trend?
Some stock traders do not need to pick up a strong trend and to identify it correctly. For example, those who trade the martingale way. It is not important for these traders where the market will move in future; it only matters that there will be a rollback. But they also can go bankrupt due to a strong market movement.
The price can go the same distance both up and down during the same time
That is what Black–Scholes formula says. However, many criticize this theory. They claim that the longer the price goes in the same direction, the more it is likely to start going in the opposite direction. Nevertheless, many multi-year unidirectional trends sometimes puzzle both the supporters of the theory and the opponents.
How to avoid a bullish or a bearish trap?
You can enter the market that is going up but soon see how the trend “breaks” and goes the opposite way. You must remember that trends change their direction most often in Forex, and least often in the stock market. If you trade with micro lots, build a chain of purchases and set stop losses, you are likely to succeed in any market. Even is the market reverses, you’ll be able to reverse with it. But to succeed, you should choose multi-year directed trends, preferably at the time of their inception.
Trend identification and advantage over market
It is not enough to just identify the trend correctly. You need an advantage over the market. Meanwhile, a correctly identified trend already gives some advantage over the market. It will increase if start pyramiding in the market. Many traders claim that they have found an advantage by means of some indicators, which is also possible. I haven’t found anything better than pyramiding and correct trend identification during 14 years of trading.
How much can you earn on the same trend?
No trend can last forever. The price may be moving in the same direction for quite a long time, for 10 years, sometimes, even longer; but it will end some day. If you have picked up the trend, don’t forget to take the profit from time to time. Otherwise you will collect water with a sieve, and this is a very futile exercise. Is the trend likely to continue going in the same direction? It is excellent, but you should still withdraw you profit, when you double or triple your capital, for example..
Trend and scalpers
Scalpers make profits from short-term price swings. They often pursuit just a single tick. Is the trend important for scalpers? It is less important than for a position trader, but it still matters. If a scalper is trading in the strong uptrend, he/she is likely to enter mostly buy trades.
Trend and intraday speculators
Intraday traders need to find a strong trend and to identify it correctly more than scalpers, but less than position traders. Day traders, as a rule, try to gain more than lose. They are based on candlestick patterns.
Trend and position traders
Position traders need to discover a strong trend more than any other traders. It is also important to identify a trend on time. In most cases, position financial traders open multiple trades in the direction of a long-term uptrend and wait for their profits from a few weeks to a few years.
How not to lose trend?
Sometimes, the market leaves a speculator “behind”. The price sharply goes up at some point. A trader believes that he/she needs to expect until the price goes down a little. But the price goes higher instead of getting lower. It makes no sense to buy at this price. At least a trader thinks so, but he/she is wrong. The price continues going up very fast. And not everybody risks “jumping into a traveling train”, which, by the way, is correct. And the “train” is leaving.
Bullish and bearish trend - mirroring the market?
Bearish trend is not mirroring the bullish market, as many think. Imagine that a rising stock market is growing quite fast. When it enters a bearish stage, it is not falling steadily; the price often rebounds up sharply. Even in Forex, for example, for the pair US dollar/Turkish lira, the lira will be, as a rule, devaluing quite fast, but it will be rising very slowly. Nobody can reverse the trend for this pair and make it move in the opposite direction.
Know trend strength or yourself?
It is hard to know the strength of a future trend, if it is possible at all. But you can well know yourself. Most advanced trader will recommend you to learn about yourself, rather than about the trend strength. You can’t know in advance how the market will behave, you can only assume, but you can learn more about yourself. You always need to have a clear plan for possible market situations and follow money management rules, so that your trading and your emotional reactions won’t give you unpleasant surprises.
Identify a trend with no effort
You should be able to identify the trend without spending much effort. If you constantly study math textbooks, use some kind of ultra-precise calculations, adjust oscillators all the time, you won’t succeed. Trading should simple and enjoyable. All talks that speculating is a hard labor is bluffing, spread by professionals to confuse beginners. What do they do it for? To demonstrate their own importance. Right trading is like a right diet, it is simple, but it is hard to stick to it.
Martingale and trend
Martingale fans need the trend less than others. At the slightest directed movement, they enter a counter-move. But still, the trend strength is taken into account by the fans of this dubious trading method.
What is a trend similar to?
What is a trend like? For example, in box, football, volleyball and other sports, an opponent can attack for a long time. It is important to be able to repel the attack and go for a counterattack. A trend can also move not according to your scenario, and you shold be able to manage it. A trend is compared with a fight, which is also quite relevant. A trend is similar to the sea or the ocean, which may be calm, stormy, flow forward and backward.
When is the trend rather a foe than a friend?
Whatever the trend is, however accurate you price predictions may be, the trend can be your enemy, contrary to the common expression “trend is your friend”. It fast turns out to be a foe if you trade on you last, or even worse, on borrowed, funds. If you remember how many Chinese (and not only) jumped out of their windows during the 2008 crisis, this is good. Not to follow their example, trade only on “spare” funds.
Identify trend by means of Expert Advisor
Expert Advisors can’t think like humans, but they can signal the trend reversal, and the beginning of a new trend. But still, you shouldn’t completely give up on Expert Advisers. Sometimes, they quite accurately indicate the beginning of a new emerging trend, especially in the stock market.
MA, Japanese candlestick patterns and trend
Moving averages help correctly identify the entry point. But they can’t tell the future. Japanese candlestick patterns are also quite informative but you need to be able to “read” them.
Success in any type of trading depends on the correct identification of the trend. To make a right decision, you need to be able to apply different ways of identifying the trend. You can discover a trend by means of price highs and lows, Thomas DeMark (TD) trendlines, inside trendlines and moving averages. The most efficient approach is proven to be the combined identification method that includes multiple ways of chart analysis. In addition, it is very important to find out your own way to success and the most suitable for you methods to analyze the market situation.
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