What is a Trend?
Have you ever heard of the expression “The trend is your friend”? If not, now you have. Successful traders use any tends to make profits. But the main question is, what is a trend? How do people trade patterns?
In a nutshell, trends always represent the directions in which the prices of stocks, currencies, cryptocurrencies, etc. evolve. There can be uptrends, at which the prices grow, downtrends, where the prices fall, and flats, at which the prices remain relatively in one position. Trends have no time limits to be defined, but the longer they keep a direction, the more confirmed they become.
How Do You Identify a Trend?
Identifying and understanding a trend’s movement is not hard at all. The simplest way includes checking assets of raw price actions. Technical traders are sure that using candlesticks as a source of information can be enough to understand the market.
Logically, uptrends can be identified if you see that some asset has such price movements that have higher highs and lows. With downtrends, the situation is the opposite, and here the price makes all the points have lower borders. A flat can be identified when you see that the price remains at a fixed level without leaving the support (lower) and resistance (higher) levels.
Identifying Trends With a Price Action
Markets that have trends are an excellent place for swing traders. These traders usually set broad price targets on trended markets. Day and scalp traders prefer using range-bound markets as these provide them quick and easy profits. Instead of setting long-term, users set a short-term target in these markets.
First, let us look at the uptrends. Here the trend is shown from the base swing low that is connected to a higher one, after what the trendline is projected further. Later on, this line is used as a support line that continually changes. As only the value of an asset gets close enough to the trendline, this support line identifies optimal “Buy” positions.
Next, go downtrends. Here, as you could already guess, everything works oppositely. Trendlines are shown from the base swing high, which is connected to a lower one, after what the trendline is drawn into the future. Instead of being a support line, it turns into a resistance line that acts dynamically and gives optimal “Sell” positions as only the value of an asset reaches the trendline.
It is all simpler when using range-bound markets. Here trendlines have definite support and resistance areas. The trends themselves are shown as horizontal graphics. If the asset’s value reaches the support line, most traders will attempt placing “Buy” orders. When the value reaches a resistance line, they will try placing “Sell’ orders. Sounds simple, doesn’t it?
Although a lot of people use this way, some traders do not like “raw” trading charts. They prefer using other methods for determining and trading trends. We shall have a look at them a bit lower.
1. Moving Averages
If you search for popular trading analysis tools, you will surely find the moving averages among the top tools in any list. It is one of the first tools that is trusted by many experts. Moving averages are used for determining trend movements, momentums, and reversals.
At a situation when the value remains for some time higher than a moving average, the tool shows the confirmation of an uptrend. If the users decide to observe the slope of a moving average, they can simply infer the trend’s momentum. The steeper the slope of it, the more momentous the trend is. This works on the contrary as well.
Further analysis can be done by combining a few moving averages. Such a move allows traders to see prevailing trends and point out possible trend reversals on time. Another point is that if a quicker moving average is higher than the slower ones, this confirms an uptrend on the market. When it is, on the contrary, meaning that the faster average is lower than the slow average, then this only shows the confirmation of a downtrend.
2. The Bill Williams Fractals Indicator
Many online traders say that the trading market is fractal and has lots of patterns that repeat over time. If one deciphers them accurately, he gets a “map” of opportunities. This indicator represents the cyclical movement of the trading market. The tool gives users great possibilities and information, including the selection of valuable entry points, the spotting of trend reversals long before they occur, and other essential details.
All swing fractals show extreme prices in the center of five periodic price bars. This means that an up fractal will have a middle candlestick that represents the highest high between 2 other lower highs. With down fractals, it is all vice-versa, meaning that the middle candlestick shows the lowest low between two other lows. So, the fractals indicator is not challenging to use and can be accessed by newcomers and professionals.
The creation purpose of this indicator was to give all users trade entry signals. If the value of anything gets above a previous up fractal, a “Buy” signal is triggered. And on the contrary, if the price reaches below the last down fractal, a “Sell” signal is triggered.
Although this indicator is not that good when it comes to giving signals, it is a great tool that quickly shows the trend direction. Traders should only look at the fractals to understand what kind of market are they facing.
3. The ADX Indicator
ADX is deciphered as the Average Directional index. It helps to identify trends directions and their momentums. Values from 0 to 100 are used for this. This index also has a simple way of determining up-, downtrends, and range-bound markets. There are two lines, a green one and a red one. If the green line is above the red line, an uptrend is indicated. If it is on the contrary, then it is a downtrend. Finally, if both lines are in one position or are simply near each other, this shows that this is a range-bound market.
One more detail is that the centreline (which is 50) can show the strength of a trend. If the value is higher than 50, then the trend is reliable, but if it is lower than 50, then the direction is giving up its position, a trend reversal might occur, and a ranging market could start.
The Things that Create and Sustain Market Trends?
Being a good trader does not only include the ability to determine trends, but also the understanding of the things that create and sustain them. This will make the market analyzing way more comfortable and more efficient.
We can use any company’s stock as an example. Stocks usually mirror their companies’ success, which means that if a stock moves higher, one of the reasons might be the company’s success in something. When speaking about currencies, they can have strong or weak positions depending on employment, trade, business, and other economic factors in a country.
Technicians are also capable of creating and sustaining trends. Their collective actions can be the thing defining support or resistance areas. For better understanding, when an uptrend has a price that breaks higher than a specific resistance level, technical traders will usually add to their positions or move after the trend. After such moves, the demand will increase, and the trend will grow further.
Yet another thing that is capable of sustaining trends is human emotion. In trading, greed, fear, or confidence are the emotions that prevail. They make people make different moves that can influence the market.
How to Trade Trends Effectively
Many details are included in any kind of trading. To make it useful, you need to use all the possibilities. Waiting for profitable opportunities is simply not enough. Using channels is an excellent idea for a trader when setting price targets and combining trendlines with raw price trading. If you didn’t know, parallel trendlines are what is called “Channels.” They are shown in such a way that ensures the price action being kept inside a trendline borders. They are great for placing various targets.
For example, when there is an uptrend, the upper line shows traders the areas at which it is better to quit a “Buy” as the trend’s price can go down.
There also is an interesting utility called “The Fibonacci tool.” This addition shows two graphics: Retracements lines and Extensions lines.
Fibonacci Retracements are only used in trending markets. These retracements assist users in choosing perfect trade entry points. The Fibonacci Extensions are used to represent the probability of how high can a price grow. So, the Fibonacci trading tool can assist a trader in setting price targets and exit prices.
So, in this article, we have discussed:
- the meaning of a trend;
- how are trends identified;
- some useful tools for working with trends;
- the reasons trends are created and sustained;
- efficient trend trading.
We hope this article was useful to you. Thank you for reading.