Market Trends: Make a Trend Your Friend
If you’ve read any educational materials on trading, you’ve definitely heard about trends. Trends are a crucial part of forex trading. They help traders enter and exit the market and build robust strategies. Since they are such essential elements of trading, we will tell you how to work with them.
What Is a Market Trend?
A trend is a direction the price of an asset follows for a certain period of time. You can find a trend for any security; for example, stocks, currencies, and commodities. They exist in any timeframe and differ by length and direction. The direction is the most crucial point you should consider when trading.
Let’s clarify what path a trend can follow.
Types of Market Trends
There are two classifications of trends - direction and period.
Direction and period are the main classifications of trends.
There are only three types of trend directions and those are easily determined on the price chart:
⇑ Uptrend or bullish trend. When you see the price moves up for an extended period, it’s a bullish trend. So, the price forms higher highs and higher lows. To confirm the upward trend, it’s enough to draw a support line that will connect at least two minimums. If the price breaks this level, it’s a sign of the end of the trend.
⇓ Downtrend or bearish trend. If the price moves down for a certain period, it’s a bearish trend. So, there are lower highs and lower lows. To be sure it’s a downtrend, draw a resistance line through at least two points. If the price breaks above it, it’s a sign of the trend's weakness.
⇒ A sideways trend, so-called flat or horizontal. In the period of the sideways trend, the price consolidates. It doesn’t move either up or down.
Another crucial point you should consider when trading based on the trend is its period. There are also three types:
- Long-term trend. The trend can be considered long-term if it prolongs for not less than six months. As you can understand, such a trend appears on both weekly and monthly timeframes.
- Medium-term trend. Usually, it lasts from one week to several months. It’s easily identified on daily and H4 charts.
- Short-term trend. It exists for less than a week. To define it, use H1 and minute timeframes.
Trends exist in any timeframe. However, we wouldn’t recommend defining them on timeframes that are less than M15. Small timeframes are not used for trend trading.
We have mentioned you should draw lines through at least two points. But to be frank, it’s not called the support and resistance lines, but trendlines. Trendlines go through at least two points and build a so-called channel, which makes the trend clearer.
A trendline serves as a support/resistance level along with the upper and lower boundaries of the trend channel.
Although the trendline is drawn via two points, it’s possible to prolong it and create an obstacle for the future price movement. This obstacle will become either a support or a resistance for the price and an indicator of either a trend continuation or the end.
Look at the picture below.
You can draw many lines on one timeframe. However, we wouldn’t recommend doing this because it can easily become confusing. Thus, look for clear trends. If you find a robust simply-visible trend, there are odds other traders will also see it, and your trade will be more successful.
Find the major trend for each timeframe.
The more often the trendline is touched by the price, the stronger the trend is supposed to be. A signal of the strong trend is the distance between two points through which you draw the trendline. If there are 20-30 candlesticks between them, the trend is considered reliable.
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