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.
What Affects Market Trends
Why do trends change their direction? The reason is that market sentiment changes frequently. The change in the market mood depends on economic events and data. Here, you should keep in mind the fundamental analysis.
Fundamental factors drive the market trend.
Every market has its own fundamental factors that will determine its direction. For instance, the direction of stocks will be determined by industry conditions and the company’s earnings. If we’re talking about the currency market, it’s worth checking the economic calendar that includes all of the essential economic readings that affect the currency’s strength.
If you know the current market conditions, you know what trend is supposed to prevail.
How to Identify Trends in the Market
Before you identify the trend, you should understand that every trend consists of price movements within a particular direction, together with counter-trends and corrections. The trend prolongs until the price moves in the opposite direction and starts forming a new trend.
- Draw trendlines. If you see that the price moves in the same direction for a certain period, you can try to draw trendlines. If you see the channel, it’s a trend.
- Use technical indicators. There are a vast number of technical indicators that determine the trend and its strength. The most effective indicators include , , and Parabolic SAR.
- Reversal Chart Patterns. There are patterns that predict the market reversal. The most famous ones are “Head and Shoulders,” “Inverse Head and Shoulder,” “Double Top/Bottom.” These patterns predict the reversal of the trend and give you a sign of the upcoming trend.
- Continuation chart patterns. At the same time, there are patterns that signal a continuation of the trend. You should look for patterns, such as triangles, flags, and wedges.
Trends and Patterns: Where the Difference Lies
The trend is a specific price direction that lasts for a certain period of time. Patterns are mostly used to determine either a trend or its reversal. They consist of precise price movements but don’t show a particular price direction.
Trade Against the Trend
It’s not the safest method, especially for a newbie investor. Usually, traders close positions that move against the current trend.
Don’t go against the trend unless you are sure the market reversal is coming.
However, if you are skilled enough, you can try trading against the current trend. Still, it’s possible to do it only when the trend’s strength weakens. You will never win if the trend is strong. When you see the bias that it will return soon, you can open a position.
How to determine when there is a chance the trend will turn around? It’s crucial to combine technical and fundamental analysis . If technical indicators signal a market reversal and fundamental factors say the market sentiment will turn around soon, feel free to open a position against the trend.
Trade With the Trend
The main rule says to trade according to the prevailing direction. The idea is simple: buy in an uptrend, sell in a downtrend. A trend reflects the opinion of the traders’ majority.
Buy in an uptrend, sell in a downtrend.
However, it’s essential to enter the market at the perfect point. If you trade in a bullish trend, enter the market when the price rebounds from the bottom trendline (support). If you trade in a bearish trend, open a position when the price pulls back from the upper boundary of the trend channel (resistance).
How to Do Trend Trading?
In the previous part, we explained what trend trading is. Now, let’s determine several rules on how to do it:
- Step 1. The main step is to determine the trend. You can do it either with a trendline or trend indicators and chart patterns.
- Step 2. Find an entry point. Buy in the bullish trend on the rebound from the support. Sell in the bearish trend on the pullback from the resistance.
- Step 3. Always remember about the stop-loss level. If you trade in the uptrend, locate the stop loss below the previous low. If you trade in the downtrend, place the stop loss level above the previous high.
- Step 4. Place take profit. You can calculate the take profit by multiplying the stop loss. Keep in mind the risk/reward ratio. Your take profit should exceed the stop loss by at least two times or you can place take profit at the level of the opposite boundary of the trend channel.
It’s exciting to trade in the trend. However, the trend doesn’t last forever and it’s crucial to determine when market conditions change. If the price of the security breaks below the resistance/support level, it’s a sign of a possible market reversal. Still, additional confirmation is necessary.
Trends don’t last forever.
Check the following points:
- The asset’s price should close 1% below/above the broken level of the trend channel.
- Check the volume if available. It should be higher than average.
- Wait for confirmation from candlesticks. At least two candlesticks should close above/below the broken trendline.
- The next confirmation of the buy/sell signal can appear if the price tries to return to the broken level on the intraday chart. The sign is reliable if the volume is below the average.
- Use the ATR indicator. If the size of the break is more significant than the average ATR, the trend has reversed. In general, ATR gauges how volatile the exact number of the last candlesticks were.
Reversal and Correction
As mentioned above, any trend is built on constant price movement in a particular direction and small corrections. It’s essential to know how to distinguish corrections from reversals.
Before we start, let’s clarify that reversal is the change of the whole trend, while the correction is a temporary change in price movements.
|What happens before||A strong price movement||Anything|
|Reason||No specific reasons||Fundamental factors|
|Type of traders||Retail traders||Large speculators|
|Timeframe||Short-term reversal (not longer than 1-2 weeks)||Long-term reversal (more than 2 weeks)|
|Chart patterns||Candlestick patterns||Reversal patterns|
Tips for Traders: Avoid Mistakes in Trend Building
Although there is nothing challenging about determining the trend, traders make mistakes that can be easily avoided if you know about them.
- Trendlines. Although the trend is visible without drawn lines, we recommend painting the channel. It will help to predict where the price can rebound.
- Only two lines. A trend consists of two lines. You can find lots of trends in the timeframe, but you should see the leading one.
- At least two points. Any trendline can be drawn through at least two points. The more points you find, the more robust the trend is.
- Don’t go against the trend. If you are a professional trader, you can try to determine the current trend's upcoming weakness. However, if you are a newbie, don’t risk it. Follow the market sentiment.
- Check overbought/oversold conditions. Usually, the market reverses when it’s overbought or oversold. Check it via technical indicators.
- Combine. It’s better to draw trends on three following timeframes and compare them.
- Don’t fear to enter late. The main aim of any trader is to buy at lows and sell at highs. However, patience is the key to success.
- Check additional patterns. As it’s crucial to confirm signals using several indicators, it’s important to find patterns that will establish market conditions.
- Keep your take profit. It’s not recommended to change this order.
- Trail the stop loss. However, you can trail stop loss if you are sure the market will move in your favor.
To sum up, a trend is the basis of forex trading. If you know how to determine a trend, you're more likely to build a successful trade. Trends provide perfect entry and exit points and show current market conditions.
To know how to draw a correct trend, you need to practice a lot. It’s better to do it on a demo account. Libertex provides a free demo account with the full range of trend indicators. You can improve your skills on your favorite securities with no risk of money-loss.
Why to trade with Libertex?
- access to a demo account free of charge
- technical assistance to the operator 5 days a week, 24 hours a day
- leverage up to 1:500 for professional clients
- operate on a platform for any device : Libertex and Metatrader 4 and 5
- no commissions for extractions in Latin America
The answers to these questions will help you to summarize the information you’ve learned.
What Are Trends in the Market?
A trend is a price direction for a certain period of time.
What Are Different Types of Trends?
There are two main types of trends. These are uptrend (bullish) and downtrend (bearish). Still, there is a third type – sideways (flat, horizontal) trend.
How Do You Determine Market Trends?
To determine a trend, you can draw trendlines, use technical indicators, and chart patterns. It’s also crucial to look for confirmation and combine methods.
What Is the Best Trend Indicator?
There is no best indicator. Still, we can recommend several to you. These are Moving Average, ADX, and Parabolic SAR.