Identifying trends in trading

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Defining a trend



Knowing how to identify a trend is a basic technical analysis element often overlooked by novice traders. However, identifying the trend not only helps limit the number of losing trades but also helps maximize gains on winning trades. A trend is an indispensable decision support tool, it gives you the main direction of the asset. It is therefore a study of the past (through price histories) that allows you to predict the most probable direction of an asset's price in the future.

Trends are reflections of all the investors’ psychology. They reflect phases of doubt, euphoria, panic, confidence, etc. with the various economic announcements on assets. Identifying trends enables you to understand investor psychology and exploit it for profit. On the market, we often say "The trend is your friend",

Characteristics of a trend



An asset may be in an upwards (bullish) or downwards (bearish) trend or horizontal (no trend).

In a bullish trend, the high points are higher and higher, and the low points are less and less low. Conversely, in a bearish trend, the low points are lower and lower and the high points less and less high. In a phase of horizontal movement, the high points are at about the same level and so are the low points (range phase).

To clearly identify the asset trend, you can also look at:

Sudden movements

: Sudden movements are generally in the direction of the trend. If you see large bullish candlesticks on your chart, it is because the trend is likely to be bullish and vice versa.


Colour of the candlesticks

: If you see a larger number of green candlesticks (bullish) on your chart, it means that the asset is in a bullish trend and conversely if there is a larger number of red candlesticks (bearish), the asset is in a bearish trend.

Identifying the trend



To clearly identify the trend in the asset you wish to trade, the best way is to look at a unit of time longer than your trade. For example, if you are trading on a 4-hour day, look at the daily asset chart. If you trade on 15 minutes, look at the 1 hour chart.

The chart for the time unit of your trade is used to identify trading signals and the chart for the longer time unit is used to identify the trend.

Indeed, an asset may have a short-term trend opposite to its medium-term trend. You need to know that it is always the trend on the longest time unit that takes over. Of course, there can be trend reversals and that's why you need to set key reversal levels on the unit of time above your trade.

I often see on forums that one should never trade against the trend. That’s not true. Counter trend trades are possible but you have to wait for clear signals and not be too greedy with price objectives. Effectively, movements are stronger in the direction of the trend.

Analysing the unit of time longer than that of your trade allows you to set yourself a single direction to deal with (long, short or neutral). For example, if your main direction is long (bullish trend), you should ignore the sales signals on your signal chart (time unit of your trade).

Tools available to confirm the trend



To confirm the direction of the trend, you can use various tools:


Moving averages

: Moving averages are the average value of an asset over a given period. They allow a simple reading of the trend without having to carry out an in-depth technical analysis. It is generally better to not choose moving averages that are too short term, and favour moving averages with a long calculation period instead. This smooths the trend and avoids having too many false trend reversal signals (moving average too reactive).


Relative currency strength index

: This is a tool that allows you to compare the changes in one currency against a basket of other currencies. Clearly, it doesn’t indicate the trend of an asset but the trend of a currency on Forex. This gives an even more global view of the trend.


The stock exchange index

: If you deal in shares, an analysis of the main index to which your shares are linked also gives you a global view. For example, if you are dealing Renault shares, you can do a CAC40 analysis. If you see that a strong sell signal has just been given on the index, you may want to avoid opening an upward position on your asset even if a bullish signal appears.

Remember: Never forget that the overall trend always outweighs shorter-term trends.

Pitfalls to avoid in identifying a trend



Distinguish between short and medium term

: Whether using your trend or signal chart, you must always have the widest possible view to identify whether the short-term trend is a trend or correction movement. To do this, identify the high/low points of the last large bullish/bearish movement and reveal the Fibonacci retracements. Movements in the direction of the trend are often more powerful (stronger amplitude) and brutal (large candlesticks). With a correction movement, the price is regularly blocked in its progression (closer price objectives). In addition, a correction movement is often part of a consolidation pattern (flags, pennants, bevels, etc.).


Trendless period

: Some assets may not have a clear trend. The high/low points are one move higher, one move lower. During these periods, moving averages constantly change direction, reflecting investor indecision. These phases without a trend can happen with or without volatility. If there are sudden movements, they are often in both directions. In a period without a trend, your price objectives should be closer. I advise novice traders not to trade assets without a clearly visible trend.

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