“The trend is your friend” is a phrase any trader has heard.
That sounds too easy, too simple. But the idea has endured for decades because it told one of the most important facts about financial markets: prices rarely move randomly for long.
Markets tend to trend follow. Prices can creep up over weeks or months. Sometimes they say no. Sometimes they get lost. Traders who learn to spot these movements will typically make better decisions than traders who focus only on individual price movements.
Knowing market trends doesn’t guarantee success but it does give you a perspective that can help you make more successful trades and avoid unneeded risk.
What is Market Trend?
Market trend is the general direction of an asset price over a period of time.
Trends are normally classified into three types:
Up Trend
An uptrend is when the price makes higher highs and higher lows.
This is usually a sign of strong buying interest and bullish market sentiment.
An uptrend is defined as:
>Rising prices
>High demand
>Sentiment is bullish
>Further Bearish Trading Activity
>A Downtrend
A downtrend is when the price makes lower highs and lower lows.
This usually means more selling pressure and less confidence in the market.
Symptoms may include:
>Prices dropped
>Sales activity dropped
>Negative market sentiment
>Reduced investor confidence
>Sideways Trend
Markets are sometimes flat for a time with no clear direction.
Buyers and sellers tend to be evenly matched and you will see prices bouncing between support and resistance levels.
The issue with sideways markets is the trend signals are not as reliable.
Market Trends and Their Significance
Most new traders spend all their time looking for an entry point.
Experienced traders tend to see the trend of the big picture first.
There are some good things about trading with the current trend, here are a few of them:
>More likely to take the victory
>Improved risk management opportunities
>More validation in the market
>Less emotional decisions
Sometimes counter-trend trades can be rewarding, but are generally riskier.
How Do Traders Know What the Trend Is?
The professional trader doesn’t use one indicator.
Instead, they use a combination of methods to confirm market direction.
Price Action Analysis of Technical
Price action remains one of the most popular ways to trade.
Review of Trader’s:
>Higher lows, higher highs
>Lows lower
>Highs lower
>Resistance and support levels
>Breakout Levels
Price action is a straight reading from the market, you don’t need to rely heavily on indicators.
Moving Average
Moving averages are useful in that they smooth the short term price action and let you see the overall market trend.
The most commonly used moving averages are:
>The 20 day moving average
>50 day moving average
>100 day moving average
>200 day moving average
Many traders consider it to be bullish when the market is above important moving averages. If prices stay below then Bears are in control.
Transaction Count
Volume is the number of shares or contracts or units traded in a given period of time.
The higher the better, volume confirms the trend strength.
For instance:
High prices and high volume often signal a strong trend
Selling pressure can be confirmed with an increase in volume and lower prices
Volume typically is a secondary confirmation to trend analysis.
It Is Important to Confirm the Trend
A big mistake traders make is making too much of short term price action.
One strong price move does not confirm the beginning of a trend.
And to avoid false signals, traders will confirm the trend.
Further confirmation can be found at:
Different time frames analysis
>Check the amount
>Breakouts above resistance
>Below are support breaks
>Uniform price
Speed generally impairs a trade decision.
Advantages of Trend Trading
There are a lot of practical advantages to trend following which is why it’s still popular.
They are:
>Easier options
>Better decisions in trading
>More risk/reward opportunities
>Trading more rationally
>More market oriented
>More of a consistent
Most winning trading strategies are built on identifying and riding existing trends.
Notifies All Dealers
Trend trading can work but it is not without risk.
Important Safety Precautions:
>Always have a plan for risk management
>Use a decent stop loss
>No over-leveraged positions
>Stay on top of the latest market news & economic events
>Look at trends across a number of periods
>Don’t trade emotionally
Markets can reverse in the blink of an eye, even when a trend looks really strong.
Conclusion
Marketplace trends indicate buyer and seller behavior. Knowing whether a market is trending up, down or sideways can help traders make better decisions and better manage risk.
More often than not, it’s not about predicting every move the market will make. It’s more about understanding the market as is and adjusting more often.
Traders who learn to identify trends, confirm the market direction and stay consistent with risk management tend to put themselves in the best odds for long-term success. By trading with the trend, instead of always trying to outsmart the market, traders can work with the market, not against it.
