Introduction
Trading with the stock market is buying and selling with the flow.
Why would you want to look for short entries when the prevailing trend is up, when buying could result in a more spontaneous trade?
Many amateur traders, even when faced with a very clear trend, cannot stop trying to predict reversals and burn their fingers by going into the opposite trend, when they could have made a lot of money simply by joining the trend.
But even if you are not a trend-following trader, you can combine the concept of trend and momentum trading with your regular trading approach.Knowing in which the rate goes and which aspect of the marketplace is more potent is an vital buying and selling skill.
To be able to correctly read price action, trends and trend direction, we will now introduce the most effective ways to analyze charts.
Before we learn how to identify trends, we must first be clear about what we are looking for.
This may seem very simple at first, but stick with me for now and you will soon see the power of this analysis approach.
The market can do one of three things: go up, go down, or move sideways.
Of course, how fast (or how slow) and how long individual periods last varies all the time, but price can only do one of those three things.
The picture below shows you three possible scenarios and how the market changes between phases. We will soon see how all price patterns and chart formations are also built from those moves.
Trading With The Trend
Most traders only use bars and candles when it comes to looking at charts, but they completely forget about a very effective and simple tool that allows them to see all the clutter and noise: line graph. The reason of bars and candles is to offer targeted statistics approximately what’s taking place on yourchart, but is it really necessary when it comes to identifying the overall trend? Probably not.
A trader should zoom out from time to time (at least once a week) and also switch to line graphs to get a better and clearer picture of what is happening currently. And since our only goal here is to identify the direction of the trend and be aware of the overall situation, the line graph is an ideal starting point.
Highs And Lows
This is my private favourite manner of reading charts and even though it sounds very simple, it also includes the whole thing you want to recognize any fee chart.
Traditional technical analysis says that during an uptrend you have higher highs because buyers are in the majority and push the price higher, and even higher lows because buyers keep buying earlier and earlier on declines.
It works similarly during a downtrend: the lows are lower when sellers reduce surplus value and the highs are lower because sellers sell first and buyers are not as interested.
Head And Shoulders Vs Highs And Lows
Ups and downs define all market patterns and chart formations. Below we see a head and shoulders pattern and this pattern is, of course, made up of ups and downs. This pattern beautifully illustrates how volatile fluctuations describe the changing power between buyers and sellers.
We just need to follow the ups and downs to understand what the market is telling us.
Try it and you will be able to describe all market patterns and traditional chart formations using fluctuations.
Great, but how do you use a trend line?
This is the real million-dollar question. You check for a breakout of the trendline, which symbolizes a trend reversal.For example, if the uptrend line is damaged and the inventory closes beneath the uptrend line, you could say that the preceding uptrend has ended.Similarly, whilst the downtrend line is damaged and the inventory closes beneath the downtrend line,it generates a buy signal because it signals that the previous downtrend has been broken. However, all these trend breakouts must be approved with volume, news flow and chart patterns before making any decisions on trading.
Two more important trading applications of a trend line
A very popular approach in an uptrend is to wait for the price to make further lows and touch the lower trendline for a buy signal. Traders who trade in ranges buy when the price touches support and sell when it touches resistance levels.
Remember, a trendline can also help extrapolate future price trajectories, and act as a warning system when a trend may reverse. By looking at both long-term and short-term trends, you can predict future price movements.
Different types of market trends?
A very popular approach in an uptrend is to wait for the price to make further lows and touch the lower trendline for a buy signal. Traders who trade in ranges buy when the price touches support and sell when it touches resistance levels.
Remember, a trendline can also help extrapolate future price trajectories, and act as a warning system when a trend may reverse. By looking at both long-term and short-term trends, you can predict future price movements.
1. Monitor Price Movements
Uptrend vs. downtrend makes the direction of price movement clear amidst all the noise.This is the underlying trend. This is done by adding a series of fluctuations. If you can connect the lower points with an upward trend, you have an uptrend. Similarly, if you can connect a series of high points of a downward sloping chart, you have a downtrend.
Strategies for Identifying Trends
Now that you understand the basics, let’s explore some effective strategies for trend identification.
Moving Averages
Moving averages are undoubtedly one of the most popular trading tools and they are also great for identifying market direction. However, there are a few things to keep in mind when it comes to analyzing trend direction with moving averages.
- The length of the moving average is highly influenced by when you receive signals when the market changes.
- A small (fast) moving average can give a lot of early and false signals because it reacts too quickly to minor price movements. On the other hand, moving averages can take you out quickly when the trend is about to change.
- A slow moving average may give a signal too late. Or, it can help you follow trends over a longer period of time once it filters out the noise.
In the screenshot below we have used the 50 EMA which is a medium term moving average. You can see that during an uptrend, the price always remains well above the moving average and once the price crosses the moving average, it enters a range. In a range, prices do not pay much attention to the moving averages because they fall in the middle of the range, hence the average.
If you want to use the moving average as a filter, you can apply the 50 MA on the daily time frame and then only look for trades in the direction of the daily MA on the lower time frame.
Trendlines
Channels and trend lines are another way to identify the direction of a trend and they can also help you understand range markets better.
While moving averages and analysis of highs and lows can also be used during early trend stages, trendlines are better suited for later trend stages because you need at least 2 touch-points (better 3) to draw a trendline. Is required.
I mainly use trendlines to identify changes to established trends; When you have a strong trend and suddenly the trendline is broken, it may signal a transition to a new trend. Trendlines during ranges are ideal for detecting breakout scenarios when price re-enters trending mode. Furthermore, trendlines can be well combined with moving averages due to their complementary characteristics.
ADX Indicators
ADX is an indicator that you can also use to determine the direction and strength of a trend. The ADX indicator comes with three lines: the ADX line which tells you the strength of the trend (we have removed this line in our example, as we only want to analyze the direction of the trend), the +DI line which tells you the strength of the bullish trend. (green line) and -DI line which shows bearish strength (red line).
As you could see withinside the screenshot below, the ADX alerts an uptrend whilst the inexperienced line isabove the red line, and it signals a downtrend when the red line is above the green line. When the price keeps changing, the two DI lines are very close to each other and rotate in the middle.
ADX can be well correlated with moving averages and you can see that once the DI lines are crossed, the price also crosses the moving average. In the video below we explain how to use ADX in more detail along with other concepts.
Conclusion
Identifying trends in day trading is a skill that requires practice and a deep understanding of market dynamics. By closely monitoring price movements, using technical analysis, and employing effective strategies, you can enhance your ability to make profitable trades. Remember that day trading involves risks, so always trade responsibly and manage your risk effectively.
