Trading with the trend on the daily chart. Trading with the Trend – 6 Ways To Identify The Direction Of The Trend
Let me rephrase that, the plethora of indicators and techniques that have flooded the financial world over the years have unnecessarily convoluted a relatively simple task. But I digress… Yes, it is a simple task. Is it easy? Well, that depends on the techniques and tools you decide to use.
There are three very simple techniques that I will show you today that, with enough practice, will make determining trend strength a much more manageable task. By the time you finish reading this lesson, you will have a firm understanding of trend characteristics as well as when to know whether to look for a continuation of the current trend or an imminent breakdown.
Characteristics of a Trending Market First and foremost, we need to know how to identify a trending market. A trending market is one that is making higher highs followed by higher lows or lower lows followed by lower highs. If we transform that statement into its visual equivalent, we get the following illustration. Pretty basic stuff, right? Thought so!
He is the most followed trader in Singapore with more thantraders reading his blog every month It is slow.
But before you leave thinking you know about the concept of higher highs, higher lows, etc. In other words, you may want to stick around.
Now comes the fun part — taking this very basic concept of highs and lows and turning it into actionable information. For that, we turn to the most basic principle of technical analysis. In short, the relationship among highs and lows as they form over time. All we are doing with this technique is observing where the extended swing highs and lows are within a given trend. The GBPUSD daily chart below is a perfect example of how something as simple as watching how the highs and lows of a market interact best options each other can signal a change in trend.
In the chart above, the first lower high was the first sign that the uptrend was beginning to fatigue. But the signs are always there; you may just have to look a bit harder to find them in some instances. For that, we need the highs and lows to interact with a key level in a way that offers a favorable setup.
In other words, we need to turn the price action you see in the chart above into actionable information. There is a common and costly misconception among traders in all markets where technical analysis is a traditional method of trading. Someone at some binary options real strategies in time came up with the notion that support and resistance levels become stronger with each additional retest.
Multiple retests of the same level make that level more visible, they do not make it stronger. And visible and strong are by no means synonymous. Think about it, if this were true — that a level became stronger with each additional retest — it would theoretically never break. So if we can agree that multiple retests earnings on the Internet from participants a given level do not make it stronger, we can naturally conclude that it makes the level weaker, right?
Well, not quite. For that, we turn to you guessed ithighs and lows. More specifically, the relationship the highs and lows have with our key level.
The illustration below shows a trending market that is respecting a trend line, however, the distance between each retest has become shorter over time.
Note how the market tested this level as support on four separate occasions since its inception. What many traders tend to dismiss, however, is the shorter time span between each retest as the trend extended higher.
Trading Daily Charts For The Bigger Picture
The likely outcome for this type of price action is as follows: Why does this happen? When it comes to supply and demandas prices move higher, demand naturally begins to run thin as traders a less willing to buy at higher prices.
At the same time, supply increases as market participants unwind their positions to book profits. In the case of the illustrations above, that demand is drying up more quickly with each subsequent rally from trend line support.
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Thus, we get a market that begins spending more time trying to keep its head above water than making higher highs. Of course, this concept also applies to a bearish trend where demand increases and supply decreases as prices drop.
The EURUSD daily chart below is a perfect real-world example of a currency pair that began testing support more rapidly over the course of days.
The Bottom Line In order to consistently make money in the markets, traders need to learn how to identify an underlying trend and trade around it accordingly.
Notice how each rally spent less time away from support as the trend became extended. We all know what happened next.
If we want to get fancy, we can combine the two techniques we just discussed to further the conviction that a breakdown was imminent. I will be the first to admit that the pair was not making lower highs before the technical break. However, the fact that a rising wedge formed indicates that each subsequent rally had less bullish conviction than the last. In some ways, this is a combination of the two techniques we just discussed.
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The idea of heavy price action is something my members have become very familiar with over the years. As the term implies, this is when a market begins to put constant pressure on a key level over a short period. I suppose I should come up with a better word for it since the word heavy only applies to a pair that is putting pressure on a support level. At any rate, the idea here is to watch how the market responds to support or resistance within a given period.
A typical period would be a few days or maybe a full week if trading from the daily time frame. If the market begins to cluster or group for an extended period at a key level, chances are the trend is about to break down and reverse.
The illustration below shows what this looks like for a market that is in an uptrend. This type of price action leads to a breakdown more times than not.
By Selwyn M. Gishen Updated Jun 25, As a traderyou have probably heard the old adage that it is best to "trade with the trend. This is sage advice as long as you know and can accept that the trend can end.
It can, in fact, be extremely powerful on just about any time frame, even the 1-hour chart. Something as simple as the three techniques discussed above are all you need to gauge whether a trend is likely to continue or break down. Keep in mind that all three techniques above are as trading with the trend on the daily chart in bearish markets as they are in bullish markets.
The charts and patterns above were only used to maintain a consistent trading with the trend on the daily chart throughout the lesson, but the techniques discussed above can be utilized in any market and on any time frame. The best thing any trader can do for themselves whether they are attempting to decipher trend strength or identify key levels is to get back to basics. Every market has its story to tell, and every story can be translated using swing highs and lows.
As I often say, your job as a trader is not to know what will happen next.
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Frequently Asked Questions What is a trend in financial markets? A trend in Forex, the stock market, etc. It shows whether buyers uptrend or sellers downtrend are in control.
How do you identify trends?
The best way to identify trends, in my experience, is to use simple price action. Higher highs and higher lows signal an uptrend, while lower highs and lower lows represent a downtrend. What are the three types of trends?
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What is the best Forex trend indicator? How do you identify a trend reversal?
Reversals occur when a market in an uptrend higher highs and higher lows begins to make lower highs and lower lows. On the flip side, a market in a downtrend shows signs of reversing when it begins to carve higher highs followed by higher lows.
Your Turn How do you currently determine the strength of a trending market?
Will you be adding any of the three techniques above to your trading arsenal? Leave a Comment:.