When the prevailing trend is up, why would you want to look for short entries when buying might result in much smoother trades?
But even if you are not a trend-following trader, you can combine the concept of trading with the trend and with momentum with your regular trading approach. Knowing where the price is going and which side of the market is stronger is an important trading skill.
To be able to correctly read price action, trends and trend direction, we will now introduce the most effective ways to analyze a chart. Intro: The different market phases Before we learn how to identify the trend, we should first be clear what we are looking for. It may sound too simplistic first, but stick with me for now and you will soon see the power of this analysis approach.
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Markets can do one of three things: go up, go down, or move sideways. Of course, how fast or how slow and how long the individual periods last changes all the time, but the price can only do one of those three things. The picture below shows you the three possible scenarios and how the market keeps alternating between the phases. We will shortly see how all price patterns and chart formations are also made up of those moves.
Probably not. A trader should zoom out from time to time at least once a week and also switch to the line graph to get a better and clearer picture of what is currently happening.
What Is Trend Trading?
And since our only goal here is to identify the trend direction and become aware of the overall situation, the line graph is a perfect starting point.
Trading with the trend: Highs and lows This is my personal favorite way of analyzing charts and although it sounds very simple, it is usually everything you need to understand any price chart. Conventional technical analysis says that during an uptrend you have higher highs, because buyers are in the majority and push the price higher, and lows are also higher because buyers keep buying the dips earlier and earlier.
Chart example: Head and shoulders vs highs and lows Highs and lows define all market patterns and chart formations.
How To Trade Trends
Below we see a Head and Shoulders pattern and this pattern is, of course, also made up of highs and lows. This pattern beautifully shows how transitioning highs and lows describe the shifting power between buyers and sellers.
We just need to follow the highs and lows to understand what the market is telling us. Try it out and you will be able to describe all market patterns and conventional chart formations using highs and lows. However, there are a few things to be aware of when it comes to analyzing trend direction with moving averages.
Keep It Simple and Trade With the Trend
The length of the moving average highly impacts when you get a signal when markets turn. A small fast moving average working trading robots give a lot of early and false signals because it reacts too soon to minor price movements. On the other hand, a fast moving average can trade with the trend you out early when the trend is about to change.
Or, it can help you ride trends longer when it filters out the noise. In the screenshot below we used the 50 EMA which is a mid-term moving average. You can see that during an uptrend, price always stayed well above the moving average and once price has crossed the moving average, it entered a range.
In a range, price does not pay too much attention to moving averages because they fall in the middle of the range, hence average. If you want to use moving averages as a filter, you can apply the 50 MA to the daily timeframe and then only look for trades in the direction of the daily MA on the lower timeframes.
Trading with the trend: Channels and trend lines Channels and trend lines are another way of identifying the direction of a trend and they can also help you understand range markets much better.
Whereas moving averages and the 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.
I mainly use trendlines to identify changes of established trends; when you have a strong trend and suddenly the trendline breaks, it can signal the transition into a new trend.
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Trendlines during ranges are ideal when it comes to finding breakout scenarios when price enters the trending mode again. Also, trendlines can be combined with moving averages nicely because of the complementary characteristics.
Trading with the Trend – 6 Ways To Identify The Direction Of The Trend
Trading with the trend: How to use the ADX indicator The ADX is an indicator that you could use to determine the direction of the trend and for the strength as well. As you can see in the screenshot below, the ADX signals an uptrend when the green line is on top of the trade with the trend line, and it signals a downtrend when the red line is higher than the green line.
When price is ranging, the two DI lines are very close together and hover around the middle. The ADX can be combined with moving averages nicely and you can see that once the DI lines cross, price also crosses the moving average.
In the video below we explain how to use the ADX in more detail with the other concepts.
The Trend Rider has 2 main components: The background colors in the chart section turn first and provide a heads up. When you see that the background color suddenly turns red, you should start looking for selling opportunities. The bars at the bottom are the confirmation that the momentum is truly turning. When the background and the bars turn red, you can often find great bearish trends.
The reason behind this two-step process is to provide a more robust approach and help traders understand the gradual trend change.
Especially if you combine the Trend Rider with conventional technical analysis, breakouts trade with the trend pattern trading, you will be able to analyze the market very effectively.