How to Recognize Trends in the Market

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Simply put, short-, intermediate- and long-term trends are the three kinds of trends that we see each day in our study of technical analysis. “A trend is your friend,” is just one of the sayings that have come out of the study of primary as well as secular trends. Some people try to identify trends by looking at averages. Given the understanding that the psychology of the markets actually moves the markets, we can acknowledge that psychology develops and ends the trends we are going to look at today.

Learning how to identify the trend should be the first order of business for any student of technical analysis. Most investors, once invested in an uptrend, will stay there looking for any weakness in the ride up, which is the indicator needed to jump off and take the profit.

Primary Markets
The bull and bear markets are also known as primary markets; history has shown us that the length of these markets generally lasts from one to three years in duration.

Chart Created with TradeStation

Secular Trends
A secular trend, one that can last for one to three decades, holds within its parameters many primary trends, and, for the most part, is easy to recognize because of the time frame. The price-action chart, for a period of 25 years or so, would appear to be nothing more than a number of straight lines moving gradually up or down. Have a look for a moment at the chart of the S&P 500 below. The chart shows the progress of the markets from the 1980s through the mid-2000s, showing the rise of the market leading up to the turn of the century.

Chart Created with TradeStation

Intermediate-Trends
Within all primary trends are intermediate trends, which keep the business journalists and market analysts constantly searching for the answers for why an issue or a market suddenly turns and heads in the direction opposite to that of yesterday or last week. Sudden rallies and directional turnarounds make up the intermediate trends and, for the most part, are the results of some kind of economic or political action and its subsequent reaction.

History tells us that the rallies in bull markets are strong and that the reactions are somewhat weak. The flip side of the coin shows us that bear-market reactions are strong and that the rallies are short. Hindsight also shows us that each bull and bear market will have at least three intermediate cycles. Each intermediate cycle could last as little as two weeks or as long as six to eight weeks.

Long-Term Trends
To determine the long-term trends that appear on the charts of their favorite stocks, veteran analysts will use a stochastics indicator. My favorite, however, is the momentum indicator called the rate of change (ROC) (which you can read about in Rate of Change):

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The normal time frame for ROC measurement is 10 days. The ratio to build the ROC indicator is as follows:

Rate of Change = 100 (Y/Yx)

“Y” represents the most recent closing price, and Yx represents the closing price a specific number of days ago. So, if the price of a stock closes higher today than it did 10 days ago, the ROC value point will be above the equilibrium, thus indicating to chartists that prices are rising in that particular issue. Conversely, if the price in today’s session closes lower than it did 10 trading days ago, the value point will be below the equilibrium, indicating that prices are falling off. It is safe to say that if the ROC is rising, it gives a short-term bullish signal, and a bearish sign would have the ROC falling. Chartists pay great attention to the time period in the calculation of ROC. Long-term views of the market or a specific sector or stock, will use perhaps a 26- to 52-week time period for Yx and a shorter view would use 10 days to six months or so.

You can see that, by changing the number of days or weeks as a time frame, the chartist can better determine the direction and duration of the trend.

The Bottom Line
Markets are made up of several different kinds of trends, and it is the recognition of these trends that will largely determine the success or failure of your long and short-term investing.

Simple Ways to Identify The Market Trend

Simple Ways to Identify the Market Trend

Simple Ways to Identify the Market Trend

When it comes to trading, being able to identify the trend of the market is crucial. When a market is trending, it is predominantly moving in one direction – either up (Bullish) or down (Bearish). As a trader, fighting against the trend can lead to unecessary losses and can make achieving good risk reward on your trades a lot more difficult.

It is also important to have reliable ways to identify the trend, because markets can also move into a ‘range’, whereby they are not predominantly Bullish or Bearish, but are chopping sideways. If you can learn to spot when a market is potentially moving out of a trend, then it will also help you. Think about trading on a market that is in a Bullish trend. You are focusing on buy positions. However, the market then begins to range. Suddenly, your ‘edge’ has gone.

Being able to spot trends and ranges can seem daunting when you are looking at live charts, but it doesn’t need to be that way. There are a few simple ways to identify the market trend. I will show you them here, as well as some of the more common methods which are actually not very good at all.

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First Understand WHAT Trend You are Looking At

Before diving in and identifying the trend, it is also very important to consider what trend you are looking at. By that I mean what timeframe you are looking at. This is important, because markets can have completely different trends depending on the timeframe you are looking at.

That might sound confusing, but it isn’t really.

Think about a market that is Bullish on the daily timeframe. The market is moving up.

However, on the 5 minute timeframe, the trend is Bearish.

That is because, although the overall trend is Bullish (on the daily timeframe), during an individual trading day, the market can be falling (Bearish).

Think about it in different terms – a football team can be dominating a league and climbing the table (Bullish), but they can also stumble and suffer losses (Bearish). That is how markets move. They do not simply move straight up or straight down.

Why is That Important?

It is important because if you identify a market as Bullish on the daily timeframe and then decide you only want to but that market, but are trading on the 5 minute timeframe, then the trend you are looking at may play no relation to the price action on the 5 minute timeframe. If the market was in fact Bearish on the lower timeframe for that day, you could suffer multiple losses.

Identifying the trend is important, but so is being able to relate the trend to your trading. For example, I may identify a market as Bullish on the daily timeframe, and then wait until it pulls back into important support levels that I believe are likely to be areas where the buyers will step in again and continue the trend. When it does that, I drop down onto the 1 hour timeframe and start looking for buy positions that fit with my trading plan. That is how you align yourself with the market trend.

You can click through examples of opposing trends on the same market – EURUSD and GBPUSD – by clicking the pictures to the right.

4 tips on how to spot a market trend before it gets obvious

The major rule of technical analysis states that “prices move in trends”. Even though stock price movements may look random, this fundamental assumption means that prices tend to follow short, medium and long-term trends.

The question is: how do you spot a trend? Let’s try to find it out.

We can define three major price trends: an uptrend, a downtrend and trading what is known as sideways. When the market is indecisive, we may expect it to trade sideways. When the market is driven by some positive news, we may see an uptrend. And vice versa, in case of negative news coming to the market, the price turns back and begins a downtrend.

If you’re a lucky trend trader (or smart enough) to spot the emerging trend right at its origin, you will be able to jump into the up- or downtrend and try to place a profitable trade.

Despite all the regulators’ efforts, price-sensitive information comes to the market rather slowly. First, it becomes known to insiders, then it is spread to their close circle, and then further on, it reaches financial experts, analysts and big investors. In the end, it comes to ordinary traders.

Financial and political news often make the price go up or down. However, the spread of the information takes time. The market’s reaction can be also time-consuming. It paves the way for the trend to mature.

Real people stand behind price movements.

The ability to identify a market trend is crucial when it comes to trading. Spotting the trend at the very beginning can be rewarding for trend traders.

Here’s a short video guide on a trend trading strategy that may help you identify and use the trend in your favour.

There are some noteworthy indications that may help you understand the process of trend building.

A recent uptrend is not a cause to be bullish

Indeed, a steadily rising chart over the past several months looks promising. However, don’t forget that it may be just a rebound from a sharp drop. That’s why in spite of a positively looking image, we read the warnings about the bear market’s “trap” — or, a good-looking rise during an overall bearish market trend.

Examine the all-time highs

The major thing in spotting the price trend is the evaluation of the market’s all-time highs. Stocks trading in all-time lows or highs areas are ultra-sensitive to changes. A wide range of stocks are rising close to or above their record highs. Therefore, it may be a good hint to pay attention to stocks at their all-time highs as a source of speculative returns and a market trend confirmation.

Saudi vs Russia oil price war

Trend is your friend: history tends to repeat itself

Probably the best way to spot an emerging trend is to go through the market’s historical price pattern and compare it with a current situation.

People’s reactions almost never change, so you may predict that today, traders will react in a similar way they did in the past when faced with the similar market events.

Trend indicators

Though technical trend indicators show us the current market’s performance with no goal to predict upcoming market trends, they are the perfect tools for us to understand the market’s performance and analyse its price movement.

Though the best brokers provide a wide range of technical indicators (Capital.com offers 75), the 4 most popular indicators include:

a. Moving averages are widely-used trend indicators that help to observe the market’s price fluctuations according to historical data for a predetermined timeframe. It allows to depict the general trend’s flow.

Moving averages provide trend traders with a clear vision whether to go long or short on a particular stock.

b. Bollinger Band trend indicators measure the volatility of the market’s price fluctuations. Bollinger Bands consist of three lines – the lower band, the middle band and the higher band. The lower and upper bands shows 2 standard deviations away from the mean average.

When markets become volatile, the distance between the bands becomes wider – and vice versa in case of low volatility.

c. The MACD (Moving Average Convergence Divergence) indicator allows us to conduct a comparative analysis of two moving averages for different timeframes. Through MACD, a trend trader can assess the price swings for two different periods. The comparison is performed according to the 3 parameters, including convergence, divergence and dramatic rise.

d. OBV (On Balance Volume) is a trend indicator that measures the market’s volume flow to determine the trend direction. Volume itself is a valuable indicator, and the OBV compiles this information into a one-line indicator. Price and volume are directly proportional. A rising price is indicated by a rising OBV and a falling price is indicated by a falling OBV.

If the OBV increases during the increasing price trend, it signals that the price trend is sustainable. When the OBV shows a decline, and the price trend is still increasing, it can signal a price trend reversal.

The good thing is that trend traders can use a combination of different indicators to create their own trend trading strategies. Learn more about the available technical analysis tools and adapt them to your personal trading experience.

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