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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Simple Ways to Identify the Market Trend

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.

Opposing Trends on Different Timeframes

Simple Ways to Identify the Market Trend

A Bullish Trend

A Bullish trending market is a market that is increasing in price over time. The definition of a Bullish trend is a market making higher highs and higher lows.

Simple Ways to Identify the Market Trend

A Bearish Trend

A Bearish trending market is a market that is decreasing in price over time. The definition of a Bearish trend is a market making lower highs and lower lows.

Simple Ways to Identify the Market Trend

Simple Ways to Identify the Market Trend #1

Draw Triangles on Major Swings

Perhaps the easiest way and most reliable to identify a market trend is to follow the market swing points. An easy way to do that is to use drawn ‘triangles’ on your chart.

You know that higher highs and higher lows equates to a Bullish trend and you know that a market making lower highs and lower lows is in a Bearish trend. Drawing triangles over significant market swings will help you spot when this is happening.

This will also keep you alert to when the market stops trending and either moves into a range, or the trend reverses.

Simple Ways to Identify the Market Trend #2

Use the Bill Williams Fractals Indicator

The Bill Williams Fractals indicator is a great tool for identifying the market trend. Similar to following market swings in the first suggestion, this indicator can help highlight the market swings.

Although the indicator is intended as a way to give ‘buy’ and ‘sell’ levels, I find it unreliable in that sense. However, as a tool to identify the trend of a market, it is great.

Upward pointing arrows indicate the high of a swing, downward pointing arrows indicate the low of a swing.

You can then easily identify if the market is in a trend and what direction, or if it is in a range.

Simple Ways to Identify the Market Trend #3

Use a Moving Average

Moving averages are one of the most common ways of identifying the market trend. A moving average is placed on the chart and if the market is above the level of the moving average, it is seen as Bullish. If below, it is seen as Bearish.

Some of the most popular moving averages are the simple 200 period, simple 50 period and simple 20 period.

However, this has its drawbacks. Depending on the period you use, the moving average can miss out on large portions of trends, and can leave you fighting against the trend.

A way to combat this is to use two moving averages. A slower one (Say the 50 period) and a faster one (say the 20 period). When the 20 is above the 50, you look at the market as Bullish. When the 20 is below the 50, you look at the market as Bearish.

Simple Ways to Identify the Market Trend #4

Use Trend Lines and Channels

Trend lines and channels can be a great tool for both identifying a trend, and also highlighting good potential trading areas within that trend.

A trend line is drawn connecting the highs of swing points and or the lows of swing points (At least two swing points to make a trend line or channel). A market respecting the trend line or channel is said to be in a trend.

When the market is testing at the levels of the trend line or channel, it can also give good areas to watch for potential trade opportunities.

A market that breaks the trend line or channel may then be moving out of the trend into a range, or into a trend reversal.

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