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What many traders tend to dismiss, however, is the shorter time span between each retest as the trend extended higher. The likely outcome for this type of price action is as follows: Why does this happen? When it comes to supply and demand , as 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. 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.
Notice how each rally spent less time away from support as the trend became extended. We all know what happened next. The breakdown you see in the chart above was the starting point of the massive 3,pip drop that transpired over the next 44 weeks. 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. 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. Notice how, toward the latter half of the trend above, the market began to cluster just above support.
This type of price action leads to a breakdown more times than not. It can, in fact, be extremely powerful on just about any time frame, even the 1-hour chart. Once again, notice how the price action became heavy toward the latter half of this ascending channel, a clear indication that the bullish momentum was not only tiring but that a break was imminent.
The result of the breakdown in the chart above was a loss over the next 30 trading days. 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 useful in bearish markets as they are in bullish markets. The charts and patterns above were only used to maintain a consistent theme 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. Rather, your job is to gather the clues the market leaves behind and assemble them in a way that stacks the odds in your favor; and every possible clue is born from the natural ebb and flow of the market.
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? A long-term secular trend is one that lasts for 5 years or longer.
Is the line pointing higher as the chart goes on? Is the line pointing lower as the chart goes on? Is the line flat as the chart goes on? Line charts should not be used exclusively but as part of a comprehensive trading system to help you identify the general direction without getting bogged down in precise details. Trend Indicator 3: Moving Average Moving average is another trend indicator that will actually work. Moving average refers to summarizing past prices, which are then plotted onto a line chart to give you an idea of the moving average of those prices.
A moving average indicator chart will help you identify the overall direction and, most importantly, the strength of a particular trend. For the easiest way to use a moving average to identify a broader direction of a trend, you need to consider these two factors: if the current price is above the MA Moving Average , then the trend is a long-term uptrend.
If the current price is below the MA, then the trend is a long-term downtrend. If the price tends to stay above the 50MA, then it is a healthy trend. If it tends to stay below these MA numbers, then it is a weak trend. In general, this trend indicator is most useful in markets that are in uptrend or downtrend—but is relatively insignificant in markets that are in a range.
Trend Indicator 4: Trendline A trendline is a unique tool indicator tool that you can draw on your trending charts. A trendline will help you more accurately identify the direction and strength of a trend, but only if you are using it in the right way. Trendlines need to be done accurately to be a helpful reflection of overall trend direction and strength.
If the trendline is pointing higher on the chart, then the direction is an uptrend. If the trendline is pointing lower on the chart, then the direction is a downtrend. How steep is it? How flat is it? As a general rule of thumb: the steeper the trendline, the stronger the trend; the flatter the trendline, the weaker the trend.
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