A trend is a directional price movement. The ability to correctly identify a trend can significantly increase your trading performance.
There are three types of trends:
An uptrend is a sequence of rising highs and lows where each subsequent high and low is above the previous one.
A downtrend is a sequence of falling highs and lows where each subsequent high and low is below the previous one.
A horizontal trend is a price movement without a clearly defined upward or downward direction. Highs are almost on the same level or are located chaotically. Lows lie along a conditional horizontal line as well or don’t have a clear logic behind their location.
It's important to remember that real-world trends rarely exactly match the description. For instance, you can see a downtrend with a too-high low that sticks out from the rest of the market or an uptrend where the following high is lower than the one before.
These deviations from the norm are inevitable since theory and reality frequently diverge. In actual trading, it makes sense to classify a price movement that best satisfies the description as a trend.
You may obtain a rough estimate for the price movement after accurately identifying a pattern. Of fact, in actuality, the price may frequently veer off track. The trend, nevertheless, enables you to comprehend something crucial: which direction is more beneficial to trade in.
Trading against a trend frequently results in losses and can be dangerous because it is difficult to predict when a trend will reverse. Because of this, trading in the direction of the trend is considerably more logical.
Advice on how to trade more effectively while utilising a trend
- Better to position Buy orders should be placed in an upswing; Sell orders should be placed in a downturn;
- It would be advisable to avoid trading if the trend was unclear since it would be challenging to forecast the direction of the price movement.
- But, you can sell in its higher zone and purchase in its lower one if the price forms a distinct sideways corridor with enough height.
How to Identify a Trend on the Indicator-Free Chart
The easiest approach to spot a trend is to visually examine the price movement on the chart. It's crucial to pay attention to where highs and lows are situated. You can tell if the movement is rising, falling, or horizontal based on where they are on the chart.
Symptoms of a trend
- In a downtrend, each low is lower than the one before it, and in an uptrend, each high is higher than the one before it.
- A trend occurs when there is a consistent upward or falling tendency. While examining the hourly chart, for instance, a sudden price increase within a few hours is not a pattern. A trend, however, can already be said to exist if a continuous price increase resembles a wave.
- The price swiftly returns to its prior levels after modest price retracements relative to its big movement.
Moreover, there are several traits of a trend that, while not necessary, can nonetheless be seen fairly frequently.
- Strong price impulses can mark both the beginning and the conclusion of a trend.
- The price frequently enters and remains in a flat condition before the opposite trend starts. The current price behaviour might be a tip to take profits.
It's important to remember that patterns might change over time. A trend, for instance, can shift upward on the daily chart while declining on the hourly chart. The higher period is given precedence in this situation, however if the hourly timeframe is the emphasis, short-term bearish bets are permitted.
Remember that when a price reaches a key level on the daily period, it may reverse the direction in which it is moving.
Thus, being able to spot a market trend reversal may be advantageous for a trader.
Some traders see a distinction between the terms "tendency" and "trend." Technically, there is no discernible distinction. However it's generally accepted that propensity is a more all-encompassing idea. While the trend is typically extremely obvious and has well-defined traits, it is not always precisely defined.
How to Identify a Trend Using Indicators
Sometimes a trend is less distinct, making it challenging to spot it clearly on the indicator-free chart.
Trend indicators come in handy for traders in these situations. Let's take a look at a few of them that are by default included in the MT4 trading terminal.
It's critical to realise that trend indicators frequently fail to function when the market swings laterally and are only effective when there is a trend.
Choose to "Insert - Indicators - Trend" in the MT4 menu and choose the appropriate trend indicator to add to the chart.
Moving Average
The provided indication is among the most basic and frequently used as the foundation for creating new indicators. The average price value over a certain period is displayed via the moving average.
Several statistical weights might be applied to the closing prices of recent and older candlesticks. Moving averages come in a variety of forms, including basic, weighted, smoothed, and exponential.
Moving averages are frequently used as a kind of support or resistance; however, they are not perceived as straight lines but rather as time-moving curves.
Many moving average-based methods have been created, and virtually all of them follow a similar pattern:
- In an uptrend, it is preferable to place a Buy trade when the price reaches a moving average from above and continues to move in the direction of the trend.
- When the price reaches a moving average from below and continues to move in the direction of the trend on a downtrend, it is preferable to place a sell trade.
Аverage Directional Movement Index (ADX)
It measures the average movement direction as an indicator. It is shown below the currency pair's chart and consists of three lines:
- The ADX itself; Positive directional indication (+DI); Negative directional indicator (-DI).
- You can identify the presence of a trend and choose the ideal moment to place trades and take profits using the ADX indicat
When +DI surpasses -DI (during an upswing), a Buy signal is produced.
When -DI crosses above +DI, a sell signal (in a downtrend) is issued.
Only when the ADX itself is increasing, which denotes the existence of a trend, are both signals genuine.
Also, it's time to consider profit-taking if the ADX is decreasing.
Standard Deviation
The curve for this indicator may be seen below the price chart. It shows market volatility, or the size of price fluctuations in relation to a moving average.
The market is said to be "sleeping" if the Standard Deviation number is low. On the other hand, if the indicator value is high, there is a lot of volatility. It makes sense to avoid trading this financial asset in both scenarios. The indicator's average values are thought to be the best ones for trading.
As a standalone indicator, standard deviation is not frequently utilised in trading. It is typically used with other analytic techniques.
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