A saying goes that the trend is your friend; however, this never explains trading a trending market or how we can signify a trending market. With this article, I will explain to you a few points on trend trading that you can start to execute immediately. This will let you know when a market is trending and how you can take advantage of such trends, also understand trading trending markets with price action.
Ensure you signify a trend with raw price action
There are several clues that can be put on a chart to help in determining a trending market and then trade with it. By making use of trend following trading systems or indicators, many traders have spent a lot of money but end up distracted, this makes the process of discovering trends much more difficult than it used to be.
I am a strong believer in the visual observation of the raw price action of a market. I strongly believe that by observing the raw price action of a market, it will be easier and effective to identify a trend and spot possibly entries among them.
A trend is not exactly a strategy on its own, it is an added point of the assembly which increases its possibility of the trade. However, deciding to stick to a trending market is not exactly a strategy.
Just as a market grows bigger, so does its previous turning point serves as a reference point that can help determine the trends of a market. The best way to identify a trend is to ensure that the market has a pattern of larger highs and larger lows for an uptrend as opposed to lower highs and lower lows for a downtrend. This is simply the visual observation of markets naturally occurring price action.
The first point of call in determining if a market is trending is the general view of a markets swing point. When you do not see a pattern of high highs, high lows or low highs and low lows but instead you see sideways price movement with no exact directions then you are probably looking at a market that is going back and forth.
Note: there is no reason for you to bother with a market being trendy or not, this is because most traders let trend discovery quite difficult. When you take a patient approach you will be able to determine a market that is trending by just looking from left to right the price action chart. Make sure you mark the swing points on your chart, as it will draw your attention to them and help you see if there’s a pattern of HH and HL or LH and LL, as discussed above. Ensure that you note the swing point on your chart because it will draw your attention to them and you notice if there is a pattern of high highs, high lows or low highs and low lows.
Ways to create a trend strategy
When designing a trend strategy, indicators will be very helpful. By taking technical analysis to the next level when designing a trend trading method, traders often make use of time frame analysis in order to have different views on the trend market. Multiple time frame analysis is the one recommended as it suggests the time frames the trader can utilize based on its desired holding times.
Traders will look at the longer time frames in order to find out and determine the strength of the trend while making use of multiple time frame analysis with a trend trading strategy. This can be done in multiple ways. Although some traders will prefer to carry this out with no indicator, just prices only.
Some other traders will consider one of the common indicators known as the moving average. The moving average comes in various types and flavors, although the goal is the same which is the ability to know if price movement is ‘above-average’ or ‘below average’ within a specific period of time.
Features of trending markets
Trending markets tend to follow the direction of the trend followed by moments of consolidation or counter-trend retrace ahead of the next step in the direction of the trend. In almost all trends you come across you will realize this pattern happens. A lot of traders tend to make a lot of money in the time of strong directional trend movement, however, they will continue to trade as the market relaxes with the trend and consolidate. It is during this time that traders give up all of the gains they just got.
It is important to understand how to single out various part of a trend; this will assist you in avoiding overtrading during consolidation periods and will grant you an opportunity when the trend makes a strong move.
Usually, a market will retrace almost to its previous swing point before the trend resumes. These retraces occur during the highest potential for a high entry within the trend. When we experience an uptrend the swing points help to support while the downtrends are resistance. The level of assistance came about when the market began to retrace lower within the structure of the broader uptrend.
The uptrend is the stepping pattern left behind by the swing points. While the market retraces to the support levels, we would direct our attention as price action signals form near this levels to join the uptrend again.
As we said earlier, a trending market will tend to move in one way and then slow down by either joining in a sideways manner or to retrace lower or higher. This is dependent on which direction the dominant trend is. It is during such retrace movements that we can focus extra hard and begin to search for high probability price action trading strategies that are discovered from previous swing point among the overall trend.
Trends trading from value
The ability to watch for obvious price action setups that develop after a market retraces itself back to an agreed level is the primary objective of a price action trader. It could be a swing point level, a moving average level or a support and resistant level. Either way, it is good to trade from the value in a trending market. The value here means an optimum point in the market has previously proved significant.
In an uptrend, we could consider ‘value’ to be supported. This is mainly because the price of the market might be seen as a good ‘value’, traders will buy from this level and push the price higher. However, in a downtrend ‘value’ is seen as a form of resistance because the price has become higher among the broader downtrend, this makes it good ‘value ’ to sell from resistance in a downtrend.
Considering the value point can also be termed, ’trading from the mean’, which is why moving averages tend to behave as a dynamic support or resistant level.
A moving average is one tool that can be used to find value. They are not used at all times but we can consider using 8 and 21-day exponential moving averages.
They are used as a general guide to finding confluent points in a market. A typical example is when 21 days EMA aligns with swing point in the trending market; this can be considered as a confluent level since there are multiple factors lining up together. By the time we sight a price action signal here, we would realize it is a setup formed in a very high probability area on the chart.
In conclusion, make sure you take advantage of the trends when they happen. Trends will not last forever, therefore take advantage of them when they occur. The market usually trends between 25 to 35% of the time while at other times they are range bound or chopping in a sideways fashion. It is important to know how to identify a trending market, to enable you to master it as soon as possible and also get the most out of it.