The correct definition of the current trend is the key to successful trading. Many people know this, but not many people use it.
In today’s article, I decided to dwell in great detail on the issue related to the definition of the trend and analyze the mass of actual issues. This article’s knowledge will help reduce the existing, rash entries, and as a maximum, make your trading strategy.
I decided to touch upon the following extremely important issues:
I have accumulated a lot of experience in the question: “How to determine the trend in Forex,” although why only in the Forex market, my knowledge can be applied absolutely in any market. Anyway. Today we will talk about defining a trend.
Why is it important to know the direction of the current trend
I didn’t want to include this question in the article. It seemed natural to me. But I remembered one conversation with a novice trader who said, what difference does it make which trend? I receive a signal to enter and enter the market in any direction.
For some reason, when he told me this, I could not find what to answer him, but the question was postponed to me. Therefore, I decided to answer all at once.
For me, a trend is a priority direction of movement. If we get behind the wheel of a car, we will hardly drive in the oncoming lane because it is clear that it is easier to get into an accident there.
This is exactly the case in trading. The trend indicates the direction of the road. I will repeat the hackneyed proverb: “trend is your friend.” By trading with the trend, the risk of getting a moose is reduced, and the potential for large profits increases.
We will assume that the answer to this question has been received. Why is it important to know the direction of the current trend? Because this knowledge will help you earn more than lose.
At what time interval is it better to determine the trend
Before getting into explanations, I want to give several screenshots of the same time but on different timeframes and try to determine the trend’s direction.
An uptrend in the EURUSD pair, D1 timeframe.
The downtrend in the EURUSD pair, H4 timeframe.
An uptrend in the EURUSD pair, H1 timeframe.
Flat in the EURUSD pair, timeframe M15.
What did I mean by that? The fact is that on each timeframe, at the same time, there will be its situation, its trend. Everything must be taken into account.
If, in a nutshell, to answer the question: “On which timeframe is it better to determine the trend,” then the correct answer will be: “On the working timeframe.” The one on which you constantly work. If you expand the answer, it turns out that there is no single trend. Each trend you define is a trend of a larger or smaller period.
For example, we work on M15 and define the trend as an upward one. Switch to H4, and it turns out that the trend is a downtrend. I decided for myself long ago that all timeframes should be monitored.
Pay attention to the screenshots above and find the D1 graph. An uptrend is visible here, and the price is at the lower border. Traders have a rule:
The trend is likely to continue rather than reverse.
If you believe this rule, then it turns out that one should consider long-term purchases rather than short-term sales in this situation. We pass to H1. There is an uptrend, and the price is also near the lower border—another confirmation for the purchase. And finally, we go down to my workstation M15 (usually M5). Here is a flat.
Putting everything together, we have a global uptrend, an uptrend on H1, and a flat on M15. We follow the M15, and as soon as the price breaks out of the flat up, you can try a long-term buy.
Would I conduct such a non-tricky analysis if I determined the trend only on the intraday timeframe? Of course not. But even defining a global trend on D1, it would not give me much either. Therefore, the trend must be determined on all timeframes, compare the information and draw the appropriate conclusions.
Trend detection methods
Now that it has become clear that knowledge about the direction of the trend cannot be neglected, I want to tell you my methods of determining the trend in the Forex market or in any other where you will trade.
There are only two types of trend:
- Upward trend.
In a downtrend, each subsequent Low is below the previous one. Each subsequent High is below the previous one.
In an uptrend, each subsequent Low is above the previous one. Each subsequent High is above the previous one.
It doesn’t take a genius to figure out when the price falls and when it rises. I want to go deeper and give several. One might say life-tested, methods that will tell you how to determine the trend.
Determining the trend: Visually.
There are many strategies in which a well-constructed trend is a key to a correct entry. But, there are other strategies where only a visual determination of the trend direction is enough.
In this case, we do not need to adhere to any clear rules, but it is enough to draw a trend line with an understanding of the simplest things:
If the line is directed upwards, then there is an uptrend. If the line is directed downwards, then there is a downtrend.
You see, in this case, I did not adhere to any rules. It was important for me that the price visually moves down.
Defining a trend: Trendlines
Anyone who has ever taken a technical analysis book in their hands knows that the current trend can be determined using trend lines. There are many methods for drawing this line, I even wrote an article about it, but in this section, I want to share the most understandable one, which Thomas DeMark suggested.
Thomas DeMark suggested taking pivot points (named after his name – TD) and building a line through them. The pivot point is a kind of fractal. If we see five candlesticks on the chart, of which the central candlestick has the highest Hi, then we will draw a downward trend line through this point.
Accordingly, if there is a TD, which consists of 5 candlesticks, of which the central candlestick has the lowest Low, then we will draw an uptrend line through this point.
Thomas DeMark said:
- The line must be laid sequentially from one TD to another;
- He is interested in the most recent TDs to the right side of the screen, and only on them, he made the main emphasis, defining a reversal or continuation of the trend.
How to identify a trend using support and resistance levels?
Throw stones at me, but I consider this method, along with determining the trend by volume, to be the most professional one. Will explain.
Let’s take a certain segment of the price and build a trend line, as shown in the screenshot below (by the way, in this case, I used the method of constructing a trend line described by Sperandeo). We have three important points: A, B, C.
Through points A and B, a trend line was built, which was broken by the price. The rules for working with trend lines remind us that if the trend is broken, then the trend has changed.
According to the instructions offered by Sperandeo, we need to wait for the retest of the broken trend line and enter the purchase.
The screenshot above shows that everything described above worked except one but. Once the trend line was broken, we had to change shoes from sellers to buyers, and the price did not rise very much.
What will the support and resistance levels tell us?
It turns out that the price has broken through the support level (which becomes resistance) and is now testing it from below. Yes, there is a slight twitch above, but that’s okay.
It turns out that after breaking through the support level, we had to actively start looking for sales, although the trend analysis prompted us to look for purchases. For this reason, support and resistance levels, for me personally, have a more significant weight than trend lines, and it is by levels that it is best to determine the trend.
See the example below, which clearly shows an upward movement (trend) supported by resistance levels. As soon as the resistance level was broken, the trend changed to a downtrend.
How to identify a trend using volumes
The trend can be determined by horizontal volumes or on trades by analogy with support and resistance levels.
Determining the trend by horizontal volume
If you have read the works of Peter Steidlmeier, then this section should not be a revelation for you, attention to the rest.
In the Forex market, CME, MICEX, RTS, and others, the price moves not because the wind is blowing and not because someone has drawn a resistance level there, but because volumes of money are pouring into it.
Some algorithms visualize the volume traded at one price level and presented it in the form of a histogram. The price where the maximum amount of volume was traded has large bars, the price where the smallest volume was traded has the smallest bars.
Understanding this theory opens the eyes of traders to the most important levels. It is logical to assume that if, for example, 100,000 contracts were poured at the price of 1.4000, and at 1.3000 5,000 contracts, the level of 1.4000 will be more significant with all the ensuing consequences.
Pay attention to the screenshot above. The price was systematically moving down, leaving the highest daily volumes higher. This fact speaks to us about a major player’s interest in sales and, accordingly, a downward movement.
Possession of information about the maximum daily volume and maximum contract volume provides excellent entry points for the trend.
Determining the trend by trading
Now, look at the grocery store. On-trade, this is the same traded maximum volume. We determine it for different periods.
I have depicted the trades available in this range and marked them with rectangles in the figure below.
In this case, the occurrence of successive, downward trades starting from January 30 to February 21 also confirms a clear interest in selling on the part of a major player. Therefore, we can talk about a downtrend.
Determining the trend using indicators
Almost all trading platforms have their own set of trend indicators. I will not list everything. I will focus on the most demanded ones.
Determining the trend using moving
The Moving Average indicator is designed to determine the trend on the chart. A line calculated by the formula can serve as a trend line well.
Defining a trend using Parabolic
Parabolic SAR leaves marks above or below the current price. If the mark is set above the price, then the indicator algorithm hints at a downtrend. If the mark is set below the candle, then the indicator marks the presence of an uptrend.
Ways to determine the strength of the trend
Determining the strength of the trend is very important information for making correct trading decisions. As you can see from the figures above, although it is a friend, the trend often changes its direction (we are talking about intraday trading). In addition to all this, the trend can be inside another trend and be not a trend at all, but a counter-trend movement.
In how he twisted, he was already scared himself. But the fact remains that the trader must take into account all market movements.
A strong trend is not the one that falls like a stone, but one that has a clear structure and an angle of inclination of approximately 45 0. I’ll give you an interesting drawing again.
There is some part of the market where the global trend is indicated in blue, burgundy, intraday, and red, accelerating the trend.
Suppose we are in the position where the arrow is pointing. An inexperienced trader will rush to sell as soon as the price bounces off the acceleration line, but this is not correct and for a good reason. Normal, strong trend, not foreshadowing any reversals, usually around 45 0. If the trend starts to accelerate, then wait for a reversal.
Anyone who has studied wave analysis knows that the market moves in certain waves. Elliot said that each wave is calculated in a certain way, and so on and so on. This is all great, but it seems to me that the most important point is that in a strong trend, the waves are about the same size. If we see a long wave or, on the contrary, a short wave, such a phenomenon should not be ignored.
See the screenshot below. Here I gave an example of a strong trend.
A downtrend started from the very top of the head. The first wave is almost equal to the second wave. Their size is designated H1. The trend continued, and the subsequent waves, the height of which was designated as H2, are also identical. There are subwaves inside, H3 noted, but this is for beauty.
Trade or vertical volume
Let’s go back to trade and vertical volume again. I will not make screenshots, but I will tell you in words.
It has already been said above that the successive reduction of the rectangles with the trade (the same can be said about the vertical volume) strengthens the downtrend.
The logic of this thought is that there is a volume of contracts in these trades, in other words, money. Who needs to collect a large number of contracts at one price? Vryatli is an ordinary trader, most likely some large trading participant.
If we believe that the markets move with large players’ direct participation, it turns out that since the price moves down, while the trades remain at the top, then a large player makes money on this movement, gradually adding to sales.
And until the nearest trade is broken, we can safely talk about the strength of the downtrend.
And the last …
In my opinion, the result is a powerful article that answers the question: “How to determine the trend in Forex” and related questions. What do you think?
As always, your opinion is very important to me, which would be nice to write in the comments. If I remember something that I did not write in the article, I will add it. Well, do not get lost, you know how to improve the article, write to me, discuss it, improve it.