How-To Identify Trend
Being able to identify if a market is trending is a very easy and simple thing to do but is very important. The way you identify is by seeing if higher highs and higher lows are made in an uptrend, and lower lows and lower highs in a downtrend. The chart below will better explain the concept of identifying a trend.
See how on this chart the downtrend is clearly definable because prices are making lower highs and lower lows. This is extremely easy to spot and is a very reliable way to identify trends in a market.
The lower highs and lower lows almost act as a stepping stone downward. Obviously the exact opposite of a downtrend would a uptrend and it uses the same thing to identify. Except this time it is with higher lows and higher highs forming.
Below you see a simple example of an uptrend that was easily spotted by higher highs and higher lows.
How-To Know When a Market Begins Trending
It is easy to know and spot when a market is trending, but the hard part is knowing when a market goes from a ranging market to a trending market. By being able to spot a newly trending market you will gain an advantage when it comes to trading that market and the better chance of having more profitable trades. For example, if you can enter a trade on the second pullback and get into the trade when the trend is young you will have a more profitable trade compared to if you enter the same trade when the market is on its fifth pullback and the trend is coming to an end.
The way that you are going to be able to tell when a market has began to trend is when either the first high or the first low is broken. When the first high is broken you know it is the start of an uptrend and when the first low is broke you know it is the start of a downtrend. Let’s take a look at a couple of examples:
The first high level is broken and the uptrend begins
The first low level is broken and the downtrend begins
How-To Use Trends to Your Advantage When Trading
When you are looking at a possible trade, identifying the trend is going to help you immensely. The reason for that is because you will know where the momentum in the market is at. Is it with the bears or bulls?
The best way to trade is with the trend so that you will have the momentum behind your trade. This will greatly increase the trade’s success rate.
One way to use the trend in trading is to wait for a pullback and then a price action trade setup. This is one of the most effective ways to trade the market. Add this with support and resistance and you will be trading with confluence. Which is the best thing you can do when trading.
The chart below shows that the market is in an overall uptrend and when it pulled back to a support and Resistance zone a bullish engulfing bar was printed. This is a great trade setup.
