TrendHow To Recognize A Trend
One of the basic trading rules to increase your chances of success is to operate in the same direction as the trend. The trend is a defined price movement towards a precise direction.
- The bullish trend (uptrend)is identified by a succession of increasing higher highs and higher lows in price.
- The bearish trend (downtrend)is identified by a succession of decreasinglower highs and lower lows in price.
Setting a trend can be quite difficult, and the identification process is often subjective. The short, medium or long term analysis periods should be well evaluated.For example, if a long-term UPTREND is in a downwardcorrection, it can be seen in the medium term perspective as a DOWNTREND. If this medium term trend in turn has a short reversal and making an upward correction/retracement, this can be seen in the short term perspective again as an UPTREND.
What is it for?
Once you have determined a trend, you can invest in the markets according to your favorite techniques with the advantage of not going against the trend flow. If the trend is long (bullish) and you have asignal to Short,it is advised that you ignore such signals and vice versa.If you have a Long signal you normally get in positions that are in the direction of the trend. In other words, you are filtering the signals thereby reducing the fake ones.
How to recognize it
A simple way to objectively determine if a market is in a positive or negative trend is to display a simple 200 periodmoving average on the chart. This offers a view of the current movement. If the price is above the 200 period moving average, we are in an uptrend.If the price is below the moving average we are in the downtrend. Moreover, the 200 period moving average works very well because it is used as a reference by institutions, banks and other large investors.
It is important to note that the further the price is away from the average the stronger the trend. Therefore, you can further filter the signals by avoiding trading if the price is attached to or close to the average.
We talked about 200-period moving average that is suitable for medium-speed trading, but if you want to trade on a short time, you can only analyze the last part of the chart using a 50-period moving average. Obviously, there is no precise rule, but with some experience everyone can adapt the analysis period by personalizing it to their trading.
An even more precise method, similar to the former but slightly more complex, is that of the 3 simple moving average of 20, 50, 100 periods.
This method only filters strong and net trends.
The bullish trend is only when the three averages are in this precise order:
- The current price is above the 20 period moving average;
- The 20 period moving average is above 50 period moving average;
- The 50 period moving average is above the 100 period moving average.
Similarly, a bearish trend occurs if the following conditions are met:
- Price is below the 20 period moving average;
- The 20 period moving average is below the 50 period moving average;
- The 50 period moving average is below the 100 period moving average.
The periods 20, 50, and 100 are the most used for a medium-term trading type, but can be modified to match their trading type.
An alternative method of recognizing a short-term trend is to use the Relative Strength Index (RSI) indicator. The rule is simple:
- RSI over 60 -> bullish trend;
- RSI below 40 -> Trend Reduction;
- RSI between 40 and 60 -> Sideways Phase.
An interesting method using RSI is to enter a retracing market after defining a trend.Using the valuesabove as the trade entry on rebound and subsequent trend recovery.
To make an example: If there is a strong long trend and a downward price correction, it is likely that the price rebounds near the value of the RSI 40, and then continues uphill. The same thing applies to a strong short trend, only in that case the price will bounce down around the value of the RSI 60.
the Analyst's answerJean Grossett - Financial analyst
From my years of trading, I have come to a conclusion that in order to identify trends a trader has to view all the different time frames as simply different perspectives of looking at the same price. Figuring out associative relationships and consequently establishing relationships between short term medium term and long term trends as follows:
– Long termtrends are viewed as consecutive bullish or consecutive bearish bars.e.g. monthly charts.
– Medium term trends are viewed via HeikenAshidoji spotter trend indicator on the weekly charts.
– Short term trend is viewed as an MACD (9,21,5), or RSI oscillator on the daily charts, following the crossover of the MACD and the signal line for bullish and bearish patterns.
This is a topic for discussion in another article.