4 Easy Ways To Quickly Identify Market Trends
“It is a military axiom not to advance uphill against the enemy, nor to oppose him when he comes downhill.”
— Sun Tzu, The Art of War
In his classic book on military strategy, Sun Tzu advocates following the path of least resistance to victory.
For traders, following the path of least resistance means trading with the trend, giving you a higher chance of success. Conversely, trading against the trend usually means that you are fighting an uphill battle, leading to greater chances for your trades ending in failure.
If the market is in an uptrend, long setups have a higher chance of panning out. In a downtrend, short setups are probably a safer bet. And in a choppy sideways market, traders may find it more profitable to go with shorter term trades and closer targets.
This is why one of the most important lessons traders should learn is how to identify a trend.
In this article, we will go over four techniques and tools for quickly and easily identifying market trends.
1. Price Action
The simplest way to determine the trend is to look at the price action.
An uptrend occurs when price makes higher highs and higher lows. For downtrends, you need to look for lower highs and lower lows.
Beginning traders may find that it is easier to spot the highs and lows by switching to a line chart. This eliminates all the regular candlestick information except for the closing price of each candle. Streamlining your chart this way makes spotting the trend much more straightforward.
2. Moving Averages
Moving averages can help identify trends, both on their own and in combination with another moving average.
A sharper, upward slope on a moving average indicates an uptrend, while a downward slope suggests a downtrend.
Price closing above or below a certain moving average (such as the 200 MA) can also be used as suggestion of bullishness or bearishness.
When used in combination with other moving averages, crossovers can be used as confirmation of a trend.
For example, if a faster 20 MA crosses up above a 50 MA, that would be a bullish cross suggesting an uptrend. If the 20 MA crosses below the 50 MA, that would be a bearish cross and could indicate a downtrend.
The MACD has two lines, the MACD line and the signal line. When the MACD line crosses above the signal line, that could indicate that a reversal into an uptrend is forming. If it crosses below the signal line, it is possible that a reversal into a downtrend is forming.
The zero line or center line of this indicator can be used as well. When the MACD line crosses above the zero line, that could indicate an uptrend. Crossing below the zero line suggests a possible downtrend.
The gap between the MACD and signal lines can be used to help identify the momentum of the trend. A widening gap suggests that the trend still has momentum, while a narrowing gap could indicate that the trend is weakening.
4. Ichimoku Cloud
The Ichimoku cloud allows you to quickly identify the trend at a glance. If price is trading below the cloud, the trend is bearish. If price is trading above the cloud, the trend is bullish. If the price is trading inside the cloud, the market is going sideways.
The angle of the cloud shows you how strong the trend is. A sharp upward sloping cloud is a stronger uptrend. A sharp downward sloping cloud is a stronger downtrend.
The color of the cloud is also a quick way to determine the trend. The cloud is formed by the area between Leading Span A and Leading Span B. When Span A crosses above Span B, the cloud turns green and the trend is bullish. If Span A crosses below Span B, the cloud turns red and the trend is bearish.
The Tenkan-sen (Conversion Line) and Kijun-sen (Base Line) can also be used in the same way as the moving averages described earlier. Tenkan crossing above the Kijun is bullish, while Tenkan crossing below the Kijun is bearish. Bullish crosses that happen above the cloud are stronger, while bearish crosses are strongest when occurring below the cloud.
Following the trend is a great way to help traders set themselves up for success, but it only gives you a general idea of what sort of setups to look for. Further analysis through techniques such as support and resistance, candlestick analysis, fibonacci tools, or other tools will be needed help identify the best places to enter a trade.
It is also important not to force yourself to see a trend if one is not immediately clear. If this is the case, simply move on to a different asset where the trend is apparent.
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