Trend are most sought out thing in any market. Traders love the trend and make most out of it. Let us see how to identify a trend in a price chart.
In price movements, there are only two phases.
- Trending phase
- Consolidation phase
It is very important to find the trend of any market before entering any trade. If you entered the market during the consolidation period, your money will be like a NPA (Non Performing Asset). It may not give any return in a given period. The best time to enter any stocks or forex currency pair, is when it is trending.
What are the two trends and how to find them?
Here we are considering only the first part of price movement. The trending phase.
There are only two kind of trends. Up trend (Bullish) or Down trend (Bearish).
when you read a Forex chart or stock chart to analyse the trend, the easiest method is to find the highs and lows in price chart and identify the trend accordingly. In Price action analysis, we do not use any indicator to find out the trend direction. We can use the naked chart to analyse the trend.
How to find an UP trend or bullish trend?
To find out any trend, first thing to understand is Highs and Lows in a chart. Let us see the chart below.
Now you know what is meant by high and low in a chart. Next step is confirming a UP trend.
An UP trend forms only when a higher high(HH) and a higher low(HL) is visible in the chart
Let us go through the below chart and elaborate the idea.
This chart shows starting of an up trend which is reversed from a down trend.
You can see Higher high (HH1) is higher than the previous high (H0) and Higher Low (HL1) is higher than the previous low (L0). So an UP trend establishes when a HH and HL is formed.
Remember , just one Higher high does not show the start of an UP trend. There must be a HH and HL to confirm the UP trend.
Identifying a Down trend (Bearish trend)
Now you are familiar with highs and lows. If you understood how an up trend forms, then it is easy to understand how a down trend is established.
A Down trend forms only when a Lower low (LL) and Lower high(LH) is visible in the chart
It is just the opposite of up trend. You need to identify, the lower lows and lower highs. Let us see the below chart.
You can see that trend changes direction to a down trend when a Lower High (LH1) and a lower low (LL1) is formed.
One Lower high or a Lower low does not form a down trend. There must be a Lower low (LL) and Lower high(LH).
When to enter an Up trend?
Now you know when an Up trend is formed. We will see how to enter a trend.
Once the HH and HL are formed, you will enter when the price breaks the HH1 level keeping the Stop loss below HL1.
So once you realize there is higher high formed, then wait for a higher low. Then you will enter only when the HH1 is broken by bullish price movement.
When to enter a down trend or bearish trend?
When a lower high and lower low is formed, you can enter the trade when the price breaks the LL1 level.
What happens during non trending or consolidation period?
During consolidation period, price fails to create a combination of HH and HL or LH and LL. It means it may create a higher high occasionally, but then reverse to make low again. Price toggles between random Ups and lows without following any direction. Best things to do during consolidation period is to keep yourself out of the trade. Next thing you can try is to trade in smaller time frames during consolidation period.
Does market follow these ideal rules always?
No. Market does not follow any rule. Market can turn around from any trend at any time. An experienced trader will follow the market moves instead of expecting that the market will follow the rules.
Whenever market turn around against your trend direction, get out of the trade with your profit or loss. Loss booking is a part of trading. You need to know when and how to enter and exit from the trade. This comes with experience as a trader and understanding the market moves.