Trends – Identifying Trends
Now that we have understood the various chart types traders use as their daily tools, traders need to identify trends is to form a view of a stock price or currency pair or bond or commodity prices. The cliche “A trend is your friend” is to emphasize traders should generally trade in the direction of the trend rather than against it. In order to identify trends, we need to understand what a trend is first.
What is a trend?
A trend is a direction in which prices form peaks or troughs. If the peaks are making higher highs then the trend is bullish. If the troughs are making lower lows then it’s bearish. If the market is going nowhere it is said to be trending sideways. Therefore the trend has three directions – up, down and sideways.
How do we Identify Trends?
There are 3 steps to identifying trends that we must constantly identify for any currency pair
As a first step to identifying trends – identify the primary trend. This is the long-term trend. If we see the 10, 5-year, 3-year and 1-year graph of USDJPY we can get a lot of information from this graph. We can see long-term trends, corrections, reversals, supports, resistances etc. So the first step would be to identify what the primary trend for the USDJPY is.
The second step would be to identify the secondary trend or the intermediate trend. The timeframe for this trend would be from 3week or 1 month to 3-6 months within the primary trend.
The third step would be to identify the near-term trend. this would typically be roughly 2-3 weeks.
Once we identify these 3 trends it would always be wise to trade with the trend rather than trading against it as the saying goes – the trend is your friend. If you are a short-term trader and the primary trend is up, secondary trend is downwards and the short term is bearish but close to some long-term support you could go long hoping to make a quick buck.
Next – Understanding Market Psychology behind Support and Resistances
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