Up or down? Learn how to identify market trend

Trading, like every sphere of activity, involves events we can't control. In trading, such events make trends. It is impossible to influence trends if you are not Elon Musk, but you can try to anticipate them. Let's learn how to identify the trends and profit from them!

A trend is a general direction in which the market is moving. It can be short-term (several hours or days), medium-term (several weeks or months), or long-term (several years).

The most important thing for a trader is to identify the current trend correctly because it will determine your trading strategy. There are three types of trends:

1. Uptrend (bullish) — the price is moving upwards;

2. Downtrend (bearish) — the price is moving downwards;

3. Sideways trend — the price curve is moving horizontally.

How to identify the current trend?

There are several ways to do it. The most popular one is drawing trend lines. A trend line connects at least two price points, indicating the market's general direction. When the price breaks through the trend line, it signals a change in the trend.

Here's how to draw a trend line:

1. Find two points on the chart that mark the beginning and the end of the trend;

2. Connect these points with a line;

3. Extend this line into the future.

This is how an uptrend, downtrend, and sideways trend look on a chart:

Downtrend and a following bullish reversal

 

A flat or sideways trend

 

As you can see, an uptrend is formed when the price creates higher highs and higher lows, while a downtrend is formed when the price creates lower highs and lower lows. A sideways trend is formed when the market consolidates, and the price makes equal highs and lows.

Sometimes, it isn't easy to correctly draw a trend line, especially on a short-term chart (1D-7D). In this case, you can use technical indicators. The most popular ones are moving averages. A moving average is the average price of an asset over a certain period. There are different types of moving averages: simple (SMA), exponential (EMA), weighted (WMA), etc.

The most popular moving averages are SMA50 and SMA200. SMA50 is used to identify short-term trends, while SMA200 is used to identify long-term trends. If the price is above SMA200, it signals an uptrend. If it is below SMA200 — a downtrend.

 

A descending trend with SMA200 (red line)

 

When the price forms higher lows and higher highs (uptrend), it also creates higher lows relative to SMA200 (red line). The same goes for downtrends: when the price forms lower lows and lower highs, it also makes lower lows and lower highs relative to SMA200 (red line). If the price consolidates and doesn’t form clear highs or lows, it will fluctuate around SMA200 without creating clear highs or lows relative to it (sideways trend).

These are just some of the ways you can identify trends. Experiment with different methods and indicators to find the best work for you.

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