Where is the trend going?
Forex Price Trending
The success of trading depends on the correct identification of the trend in forex. How not to make a mistake in your choice? How to identify a trend using highs and lows? How are the lines of TD (Thomas DeMark) drawn? What do the internal trend lines indicate? Do moving averages help traders in their work? In this article, you will find answers to all these questions!
Trend Identification with Highs and Lows
One of the definitions of an uptrend is the alternation of higher highs and higher lows. In fact, the upward trend is unbroken until the previous relative minimum is “taken”. If this condition is violated, then this is a warning that the trend is likely to be broken. Meanwhile, it must be recognized that the interruption of the sequence of higher highs and higher lows should be considered as one of the possible signals, and not an absolute signal of a reversal of a long-term uptrend. Similarly with a downtrend. Upward and downward trends (or trends) are often distinguished on the charts by straight lines. An uptrend line connects a series of lows; a downtrend line connects a series of highs. The trend may go on for years.
For trend lines and corridors, these rules apply.
- Price decreases approaching the uptrend line and price increases approaching the downtrend point are often a great time to initiate deals in the direction of the main trend.
- The breakdown of the uptrend line (it is better if it is confirmed by the price of daily closing) is a warning to sell; the breakdown of the downtrend line – a warning to buy. Confirmation of the breakdown is the minimum% of the price change or the minimum number of daily closures behind the trend line.
- The upper line of the ascending price and the lower line of the descending corridor are potential areas of income fixation for medium-term exchange players.
Corridors and trend lines are effective in analysis, but their significance is often exaggerated. It is easy to overestimate the predictive power of trend lines when they are plotted post hoc. It is often overlooked that during the development of an uptrend or downtrend, these lines need serious adjustment.
The above example suggests that the breakdown of the trend line is more likely the norm than the exception. An important fact is a fact that trend lines must be broken in the process of their modification, which is equivalent to saying that trend lines are often adjusted during their extension. The conclusions from this observation are as follows: graphical analysis works much better after the fact that online, and breakdowns of trend lines are often a trap for speculators.
Thomas DeMark Lines (TD)
The author of this theory correctly noted that drawing trend lines is an arbitrary process. On any chart, different traders will draw lines in different ways. And even the same person at different times will draw the trend lines on the chart, not the same way.
The reason for this ambiguity is quite simple to discern. The trend line, as a rule, involves the combination of a number of relative highs and lows. If there are 2 points, then you can draw a trend line relatively accurately. But if you can connect 3 or more points, as it usually happens, then you can draw exact trend lines only in the case of strict linearity. In fact, the drawn trend line will exactly pass through 1-2 relative minimums or maximums, bypassing the others. A “correct” trend line is only in the imagination of the person looking at the chart.
The author of the idea admits that in order for the trend line to be unambiguously and relatively accurately identified, it should be based solely on 2 points.
DeMark notes that it is necessary to draw trend lines not from left to right, but from right to left since price activity is now more important than movement in the past.
Internal trend lines
Conventional trend lines are usually drawn through price highs and lows. But there is an opinion that price extremes correspond to short-term chart movements associated with excessive emotions of participants in the trading process, and that therefore these points may not correspond to the true market trend. Internal trend lines provide an opportunity to circumvent the implied requirement of drawing trend lines through graphic extreme points. The internal trend line is drawn close to most relative highs or lows and completely ignores the maximum and minimum values. In other words, the internal trend line can be seen as an approximation of the linear points of the extrema.
Double adjustment of trend lines is visible on the Paypal stock chart
In fact, there are several ways to draw an internal trend line on a chart. Nevertheless, experience shows that internal trend lines are more useful than standard trend lines in identifying potential resistance and support zones. The analysis demonstrates that internal trend lines tend to better indicate where the market would have stood in the fall and stopped at price highs than normal trend lines have.
Of course, this series of examples does not prove the obvious advantage of internal trend lines over standard ones, since you can always find graphs that can prove any theory, and such proof is not implied and not assumed here. The comparisons on these charts are described in order to make it clear to traders that the internal trend lines will better indicate areas of support and resistance.
If I find the internal trend lines more useful than the standard trend lines, this does not mean anything. The observation of a curious speculator cannot serve as scientific evidence. Given the subjectivity of the nature of the internal trend lines, it will be difficult to test their reliability. Nevertheless, the internal trend lines are something that a sensible chartist should pay attention to. I think that by “reading” the internal trend lines, the speculator will achieve more significant results than with the identification of standard trend lines.
Trend Identification Motives
Why identify the trend at all? Not all speculators ask this question. It is important to make money, and everything else will be decided later. In fact, not everything is so simple. Traders do not always know why they need money. And if they do not have a clear and intelligible answer to this question, then it is better for them not to trade yet. Many speculators come to the market for the next portion of adrenaline. In most cases, only the speculator who really needs to earn money will be able to recognize the trend. If for him trading is entertainment, then he certainly will not succeed.
Three types of trends – bullish, bearish and sideways
How to determine which trend is now? If the chart goes up for a long time, then this is an uptrend. Bearish trend – a situation when the chart goes down. But there may be a lateral trend, when the chart moves up and down for a long time, that is, it stomps in one place. The lateral trend is usually considered the most difficult due to uncertainty.
Stock market trend
It would seem a trend – everywhere a trend. In fact, this is not so. In the stock market, the trend can last for months and years. Making money in the stock market, according to many professionals, is the easiest way. Although there are pitfalls and their difficulties. The uptrend in the stock market is indeed the most reliable. Stocks are especially good in price in the first 2 years of the new bull market, that is, after the crisis.
The most difficult way to catch a trend in the currency market. Nevertheless, traders are attracted to this market by the fact that they provide huge leverage. For example, 1: 1000! On the stock market, this is not the case. More or less persistent trends in the foreign exchange market may be in currency pairs, where one currency is strong and the second is weak. For example, the US dollar – the Turkish lira, the US dollar – the Brazilian real, etc. But even on these charts, powerful counter-measures of the market, which last for months and years, are visible with the naked eye. When we see such respected currencies as the US dollar, Japanese yen, euro, etc., “fighting” on Forex, then it’s quite difficult to see a unidirectional clear powerful trend, since they are rare.
Product Market Trend
It is easier to make money on the commodity market than on the currency market because their trends are relatively long, but not as persistent and directed as in the stock market. However, the gold, silver, grain markets and not only trends sometimes lasted long enough.
Identification of a tendency and emotional intensity
Speculators can have an emotional breakdown while catching a trend. In order to be successful, you must be able to not only correctly guess the trend, but also choose the right position volume. To guess the direction of the movement of the chart, you must have certain knowledge. It is also important to use trend lines, oscillators, indicators and other technical innovations.
Position volume and trend strength
The power of the trend will not depend on the volume of your working position, but if the lot size is incorrectly selected, the trend can destroy all your capital. Sometimes a speculator enters the maximum possible lot and a powerful trend picks him up. Moreover, the trader can buy up to an open position every day and increase his income exponentially. But such luck is not always.
Market Trends and Opposing Opinions
If most traders lose money, despite the fact that they use graphical analysis, then perhaps it makes sense to do the opposite from their desire? Like it or not, there is a category of speculators who oppose the majority opinion and earn. Do these people need trend identification? It is likely that with the right approach when recognizing a trend, the speculator increases the chances of success even if he trades the method the other way around.