You will read find the phrase “the trend is your friend” in practically every book or lecture on trading. Of course, this importance of trends for any trader on the financial market can’t be overemphasized. The primary principle trading is built on in the first place is that rates vary, i.e. price fluctuations. If there is no trend, the market is at a standstill. Therefore meaning that it wouldn’t be possible to earn profit from it. This is why it is so important to study trends in detail. In this article, we will break down the concept of a trend itself, as well as analyzing the types of trends and how they spread. We will also look into simple nuances relevant to the topic.

What is a trend

To begin with, it is worth considering the concept itself. A trend is like a tendency. Conceptually, these two concepts carry equal weight. Within the context of trading, this refers to any kinds of price movement. Once you understand that the market and asset courses are never entirely free of movement for any extended period of time, you’ll know that some trend is always active.

Types of trends

There are several kinds of trends, categorized by type. The market can be in one of three states, the price can rise, fall or remain relatively on one level. To be more accurate, in essence, the rates can easier move up or down. Market price formation is always volatile to one extent or another. Therefore, evaluating the type of trend is done by taking into account the leading force in alternating minimum, maximum periods.

An ascending trend – is characterized by price movement where the previous minimum and maximum improves from the previous value.
A descending trend – is the tendency where the chart is moving down and every consecutive bottom and peak is lower than the previous.
A neutral trend – is a situation when the price, at a specific time, maintains its position within the confines of the financial price range.

In terms of neutral trends (flat, nonexistent, the lack of a trend or so on), it is important to clarify that, in this case, the evaluation of the market situation is always carried out through the following approach. Therefore, if at the one-time interval or chart scale appears flat, then change the timeframe (you can do up to the second on Binomo’s platform). A fixed ascending or descending trend will definitely appear.

In particular, traders refer to these trends as either “bullish” or “bearish”. The vast majority of market participants use this slang. In trader’s slang, bullish indicates that they aim to increase the asset price. Bearish, on the other hand, means that the majority of traders are actively trying to devalue asset rates through their actions. Therefore, a bullish trend is an ascending one and a bearish, descending.

Types of trends

The types of trends are shown graphically in the picture above. It is a distinctive figure made up of three types of trends. In the start, the price grows, later the movement slows and at some point down the line, the asset course stabilizes. Following this, there is a decline and there is a reversal of the original trend. So, we have explained what exactly a trend is. Therefore, it is now time to set aside the theory and move on to more practical points.

How to identify a trend

There are many ways. Hundreds or even thousands of specialized indicators and methods have been worked out. That being said, they all aim to forecast future market behavior. There is absolutely nothing difficult about identifying the current trend or analyzing historical data. After a few minutes worth of clarifications, any beginner can do it, even if they are completely new to trading.

Typically, trends are evaluated on linear charts, because, in this case, the main trend is important, not the concrete price fluctuations. All that extra “noise” will only serve as a distraction. So, in order to identify the type of movement, you can build a line on the chart on Binomo’s terminal (or any other platform of your choice):

● When the line is rising up, it is an ascending trend (bullish);
● When the line is falling down, it is a descending trend (bearish);
● When the line in moving relatively horizontally (flat).

Conduct your analysis of the market situation on a minimal chart scale. On the trading platform, it can be regulated by using the dial on your mouse or the “+/-” buttons on the chart. A subtle adjustment of the scale can be made by scrolling the mouse in the area of the lateral scales (time) and vector (asset course).
Likewise, as well, you can easily mess with the chart with a click of the mouse on any area. As experience shows, only a relatively small percentage of traders know about this. Using this manual zoom with the mouse significantly expands your opportunities for conducting technical analysis.

How to identify a trend

On the example depicted above from Binomo’s platform, three types of price trends can be seen. It is clear that the flat is a price channel, within which the course fluctuates, forming a series of micro-trends. It is a similar situation in regards to bearish and bullish trends.

The duration of trends

Price trends can loosely be divided into three types, short-term, medium-term and long-term. However, the concept of time is always relative. For example, the monthly chart can be considered long-term movement, 24 hours as medium-term, and hourly as short-term.

Binomo’s platform offers timeframes ranging from 1 second up to 5 minutes. So, within this timescale, a long-term trend would be identified in a 5-minute interval, medium-term from 30 seconds to 1 minutes, and short-term in a matter of seconds (1-15 seconds). Such a range allows for effective standard technical analysis within the confines of short-term (by Forex’s scale) trading, with trade expiration periods in 1 hour.

Trend stages

Anyone can identify the type of trend, there is nothing difficult about it. That being said, you can conduct unlimited analysis on it. There are an array of finer, important nuances. In this section, we will explain trend stages. Every price movement goes through several steps. In short, at first the trend is born, then it enters its fundamental stage and finally consolidates.

The beginning of the trend. The moment when one trend is completed and then it begins to change course in the opposite direction. The point is clearly evident on the chart. An ascending trend has begun when its point is the minimum of the former bearish trend. When there is a descending trend, the point is the maximum of the bullish trend.

The distribution phase. This is when there is more active price movement. There are sharp and fast movements in a specific direction on the chart. At this stage, the degree of the wave typically weakens, often forming a series of singularly-colored Japanese candlesticks. This means that the course is sustainably rising or falling.

The accumulation phase. It is characterized by extended stable growth or decline. In this phase, short-term reversals are possible against the trend. They are referred to by traders as corrections.

The end of the trend. If the accumulation phase doesn’t shift into the second period of distribution, then what follows is local elements characterize the period in which the trend comes to a close. After that, a flat period begins, or it enters directly into a reversal, entering a new bearish or bullish trend.

Analyzing and forecasting trends

Trading stages from the perspective of fundamental analysis

The approach of fundamental analysis differs from technical, as traders evaluate the gist of what is happening of the market, not the movements of the asset on the chart. We have already given you an overview of trend stages as according to technical analysis above. If you consider it from another perspective, at the same time there are concrete phases on the market that go through highly concrete processes.

1. The onset. It is a point where the balance shifts between bullish and bearish, i.e. due to large-scale market activity, such as by representatives of transnational corporations, banks, currency funds and so on, not just a handful of traders. Typically it coincides with the placing of several large trades or the release of key economic news. It is very difficult to identify this stage, as influential traders (representatives of banks for example) usually use un-published insider information.

2. The spread. This is the point when the price movement becomes clearly noticeable to all market participants. Therefore, a large number of traders enter the market at this point, including online traders. A significant number of trades are opened, which only drives the rate movement in the direction of the trend.

3. The accumulation (consolidation). The market and its participants take a “time out”. Influential traders typically exit it, meaning there is an imminent decrease in movement or it could even cause a reversal, which happens in some circumstances. However, if the leading trend (bullish or bearish) begins to regain its initiative, then the correction concludes, the price returns to the confines of the local maximum and the trend continues.

4. Completion. This happens at the same time as the onset, or the market goes flat when the large players leave the market. The trend concludes and traders close out their positions. This continues until the point that there is another clear trend. On average, statistically around 70% of the time the market is quiet, meaning there is a lateral trend. It isn’t recommended to trade during these times. The trend is a trader’s’ friend, so their enemy is flat periods, as signals accuracy declines across all technical analysis systems.

Analyzing and forecasting trends

The timely identification of the beginning and end of trends, as well as forecasting their duration are key skills for any trader. These skills, in particular, determine how much success you achieve trading and if trades will be closed profitably or not. When trading with futures contracts “Buy/Sell”, on most of platforms you only need to know the direction of movement. This makes the task significantly easier.

There are many strategies based on visual analysis of characteristic reversal patterns, as well as those based on indicators. These different approaches are equally effective, especially in combination. When trading, experienced traders always take into consideration many key points, as opposed to concentrating on some very specific system of analysis.

The main chart analysis patterns are the figures “head and shoulders”, as well as “double/triple bottom or peak”. When the line on the chart adopts this form, it means that there is a more than 70% likelihood that there will be a market reversal. This balance is built on many effective trading strategies.

Indicator analysis

In the picture above, there are schematic images of the described patterns as an example of a figure during the reversal of an ascending trend. However similar patterns arise as the end of bearish trends, although they appear as the mirror opposite and point down. For example, not “triple peak”, but “triple bottom” and so on.

Indicator analysis

Thousands of possible indicators have been invented all with one common goal, to help traders forecast market behavior. There are even three types of tools. There are total indicators, trend indicators, and oscillators. In terms of the first type, they have been called into question, as it has been long known that they don’t accurately reflect the total picture of open trades.

Oscillators and trend indicators are very popular and effective, most of platforms platform provide 14 of the most effective tools. This includes the Alligator, the Moving Average, RSI, Stochastics, Momentum, and Bollinger Bands along with others.

Conclusion

We have provided an overview of trends from a trader’s perspective, including what they are, the various types, periods and so on, although we were only able to touch upon the concrete methodology for building forecasts. The problem is that trading trend analysis strategies are a very wide topic. On your own, find time to research trends more in-depth. On our site in the education section, there are overviews of the most effective trading systems for futures contracts.

TRADE CRYPTOCURRENCY

“General Risk Warning: Binary options and cryptocurrency trading carry a high level of risk and can result in the loss of all your funds.”

The trend is a trader’s friend
Rate this post

Leave a Reply

Your email address will not be published. Required fields are marked *

Pin It on Pinterest

Share This