Trend on . Defining and constructing trend lines
Trend - in the sphere of financial markets it is the direction of price movement of the chosen instrument: rise or fall in the price of the asset.
- Types of trends
- Trend phases
- The strength of the trend
- Drawing the trend line
- Difficulties of trading by trend
- Trading on the trend line correctly
- Trend Indicators
- Advantages and disadvantages of the trend strategy
Types of trends
There are three basic types of trend:
- upward trend (bullish trend, up-trend), which shows the growth of prices in a certain period of time. On the chart it looks like a series of price lows, each of which exceeds the previous one.
- downtrend (bear trend, down-trend), which indicates a fall in prices; on the chart it looks like a series of successively lowering price highs;
- Flat (sideways trend, sideways, neutral consolidation), which reflects insignificant fluctuations in price within a narrow range of values. On the chart it looks like a series of highs and lows located on the same level.
What phases does a trend consist of?
Each price trend can be divided into several phases:
- 1. The beginning of the trend.
- 2. trend phase.
- 3. Correction phase.
- The end (reversal) of the trend.
The strength of the trend
A trend is a schematic direction of price dynamics. To understand them and be able to build them correctly is a skill vital to any trader. Trends help:
- create independent trading strategies;
- better understand the theories derived from the teachings of Charles Dow;
- It is more effective to use stock exchange technical indicators.
Drawing the trend line
In technical analysis, the concept of a trend is inextricably linked to support and resistance levels. All types of trends are displayed on the charts of currency pairs in the form of a price channel, bounded by technical lines, which are usually called trend lines or trend lines.
The rule for an uptrend
The uptrend on the chart is constructed by drawing a support line through successively rising lows. Then the obtained line is copied in parallel by the price maximums, acting as a resistance line.
The rule for a downtrend
The downtrend is constructed by drawing a resistance line through successively decreasing highs. Then the obtained line is copied in parallel through the price lows, acting as a support line.
Rule for flat
A flat is constructed by drawing horizontal support and resistance levels through the lows and highs, respectively.
The rule of number N
The uptrend is built by "bottoms", the downtrend by "peaks". To identify important extrema you can specify time filter and build trends only on those "peaks" or "bottoms" that are confirmed with a certain time lag before and after its formation. In the literature, such a filter is often referred to as number N.
For example, we set the number N equal to 2. This means that we can plot the uptrend only by the peaks for N intervals before which there were no peaks above, and for N intervals after which there were no peaks above. The second variant of trend construction shown on the graph does not suit us.
Difficulties of trading by trend
It is difficult to confuse which trend is in front of you, but not all traders can follow its prescriptions. Most often they are hindered by psychological reasons. Traders are haunted by the following prejudices and fears:
- The system of working by trends seems too simple and therefore ineffective to them;
- the effectiveness of trends is difficult to calculate using statistical methods;
- it is unknown at what time the entry/exit to the position will take place;
- it's hard to measure stop losses (loss limiters);
- it is necessary to constantly monitor the price chart;
- At small chart scales it is difficult for a novice speculator to draw the trend for the correct trade opening.
Some of these problems can only be solved by practice and experience, but some of them can already be solved by arming yourself with a calculator, an Excel sheet, or a "ruler" in the trading terminal. With these tools you can Calculate the effectiveness of trending strategies.
Trading on the trend line correctly
Classical approach
Trend trading involves opening positions at a bounce from the trend line and closing positions at the opposite trend line. In this case, classic trend trading implies: in an uptrend - only buying, in a downtrend - only selling. Flat implies the possibility of both buying and selling.
- For an uptrend: A buy trade opens on a rebound from the support line and closes near the resistance line of the trend.
- For a downtrend: A sell trade opens on a rebound from the resistance line and closes near the support line of the trend.
- For the flat: A buy position opens on a rebound from the support line and closes near the resistance line. A sell position is opened in a mirror manner.
An example of a classic strategy
To give you an example, consider the securities of Norilsk Nickel and take apart their daily slice. On this chart, the stock paints a very confusing picture on a large scale. But if we look at the quotations in detail, we can easily see quite clear trends.
The trending strategy is simpleThe following is an example: break the downtrend - sell the securities, break the uptrend - buy. We hit a sideways trend - wait.
We will make three calculations:
- Let's calculate the annual return for position trading (a "buy and hold" strategy).
- Let's calculate how much could be earned by applying a trending strategy and working only on the increase in quotations.
- Let's calculate the effectiveness of the trend strategy using trading on the decrease of quotations (short positions / shorts).
As you can see, trading on trend lines can give a significant profit and a better assessment of trends in the selected exchange instruments.
The method of determining the trend by peaks and troughs according to the Dow Theory (Price Action)
The idea itself, of course, is not new and not so radical as to speak of any revolution in trade.
Analysis of peaks and troughs - technique, originally presented as a principle of the Dow theory, still works today, while the theory itself may have lost some of its luster. In my opinion, peaks and troughs are the cornerstone of all technical analysis.
When we look at any chart, we can see that price does not walk in straight lines like a soldier in formation, but moves in a zigzag pattern. During a trend, a rally is followed by a correction in which some of the growth is lost. Then a new rally and another correction, and so on. These are the peaks and troughs.
As long as price moves in a series of rising peaks and falling troughs, the trend is considered intact. But as soon as rising peaks and troughs are replaced by falling peaks and troughs, the trend is reversed.
Figure 9 shows a series of increasing peaks and troughs. When price fails to make a new maximum (1), this is a signal that the trend may be about to change. However, this will not happen until the price falls below the previous base (2) and we see a declining peak and trough. According to this technique, the trend has changed to bearish.
In a bearish trend, prices continue their downward alternation of peaks and troughs (see Figure 10), until the last price at the last trough is able to update another low (3). The subsequent movement leads the price above the previous high (4), and the succession of declining peaks and troughs changes increasing. In fact, the signal appears at (5), when it becomes obvious that the price has made a new high. At this point, we do not yet know where the next peak will appear, but we do know that it will be higher than the previous peaks and troughs.
As we can see from the behavior of the chart at point 10, there is nothing to prevent the price from falling below the trend reversal signal (5), but the chart will still be evaluated as an uptrend.
Half-signals strategy
There are situations when we are in doubt whether a trend change has occurred or not. In Figure 3 we can see that at point 1 the last trough has fallen below the previous one, but this does not concern the last peak, so we have only half of the signal.
What now? We need the new price movement to show a high below the previous high, and then the price falls below the previous low at point 2. This is the half-signal, i.e., much less reliable, because price will probably move far away from the last high; but the probability that the reversal is valid is much greater. Those who don't want to wait for the signal at point Y run the risk of a strong rally like the one shown in the following Figure 12.
In this case, prices rose and made a new peak, indicating that the trend never reversed (I will try to look at how to deal with this in the next articles). Half-signals can also appear when the trend reverses from a downtrend to an uptrend.
Semi-signalsOf course, they are not as reliable as the peaks and troughs fully corresponding to the theory, but, as we will see later in the following articles, they too can be traded.
Analysis of peaks and troughs simply must be considered in conjunction with other techniques in the technical arsenal. The difference between the analysis of peaks and troughs is that as an indicator, it assumes a stronger signal than all lagging computer algorithms. Moreover, it is based on traders' psychology, which is known to underlie the price movement.
Consolidations
Sometimes, pullbacks within a trend develop in the form of trading range. Figure 12 shows some sideways movement after a rise. Breaking out of a trading range can be seen as a buy or sell signal on a peak or trough, or as another confirmation of a prevailing trend. In reality, when price breaks out of the range, it violates several minor reversal points, which are actually areas of resistance or support. Taken together, they represent the equivalent of more significant peaks or troughs.
The value of a reversal on an active peak or trough always and directly depends on the type of trend presented. The longer the trend lasts, the more significant the reversal is. A trend reversal on an hourly chart will never be as significant as a reversal of a medium- or long-term trend, when the formation of peaks and troughs lasts more than a month.
An example of how the strategy works
The signal for a bullish trend appeared when the June 2001 low held above the base from late May. This was confirmed on June 11, when price broke the high of June 6. Some concerns about the direction of the trend appeared in mid-September and late October, because the high was lower than the previous high. However, there were no signs of lower troughs. This is why it is usually not a good idea to be particularly trusting of the half-signals.
You can't say it will be as clear every time, because the market is a volatile structure. However, it is simply amazing how well this simple tool can help improve trading results. You can learn more about the technique in the following video.
Also on our website you can find many interesting trending strategies for the foreign exchange market and binary options, both on the basis of traditional indicators, as well as using the author's developments.
- Trend Trading Strategy 4TF-HAS with Pin Bar Detector
- Trending Strategy FX King System
- Universal trading strategy End of Day Binary
Trend Indicators
For those who are new to trading on the market, we suggest considering two indicators that serve as good advisors in determining the trend - these are Trend_alexcud и FanSimple. Both indicators are often used by experienced traders in various trading tactics for additional advice in establishing a trend. Their construction is based on the moving averages method, the most popular method of market analysis on the market.
Moving Average Method
The basic principle of this method - A sell signal is registered when the price chart falls below its moving average chart, and vice versa, a buy signal is determined when the price chart rises above the moving average chart. Indicators analyze the market at once in several timeframes, which is very convenient, and in case of using some trading platforms allows the trader to save traffic, excluding frequent reloading of the working window of the platform.
Trend_alexcud multitemporal indicator shows the trend direction and gives the command to open a position for three periods at once in one window. This indicator characterizes the trend quantitatively as a percentage, and on the right, at the bottom, recommendations for opening a position are given. The main advantage of this indicator is that a trader can assess the situation and know the trend direction within seconds, which is very important in the fast-moving market. The main disadvantage - lagging of signal in short-term periods (that is why the indicator is used as a auxiliary).
FanSimpleIt is a little more complicated, but also more accurate, it shows the correctness of the reversal of the fan of averages at once on six timeframes. The indicator includes three (in some variants four) moving averages with values 5, 21, 55 (sometimes 233), which are reflected on the chart. In the upper right corner of the chart are six icons in the form of blue arrows up, red down or gray rhombics, respectively for the six timeframes: M1, M5, M15, H1, H4, D1.
Blue up arrow shows that on this timeframe the average fan is correctly opened up, red down - the fan is correctly opened down, gray diamond - there is no correct opening of the average fan on this timeframe. The green circle above or below the arrows and rhombics shows where the price is - above or below the fan. The colors of the pointers can be changed.
The rules of the fan are as follows:
- The right fan showsstrong trendThe average is in ascending order: 5, 21, 55 (233). This is when there is a strong movement of currency pairs, defined as a trend.
- The wrong fan will only giveFlat. For example, 5 has crossed 21 up, and 55 is still above them, or 1 hour on the chart is trending up, and 5 minutes down. Flat is also defined when the M5-M15 does not coincide with the H1-H4.
Conclusions on the work of the indicator:
- Any trend starts with a flat, watching the moving averages, the trader has to catch the moment that they are positioned in exactly the right order: 5th, 21st, 55th ( 233rd ). This will be the trend.
- As long as the correct fan is not formed on the chart, the currency pair will be in a flat state.
These are just two examples of trend indicators. In trading, traders use their different variants - displayed on the chart or in a separate block, in the form of signal lines or trend lines. Trend indicators can be based on moving averages, Fibonacci extensions, zigzags, Elder theory, Heikin Ashi indicators and Price Action strategies. We update our archive of the most popular and of trend indicators in demand every week.
- Gaussian Rainbow Trend Indicator: Rainbow by Trend
- ACB Heiken Ashi Smoothed indicator: the best indicator for trend strategies
- Trend indicator Super Trend Profit: 85-90% profitable trading signals
Advantages and disadvantages of trend trading
The concept of trend is one of the key in technical analysis on the stock market, where price behavior is reflected graphically and forecasts are based on it. The first thing a trader learns is to look for and follow the trend, as this is his main income in the future.
Trend trading is the most common type of trading on . A well-known proverb among traders says trend is your friend, which means that the trend is your friend. Trading in the direction of the current trend allows a trader to clearly identify entry and exit points, to maximize profits from price movements and minimize trading risks.
The disadvantage of trend trading is the individual perception of each trader. For example, the lines of the same trend drawn by two traders may differ. As a result, one trader will observe a breakout of the trend line, while the second trader will observe only a touch.
The reliability of the trend depends on the size of the timeframe - the older the timeframe, the more reliable it is, but, accordingly, it takes much longer to form.
The popularity of trend trading has caused a huge number of trend trading strategies and trend indicators.