Market Trends
Successful trading comes down to identifying Trends so that you can maximize your win probability.
A market trend is a general direction in which the price of a security or the overall market is moving. Trends can be upward, downward, or sideways. An upward trend, also known as a bull market, is characterized by a series of higher highs and higher lows, indicating that the price of the security is generally increasing. A downward trend, also known as a bear market, is characterized by a series of lower highs and lower lows, indicating that the price of the security is generally decreasing. A sideways trend, also known as a range-bound market, is characterized by a series of approximately equal highs and lows, indicating that the price of the security is generally moving within a narrow range.
Types Of Trends
Uptrends
An uptrend is a market trend characterized by an overall increase in price, with successive price highs and lows that are higher than those preceding them. As long as the price continues to make higher swing lows and higher swing highs, the uptrend is considered to be intact. However, if the price starts making lower swing highs or lower swing lows, it may indicate that the uptrend has reversed into a downtrend.
Downtrends
A downtrend is a market trend characterized by a general decrease in price, with successive price highs and lows that are lower than those preceding them. A downtrend is made up of lower swing lows and lower swing highs, and as long as the price continues to make lower swing lows and lower swing highs, the downtrend is considered to be intact. However, if the price starts making higher swing highs or higher swing lows, it may indicate that the downtrend has reversed into an uptrend.
Sideways Trends
A sideways trend, also known as a range-bound market, is a market trend characterized by a series of approximately equal highs and lows, indicating that the price of a security is moving within a narrow range. This type of trend usually occurs when the forces of supply and demand are roughly balanced, and it can be frustrating for short-term traders and trend traders because there is no clear directional movement. Sideways trends often occur during periods of consolidation before the price either continues a prior trend or reverses into a new trend. They are typically the result of the price being confined between strong levels of support and resistance.
Pullbacks
The term "pullback" is sometimes used interchangeably with "retracement," and it refers to a temporary pause or dip in an asset's overall trend. It occurs when there is a tendency for a trending market to retrace a portion of its gains before continuing in the same direction. It is important to note that a pullback is not the same as a reversal, which is a more permanent move against the prevailing trend. The main difference between a pullback and a reversal is that a pullback is temporary and lasts for a few trading sessions, while a reversal signifies a complete change in market sentiment and can be a more permanent change in the direction of the overall trend.
Reversals
A reversal is a change in the direction of an asset's price movement. In a bullish market, a reversal is a decline in price from an absolute high established by an uptrend. In a bearish market, a reversal is an increase in price from an absolute low made during a preceding downtrend. The opposite of a reversal is a continuation, which is when an asset's price trend holds and continues in the same direction. A reversal forms a new trend, while a pullback is a temporary pause or dip in the trend that eventually ends and the price starts moving back in the trending direction.
Trendlines
How do you draw trendlines?
A trendline is a straight line drawn on a chart that connects two or more major price points. It is used to show the historical trend of price movements and to identify support and resistance levels. Trendlines can be composed of highs, which are known as resistance levels, or lows, which are known as support levels. They are a visual representation of these key price levels and can be used in conjunction with other chart patterns, such as trend channels, wedges, flags, and triangles, to help identify trends and predict future price movements. Trendlines are an important tool in technical analysis and are commonly used to help traders make informed investment decisions.
Types of Trendlines
There are two types of trendlines: ascending and descending.
Ascending Trendline
An ascending trendline, also known as an up trendline, is a straight line that is drawn on a chart by connecting the lows of a security's price action. To qualify as an ascending trendline, the most recent low price must be higher than the previous low price. An ascending trendline is considered a level of support that extends into the future, and its positive slope indicates that demand for the security is increasing (there are more buyers than sellers). As long as the price of the security remains above this line, it is considered to be in a bullish trend.
Descending Trendline
A descending trendline, also known as a down trendline, is a straight line drawn on a chart by connecting the highs of a security's price action. To qualify as a descending trendline, the most recent high must be lower than the previous high. This trendline is a level of resistance that extends into the future, and its negative slope indicates that supply for the security is increasing (there are more sellers than buyers). As long as the price of the security remains below this line, it is considered to be in a bearish trend.
Trendline Breaks
Trendlines are a popular tool used in technical analysis to identify trends and predict future price movements. A common approach to trading trendlines is to watch for price action that bounces upward off the support of a trendline and downward off the resistance of a trendline. Trendlines are often retested several times before they are broken, and when a trendline is broken, particularly with high volume, the price is likely to move significantly above or below the broken trendline, which may indicate a trend reversal. There are different opinions on how far apart connected price points should be and whether the trendline should connect to the wick or body of a candlestick, but it is important to keep in mind that all trendlines eventually fail.
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