What is the trend in financial markets and the world of trading?
Market trends, or as they are known, are an essential tool in technical analysis in trading. Why? It allows us to determine the direction of market movements, derives results, and make decisions based on them. In this article we will discover:
What is the trend in Forex and trading in global markets?
Types of trend trends - uptrend, downtrend, and sideways trend?
How to determine the trend?
How to trade with the trend?
How to deal with the trend?
What is the trend in Forex and trading?
We can define the direction of the market (the trend) in trading as the direction in which the market moves in a sustainable way during a specific time period. The movement will never be in a straight line, but prices usually vary in an ascending and descending direction, forming a kind of wave that together forms and determines the trend. In the following image, we show this concept in a simple way:
The ability to determine the direction of the market (the trend) is essential in trading because it provides us with very valuable information so that we can make deals in the market. For this, we have technical analysis assistance and all of its graphical tools for determining candlestick patterns on charts, but we'll see that later.
To determine trends, it is also important to determine the trading method and the time frame in which you will work. For example, if you were to practice scalping with a specific instrument and your charts were for a 5-minute period, the trend in that time period would be different from whether, for example, you were trading long-term and weekly or monthly charts.
Types of a trend in financial markets - uptrend, downtrend, and sideways trend
Trends can generally be grouped into three broad groups based on their direction: uptrend, downtrend, lateral, or non-directional. Let's take a closer look at each of them.
Market trend in an uptrend or "bull market"
An uptrend in financial markets indicates an upward movement in prices over a sustainable period of time. This trend is also called "bull market" in English and it is characterized by a sense of optimism and confidence and because the pressure of demand exceeds the pressure of supply, and therefore it reflects the rise in prices. A bull in English means Bull and is a symbol of vitality and strength.
The bullish trend generally begins after a period of hesitation and uncertainties in the market and then limits bottoms and highs to the top.
In an uptrend we can discover three stages, according to the Dow Theory:
Accumulation. Investors have a moderate position with some caution, with little volume in the market, and some uncertainty, so sales are occurring.
Share. Confidence begins to slowly return to the market, investors return to search for profit, volume increases and price increases begin. The graph shows how to increase the maximum and minimum.
distribution. The bullish period is gradually stopping as large investors and more experienced traders believe it is time to get out of the market and sell while the least expert buys believing they will make quick and easy returns.
Market trend in a downtrend or "bear market"
A downtrend or a falling market indicates the moment when the price begins to decline in a sustainable way. Pessimism begins to spread across the market and the fear of losing money. Investors begin to exit the market and the selling pressure exceeds the buying pressure. The maximum and the minimum are decreasing. In the same way as the bullish trend, the bear market has three stages:
distribution. The price reaches the absolute maximum, and from that peak, it begins to decline when the first sales orders appear.
Participate. Prices are falling more sharply as bears dominate the market. Pessimism is spreading and investors are looking to quickly exit the market.
panic. Fear leads traders to give up their assets at any cost.
Lateral trend or a trendless market:
We talk about the sideways trend when the market is not identified as an uptrend or a downtrend. The price of the asset swings in a narrow range between support and resistance, without major differences over a specific time period.
During the sideways market, large returns are not usually achieved, as is reasonable, as the price moves in a very small range, so investors usually don't like this trend. However, it should be borne in mind that if it is a long term trend, you can always find small upward and downward trends as in the image above, which can serve us modest opportunities. On the other hand, if stock prices are, we can always benefit from dividends.
Other types of market trends (trend)
Market trends can also be ranked based on their duration over time. Again, we talk about three types of trends:
The main trend or long term. Dow's theory holds that this lasts more than a year.
Medium or medium direction. It will last for about three months.
Immediate or short-term trend. Less than three weeks.
We must always bear in mind that each trend is always part of a larger trend and that this trend will in turn be shaped by other small short-term trends.
How to determine the trend of the trend in the market
To determine market trends in a chart, the most logical thing is to use trend lines, which is a very simple but valuable tool for drawing conclusions. How can we draw the trend line correctly? First, we must first determine whether we are facing an emerging market or a declining market. If the trend is bullish, we will find at least two consecutive ascending lows, and if it is bearish, then there must be two consecutive bearish tops ideally, to confirm both directions, there should be a third maximum or a third bound.
The uptrend should always be drawn in the lower area of the chart, to join one after the other in a row.
The downtrend should be drawn in the upper area, to join the ceiling one after another.
Once a trend has been marked, the line will help us determine if there is a change in direction in the near future: as long as the line does not break and the bottom continues above or touches it, it is normal to continue. If the price breaks the line, it can be interpreted as a sign of change, as if it were resistance or support.
The MetaTrader 5 Supreme Edition trading platform, the exclusive Admiral Markets plugin, contains several trend indicators that help us to identify and find entry signals. Here are some of them:
When we talk about trend trading or trend trading, we are referring to a way to work through which we try to make profits by following the movement of the market. Essentially, it consists of opening a position at the lowest point possible, during corrections, and keeping the position open until a change in direction occurs. This technology works with any type of asset, whether it is Forex, stocks, commodities, etc., and is based on the popular phrase "trend is your friend".
To trade the trend we must follow a few guidelines:
Determine direction by following the advice in the previous section.
Choose the moment to enter the market. The idea is to buy a low price to sell at a high price in long trades and vice versa in short trades.
Place a stop-loss order. The most desirable thing is to put it on the previous support and then use the trailing stop to avoid early closing.
Put in our trading plan the conditions that must be given to close the position.
Let's see this with a very simple practical example:
Market trend - trading in the opposite direction
Most traders consider trading against the trend a very risky and difficult method. Therefore, they are not recommended for novice traders or those with a significant risk aversion. Basically it consists of trading the price rebound at resistance: if the movement is bullish, the trader is selling, if the movement is bearish, the trader buys.
This strategy is complicated because the trader has to decide that the trend is running out and for this reason, he takes a position against it, that is, he places himself against the majority of the market: he buys when he sells the majority and sells when he buys the majority. In the following example, we can get an idea of how the process works and how dangerous it is.
I hope this article helps you to know what is the trend in the world of trading and how to trade with it.If you want to learn more you can check out this article: Forex Strategies for Novice Trader 2020