How can I see what's trending

Easily recognize trading trends in the chart

If you want to trade successfully, you have to recognize the trading trend. In this post, I'll show you a simple way to determine trends and the relationship between the time units.

Many trading beginners dive into the world of candle charts and no longer see the forest for the trees. What do the colors mean? Why are the candle bodies different? Is the market falling or is it rising?

In some trading book there was something about "You have to recognize the trading trend". Another well-known stock market slogan is: "The trend is your friend".

If you are still unsure of the meaning of a trend in an underlying asset like a stock or an index, don't worry. At the end of the article you will have a very good understanding of how trends are created and how trends are identified.

We start the topic with a self-made definition:

A trend in exchange trading is a pattern of historical prices in an underlying asset.

But isn't a trend generally always future-oriented?

Yes and no. A trend is much more something current that is expected to reach the masses shortly. This applies to both fashion and stock exchange trading.

In stock market trading, we want to jump on a trend as quickly as possible and hope that it doesn't end at this very moment.

 

What is a trend in trading?

In trading, we can trade in two directions - long and short. When we enter into a trade, we (at the beginning) assume a preferred trading direction and therefore have a market opinion. The Dax is rising now, I'm going long .. Disney shares are falling now, I'm going short.

I can expect a rapid / volatile rise (downturn) or a calm upswing (downturn).

If we look at a chart, we see that there can be three trend phases in total:

  1. Upward trend
  2. Downward trend
  3. Sideways phase / trendless

We'll go into all three phases in a moment.

In this chart we see the individual phases.

The underlying is initially in an upward trend, then changes to a longer downward trend. The market participants push the price up out of the red trend channel with increasing volume.

The volatile phase does not last long and there is a sideways movement. The market is resting and picking up new momentum (purple circle) before breaking up again. Here, too, there is a short downward trend (red trend channel) before it goes into a trendless phase.

 

Important:

The price development in an underlying changes again and again between trends, volatile phases and trendless phases.

It is important that you as a trader accept the different phases! It won't always go steeply downhill or uphill. Anyone who has been around for a long time may have noticed that the volatile phases have the smallest share in the development of an underlying asset.

 

What is a trend made of?

A trend always consists of movement and correction. The movement is logically longer than the correction.

In the uptrend it means that a high point is followed by a short setback and then a “higher” high than before is formed. In the downtrend it is the other way around. At a low point, a new low point occurs after a short upward ricochet.

You can see this very well in the red trend channel, as the course does not fall through like a stone in one go, but is gently led downhill like a staircase.

This chart is an excerpt from Figure 1 and shows us the first downtrend again. Here I have clearly marked the high points (green circles) and the low points (orange circles) again.

Since it is a downtrend, a low is followed by an even “deeper” low.

In the next section you will learn how to identify such trends on your own.

 

How can you spot a trading trend?

You now know that there are upward trends and downward trends in a market and that the different phases always alternate.

The exciting question that you as a trader have to ask and answer is:

When is a trend actually a trend?

The question is so interesting because for successful trend trading you have to recognize the trend very early. It doesn't help you if the trend has already run a long way, because you know that every trend comes to an end. At the same time, the early speculation á la “a trend could emerge here” is dangerous. So it depends on the timing, as we'll see in a moment.

There is a rule of thumb you can use when determining trends:

You need at least 3 points to be able to identify a trend. These 3 points are 1 low point and two high points (upward trend) or 2 low points and 1 high point downward trend).

 

In the left picture you can see the beginning of a slight downward trend, as a logical consequence of the impulsive increase. We already have three points for a potential trend channel. This becomes visible by connecting the two low points with a line and drawing a line at an identical angle, starting from the (so far only) high point as a parallel.

We now assume that the price will continue to move within this trend channel and will shortly reach the top line again (blue circle). There it should "ricochet" and form another deep inside the canal.

If we now know, or rather believe, that the price will reach a certain mark shortly, we can form a trade out of it.

 

How can you trade a trend as a trader?

The desire of every trader is to be able to predict the future price of a stock or another underlying asset.

Whoever manages this regularly becomes rich. I deliberately did not write “always” because that is impossible. In trading we trade probabilities. If I recognize a trading setup that offers me a 70/30 risk-reward ratio, that is already very promising. Determining a trend is an aid here.

Once we have identified a trend, we need to find a suitable entry point. There are several options here.

 

Version 1: You wait until the price touches one of the two trend channel lines and then speculate on the ricochet. If you touch the upper line, you go short in the market, if you touch the lower line, you go long.

Variant 2: You always only act with the trend. If the trend is short, you go short in the market at the top of the trend channel. In the opposite case, correspondingly long. In the picture above, this would be a short entry at the level of the blue circle.

Variation 3: You are acting in the direction of the overall trend. To do this, you have to look at where the course came from before it forms the trend channel. In the picture above, the price is swinging from the bottom to the top and is clearly on an upward trend. Accordingly, I will choose a “Long” entry in the trend channel on the lower line.

Variation 4: You take the previous scenario, but you consciously wait for an impulsive breakout of the trend channel and set your buy stop just above the upper line.

 

What role do time units play in trading?

If you look at the individual time units, you will see that a trend is visible in every chart. Of course, this is faster in the minute chart than in the hourly or daily chart (1 candle = 1 day).

I am a fan of trading in higher time units, as there is more clarity here, the institutional players are also tinkering their setups there and there are fewer fakes than in the minute chart.

It makes sense to compare the individual time units with one another. Does it make sense to go long on the hourly chart when the daily chart calls for short?

Probably not, but ultimately your trading style decides. If you're a scalper, that's fine. It can be more difficult for swing traders to trade contrary trends.

Take a look at the individual time units and test for yourself which approach suits you and where trends can best be traded.

 

 

Conclusion:

You now know how to recognize a trading trend and how to use it for your day trading or swing trading.

As always in trading, there is no indicator or formation that always works. Of course, every trend comes to an end at some point and we don't know when it's going to happen. We only ever trade probabilities and a visible trend helps to build a good CRV for a trade.

Incidentally, it is a fallacy that volatile phases enable large or larger profits. A trend that is recognized in good time usually allows several points to be made and often takes longer. Momentum, on the other hand, “kills” the trend and is quickly over.

Do you have experience or questions about acting and recognizing trends? Just use the comment function or write to [email protected]

 

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Good insights!

Tim