What is a Market Trend and How to Read Them
“The trend is your friend until the end when it bends” is a very well-known saying in the world of futures trading and regardless of the type of chart you use, as a trader you need to be able to identify how a market is trending.
What is a market trend?
A market trend is ‘a perceived tendency of financial markets to move in a particular direction over time. These trends are classified as secular for long time frames, primary for medium time frames and secondary for short time frames.’
Determining the trend of the market is one of the most important things to learn and remember first, regardless of the chart type you use, and for this you need to carry out trend analysis. This also applies regardless of the trading style you use. It is vital to trade in the direction of the major trend and there are many tools you can use as an aid for basic trend analysis.
Trend analysis is based on historical market data and it allows traders to make predictions on what may happen in future stock markets.
• Uptrend lines: high highs, higher lows • Downtrend lines: lower highs, lower lows
However, prices can also move from side-to-side when not trending up or down. This means prices remain within a reasonable narrow band for a period of time. The longer the sideways action, the more powerful the breakout from the sideways trading range.
All trends come to an end, but over their course, they tend to stay in motion. A simple rule is that prices must cross the trend line and display strength or weakness at follow-through.
Channels give traders hints on where to position trades, thus making the trend a little clearer. Sometimes, you can draw a line parallel to the trend line to create a trading channel. In an up-trending move, the parallel line across the highs defines the channel and the straight line across the reaction lows reveals the trend.
Traders who want to be long may decide to wait for prices to get back to the trend line. Breakouts occurring below the trend line or above the channel line can be indicators to exit the position. During an uptrend, prices approach the upper channel line and this may suggest the market is ready for a short-term correction. In a down-trending market, the trend is determined by the straight line across the highs and a channel line is drawn across the lows.