The world of trading can be harrowing for many and that is why one of the first skills that any trader, professional or beginner, picks up is the ability to identify trends. They say that markets are trending 20% of the time, and ranging for the other 80%. While there is no official study and record of that, the fact of the matter is that trading requires one to be able to find an opportunity in the markets while controlling and minimizing risks.
Before getting formally into how one should identify a trend, one must first understand that there are different types of trends. For instances, within a trend there may be an underlying trend and this may get traders confused. This occurs due to the fractal nature of markets.
When looking for a trend, there are three types. You may find an uptrend, downtrend, or sideways trend. The sideways trend is one that is most often found on the markets and will often be referred to as “ranging” or “consolidation”. This occurs when price action bounces between two key levels.
Trends can also be further subcategorized into primary, secondary/intermediate, short-term, and intraday. Primary trends occur over the course of months to years, secondary or intermediate from weeks to months, short-term for days, and intraday from hours to days.
In order to primarily identify which way a trend is going, often times, a trader will be looking for prices to poster higher highs and lows or lower highs and lows to determine whether the market is trending in an uptrend or downtrend respectively.
As seen above, the image depicts how one would identify an uptrend where prices continue to increase, creating higher peaks and higher troughs.
Earlier on we mentioned that trends can be sub categorized into four different categories depending on the time frame. The figure above shows an intraday uptrend as it occurs on the 4-hour chart.
However, if zoomed out to the daily or weekly, or monthly chart, the primary or secondary trend may show otherwise. Therefore, please exercise caution when conducting trades in a trend. Despite that keep in mind that the trend is your friend.