The situation in the market changes constantly. It is important to be able to distinguish a trending market from a ranging one. It may generate certain difficulties in the beginning. I wish to guide you through this task in today’s article.
Recognising the trend in the market
The trend can develop in both directions, that is upwards and downwards. When the price is rising and forming higher highs and higher lows, we say there is an uptrend. When the price is falling and creating lower highs and lower lows, there is a downtrend. Seems simple? Well, the problems begin when the trend is not that strong. Even during the uptrend, the price may occasionally fall. Analogically, during the downtrend, the price may sometimes form higher highs and lows. We call these periods consolidation time.
The areas of consolidation create the support and resistance range. The price will usually move in the direction of the trendline after consolidation and soon resume the previous trend.
Identifying the trend will be different for different chart periods. Consider the exemplary AUDUSD charts below for 5 and 10-minute candles intervals.
Notice, how consolidation areas narrow when we choose the bigger timeframe. The trend is more easily observable too.
How to trade with the trend
The first step is behind us. We have identified the trend on the price chart. The next task is to find the best points to enter your trading position.
It is recommended to trade along with the trend. Going against it is much riskier.
Breakout from the support/resistance
When you draw support and resistance levels on the chart, you will notice that the price seems not to move beyond them. However, it will eventually happen and you can use this moment to your advantage. Enter the trade when the candle breaks through the support or resistance level.
Rebound from the support/resistance
Again, recognise the trend and consolidation areas. Draw support or resistance line and observe the price. When the trendline crosses the support or resistance, the price rebounds and continues in the previous direction. This is a good moment to open your transaction.
Being able to identify the trend in the market is one of the most important trader’s tasks. By joining price’s highs and lows on the chart you will receive a trendline that shows the direction of the trend.
Be careful as the price consolidation periods happen. Draw the support and resistance lines. Look for the moments when the price breaks them or rebounds from them. Use them to enter trading positions. And remember to trade along with the trend.
Pocket Option offers a free demo account. It is supplied with virtual cash so in case of failed trade, you do not lose your own money. This is an excellent place to practice identifying and trading with the trend. Use the demo account until you get the confidence to move to the live one.
Have a good trading day!
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