By Carl Woodhouse
The first step in our traders’ analysis process, when looking at the charts of a financial market, is to establish a trading bias, this simply means should we be looking to Buy or to SELL. To do this we need to understand the environment of the market and identify the direction of the dominant trend or direction of price.
In the world of technical analysis, there is a vast variety of techniques that traders utilize to establish and identify a trend. There are traders that will use single or multiple moving averages and analyze their relationship to price for example. Then are those that will use indicators or oscillators on their charts that are designed to identify and establish the trend of a market. Finally, you have traders that will use only price action to establish a trend or a combination of all of the above.
In the Fibonacci Master Trader course, we teach 5 powerful easy to follow techniques that will allow you to identify the trend of a market, and establish your directional bias within seconds of analyzing a chart.
For the purpose of this guide, we will take a brief look at one of these strategies.
Identifying a trend with price action
It is important to understand that a market’s price will never fall straight down or rise straight up. There will be periods during the rise or fall where the price of the market will move counter to the dominant trend. So in a bull or rising market, for example, there will be short periods where prices will start to fall, conversely in a Bear or falling market, there will be short periods where prices will start to rise. This reoccurring price behavior can occur in any market and any timeframe and creates a pattern that allows us to quickly identify the main direction of a market’s trend.
When establishing the trend of a market using only price action, our traders will look for these patterns.
Higher Highs and Higher Lows to identify an UPTREND
Lower Lows and Lower Highs to identify a DOWNTREND
IDENTIFYING AN UPTREND HIGHER HIGHS/HIGHER LOWS
Example 1: Nasdaq
Notice on the charts how the uptrend is clearly definable because prices are making higher highs and higher lows. This strategy used to identify a market’s trend can be obvious and easy to identify on any market and any timeframe.
Example 2: Apple Inc
Notice how the higher highs and higher lows that develop within the price action virtually act as stepping stones or stairs upwards.
The opposite of an uptrend is a down trend and we use the same process to identify the trend direction, except this time we are looking for a pattern of lower lows and lower highs.
IDENTIFYING A DOWNTREND LOWER LOWS/LOWER HIGHS
Example 3: Itv
Again notice how the lower lows and lower highs that develop within the price action virtually act as stepping stones or stairs downwards.
Example 4: Apple 60 Minute Chart
Identifying the trend of a market using price action is just one of a combination of techniques in our methodology, that are traders will utilize when analyzing charts on your behalf, for our daily market review and trade alert service.
Once we have established a directional bias for a stock, commodity or currency pair, the next step is to analyze the MOMENTUM of the trend. It Is important to understand, that just because we have established the dominant direction of a market’s price, does not necessarily mean it is the correct TIME to buy or sell into it.
Trends get tired and they can end and change direction in a flash, analyzing the MOMENTUM or the ENERGY within a trend is essential. A common mistake many traders make is buying or selling into a trend that has no legs and has gone has far as it can go. These traders will often get stopped out of a trade, as quickly and as easily as they had entered it. This is because the trend they had entered had run out of momentum and was effectively dead.
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