Trading is based on probability and traders tend to have a greater chance of success in the markets when they are able to identify the current direction of the prevailing trend. In this article, we will focus on some examples of trend identification through different methods.
- One of the principles of technical analysis is that markets move in trends.
- This means that there is a greater possibility that the market will continue a trend than to reverse it.
Trading is based on probability and traders tend to have a greater chance of success in the markets when they are able to identify the current direction of the prevailing trend.
Sometimes, before opening a position, the trader will ask "In which direction should I trade?"
There is a wide variety of methods to identify the direction of the prevailing trend. These are:
- Previous highs and lows
- Trend lines
- Fibonacci retracements
- Fundamental analysis
In this article, we will focus on some examples of trend identification through different methods.
In oil, we identify highs and lows forming lows compared to the previous ones. This is a sign that the market is currently in a downtrend.
On the other hand, if the highs and lows form highs, this will be a sign of market strengthening, indicating a bullish move.
In the example above, we take the US500 where a 200 period Simple Moving Average has formed. If the chart goes above the moving average, then this is a sign that the market is in an uptrend. On the other hand, if it is below, this will be a sign that it is in a downtrend.
As a last example, we take the pound and the method used will be the Fibonacci retracement. This is a method based on market geometry that indicates that if the current corrective movement of the market is below 41.4% of the movement of the chosen instrument, then the current trend will be bearish, and this is what we observe in the GBPUSD, where the Corrective movement found is below 41.4% of the current movement.
On the other hand, when the market forms a bullish move, corrective moves should not break 41.4% of the rising move.
In conclusion, there are many trend identification methods and traders should select those that are not only the most effective in the instruments they trade, but also the ones that they find the simplest to apply.
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