Online Trading (TOL), is a financial activity that generates profits from fluctuations in the financial markets.
What is a Trend
By carefully studying the charts, investors who apply technical analysis will recognize trend reversals or continuation figures.
In this way they will know what to do with open positions or those that are to be opened in the trading session.
Learning how to identify a trend should be the first step for anyone experimenting with technical analysis. It will not always be as easy, as it may seem, to identify a trend and determine the direction of a particular security.
Reading a whichever diagram of the prices, it will be noticed that these do not move in straight line towards a direction, but rather they follow a series of ups and lows, where in the technical analysis, it is defined like, the succession of maximums and minimums to constitute the Directional Trend. Recognizing the Trend is essential, if you work with technical analysis or operational strategies, nothing will make sense if you do not know that Trend will be in place and if it will be a strong and reliable Trend, even if you work with reversal figures, it will be essential that there will be a Trend to reverse.
Working with Trend Following or Breakout strategies it will be essential that there will be a strong Trend. With this knowledge you will gain more and more confidence in what you will do, and you will get more stable performance. Anyone who is serious about trading can only acquire this knowledge.
In technical analysis the Traders distinguish different types of Trends and name them according to the indications they give the stock market.
There are basically three types of Trends:
- Uptrend: it is a trend bullish;
- Downtrend: is a bearish trend;
- Sideway Trend: is a sideways trend.
How To Identify The Direction Of A Trend
In Trading, the hardest part will be to interpret, and understand in real time, what will happen while the market is still moving, so it will be important to identify the prevailing trend and direction.
Online Trading with Trends is independent of Trading strategy.
Identifying the direction of the market and the individual trend could be the first step in your trading strategy. Investing with Trends means investing according to the trend, so when a Trend will have a positive trend that will take it upwards, many Traders, especially beginner Traders, are waiting for this trend to change so that they can take advantage of the trend change when they could have made a lot more money in an easier way.
To help identify the direction of a Trend, the first simplest method will be to use charts, especially line charts, but there are also charts that only use bars and candles, as they also provide detailed information about what happened on the charts.
With line charts, you get clear images that are better at reading what has already happened and will happen, unlike bar and candles charts that may be more difficult and confusing to read and interpret.
Then, in order to identify the direction of a trend, you will have to analyze the highs and lows in the charts, for example, in a positive trend you will notice more significant highs when the price will push upwards.
The highs and lows, however, will be lower in a negative trend, indicating a price decline.
If it happens that you will not be able to clearly understand what is happening on the charts, you should not act and wait until you have no more doubts, however, in most cases it will happen that you will be able to establish quickly enough when you find a positive trend, or a negative trend or a stable one. A useful tool to use are moving averages, which are good for identifying market trends.
A moving average is a Forex indicator formed by a line that will follow the price, summarizing the movement of the price by calculating the average price for a given period.
There are two types of averages:
- Simple Moving Average: the diminutive of Simple Moving Average is SMA, which stands for Simple Moving Average. It is calculated giving the same importance to all prices, regardless of how far they are from the current moment;
- Exponential Moving Average: The diminutive of the exponential moving average is EMA, which stands for Exponential Moving Average. It gives more importance to the most recent prices.
Different moving averages will offer different advantages in particular market conditions. It will depend, however, much on your trading style and the way you feel more comfortable. There are also many ways to use moving averages, such as directional filters, while there are some Traders who look only at the slope of the average to determine the direction, other Traders, however, also analyze the type of moving average of the current price.
Trend Channels and Trend Lines are a high way that can be used to identify the direction of a trend. They are technical analysis concepts that can be used to identify the direction of a price sequence, i.e. a Trend. The Trend Channels, are obtained when we have two Trend lines, one will be used on the supports and one will be used on the resistances, which being parallel will form a real channel.
There are three types:
- ascending channel;
- descending channel;
- horizontal channel.
Considering a Trend channel it will be possible to find the best points of entry on the market, betting on a rebound that will bring back the prices in the channel or on a Breakout of one of the Trend lines, with consequent breakout of the channel.
The Trend Lines are drawn by identifying and connecting two or more highs, or two or more lows on a chart, after identifying the areas of support.
There are three types:
- Uptrend: is a bullish trend;
- Down Trend: is a bearish trend;
- Absence of Trend: it is a side market.
Trend Lines will not provide signals on the newly formed trend. You need at least two points to draw a trend line, which only in a third time will tell how the markets will have behaved according to that trend line. Therefore, using Trend Lines will only provide predictions for the future, are better for the long term and are much more subjective than other tools.
For beginner Traders it is not very recommended to use this method, as it can bring considerable problems due to their very subjective nature.
Finally, it is recommended to use the ADX Indicator to determine the direction of a Trend.
The ADX Indicator has three lines:
- The ADX line: indicates the strength of a trend;
- the +DI line: shows the strength of the Bullish;
- the -DI line: shows the strength of Bearish.
Like every trading instrument, the ADX indicator has its limitations, e.g. when the price will move in a non constant way for a while, the ADX indicator will show unclear signals.
No instrument will always work one hundred percent, so you will need to know when to use them and also when not to use them, and above all understand their limitations.
To build a reusable trading strategy, you will be able to combine different instruments, taking advantage of the different advantages that the instruments will offer, in particular it will depend a lot on how the various instruments are chosen, and how they will be understood and applied to the conditions, in real time of the market.
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