You're standing by the river, ready to swim upstream or downstream. Which seems easier? Trading against market trends is like swimming upstream – difficult and often pointless. Trading with trends, on the other hand, is like floating downstream to your destination.
When it comes to financial markets, a trend refers to the general direction of price movements over time. Whether you are trading forex pairs, CFDs, or cryptocurrency, trends don't just help you - they are necessary for your survival. Trends tell you where momentum is going in a market.
Consider Bitcoin's incredible run from $1,000 to just shy of $20,000 dollars in 2017 - that did not happen by coincidence, it was a steep uptrend largely as a result of institutional adoption, media hype, and FOMO (Fear of missing out). Traders who recognized that opportunity and were able to ride that trend made lots of money. Those who fought the trend? Let's just say they learned some expensive lessons.
What Is a Market Trend? Breaking It Down Simply
Uptrend (bullish market) An uptrend is like climbing a staircase. Prices are making higher highs and higher lows along the way. Even when the market pulls back, overall price will not pull below the recent low and push a new high. Gold is a great example, which has moved from $1,200 levels to $2,000 over past couple of years.
Sideways Trend (range-bound market) Sometimes, markets get stuck in a box, bouncing back and forth between support and resistance levels like a ping-pong ball. The S&P 500 oscillated in this sideways range most of the summer of 2015, to the dismay of every trend follower, but the delight of the range-bound trader.
Why trends form: The psychology behind the market
Psychology in the Market Fear and greed generally drive market moves. If greed is driving the move, the market is typically in an uptrend. Investors see prices are rising and buy because they are afraid of missing out. When greed drives the market, this creates more buyers and increased buying pressure ultimately pushing prices higher. Uptrends emerge during a market like a snowball going downhill.
Fear dominates when markets are in downtrends. Bad news strikes, you see prices decline, selling takes place, and panic selling begins. As sellers create more and more sell waves, each wave breeds fear in the market, which sparks additional selling. You can see this cycle operate in graphic detail in the 2008 financial crisis.
Identifying Market Trends Like a Pro
Moving Averages: Your Trend Satellite Moving averages help you to smooth away price noise and see the true direction of price. The 50-day and 200-day moving averages are widely used. When a price trades above the 200-day moving average, you are likely in an uptrend. When it is below the 200-day moving average.
You are likely in a downtrend. The "golden cross" is where the 50-day moving average crosses above the 200-day. The golden cross is seen as the start of a major uptrend. Conversely, the "death cross" is when the 50-day crosses under the 200-day moving average and can be seen as a potential downtrend. When NASDAQ had a golden cross in late 2016, it preceded a powerful bull run.
Trading Strategies Based on Trends
Trend-Following (The Path of Least Resistance): The simplest strategy is you buy uptrends and sell downtrends. It is simply follow the path of least resistance. Riding a wave instead of fighting it. Those fortunate enough to be a trend-follower in the 2020-2021 bull run of Bitcoin were rewarded very well. Those who bought during pullbacks, kept their nerve, and even bought through down days captured an enormous payday!
Timing your entry is important. Don't chase prices in extreme highs or lows. You'll have to wait for pullback if you entered in an uptrend, and a bounce if you entered in a downtrend. A pullback or a bounce against a stronger trend is just a temporary measure that opens better entry prices with better risk-reward ratios.
Your next steps to trend trading
Learning about market trends provides you with a massive edge in your trading but understanding alone is useless without doing. Trends are probabilities, not certainties. They're your best guess about future price path based upon current momentum and psychology in the marketplace. Markets and timeframes exhibit three types of trends: uptrend, downtrend, and sideways. Just as important, learning how to use some moving averages, trendlines and momentum indicators will help you identify trends and develop a profitable trading plan.
For more info:-
Comments