What is Trend?
You may have already heard popular phrases like “The trend is your friend” and “follow the trend”. But, what is a Trend, exactly? In its simplest definition, a Trend means the direction of the market. In more technical terms, a Trend is the direction of successive tops and bottoms.
There are three main types of trends: uptrend, downtrend, and sideways. During an uptrend, there are higher highs and higher lows. On closer inspection, one can notice that each top is higher than the previous top, and each bottom is higher than the previous bottom. An uptrend is likely to continue in the same direction.
In a downtrend, there are lower highs and lower lows. On closer inspection, one can notice that each top is lower than the previous top and each bottom is lower than the previous bottom. Just like uptrends, the downtrend is likely to continue in the same direction.
When the market is not trending, it doesn’t move upwards or downwards. Instead, it moves sideways. On closer inspection, one will notice that in a sideways market there are approximately equal highs and equal lows. Another way of defining this sideways movement is by calling it a range. Unlike uptrend and downtrend, a range is more likely to break out either above or below the sideways pattern.
The best way to identify a trend is to draw trendlines which connect a series of highs and lows. In an uptrend, draw an upward trendline from one low to another successuve higher low. In a downtrend, you do the opposite with a downward trendline connecting lower highs. It is always best to connect at lease two points to make the trendline valid
In a range-bound market with no trend, you will draw horizontal trendlines. These indicate clear areas of support and resistance.
Every market will have a trend, although you may need to examine different time frames. For example, a one-day chart shows a sideways market. However, there may be volatility on a shorter time frame, say the one-hour chart. A trend can therefore last for seconds, days or months.
Many trend following traders pick the major currencies. This is because these pairs are more liquid than other currency pairs. The more liquid a market, the more price movement we can expect. This means there should be better opportunities to trade as prices will move strongly in one direction.
Trend followers aim to capture the middle of a market trend for profit. These traders don't care if the market is going up or down. However, they need to practice good self-discipline to follow precise rules so they are not swayed by market moves
Trend followers use technical analysis tools to help them identify trends. These include Moving Averages and Bollinger Bands.
Now you know why the trend is your friend! Until next time, traders!
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