Trend judgment is a trading skill that all traders need to master. Understanding the market trend will help you develop a profitable trading strategy.
There are three market conditions:
- No trend/range
There are two main methods available to judge the market’s trend:
- Sequence of highs and lows
- Moving average
Sequence of highs and lows
An uptrend is a sequence of higher highs and higher lows.
You can connect higher lows to form a trend line in an uptrend.
A downtrend is a sequence of lower highs and lower lows.
In a downtrend, you connect lower highs.
A range market is where there is no sequence of highs or lows.
A moving average can indicate the market trend. In an uptrend, the moving average will be pointing higher, lower in a downtrend, and sideways when there is no trend.
The steeper the moving average line, the stronger the current trend.
Strong up trend
To determine the short-term trend, use a short-period moving average of 5 or 10 bars.
To determine the long-term trend, use a long-period moving average of 30 to 200 bars.