Lately, I have released an article about trading with Trend Level Signals next to RSI and support/resistance level. And then I received a question from my readers “How to identify a trend?”
This is, in fact, a very good question. For those, who trade for many years, the answer will be very simple. They will look at the chart and know. But for those, who are at the beginning of the trading adventure, it may be more difficult.
I have decided to meet my readers’ needs and write this particular article about trend identification.
The relativity of the trend
The simplest way to describe a trend is to say that the uptrend is when the prices keep higher-highs and higher-lows. The downtrend is formed by lower-highs and lower-lows.
However, the trends are not even. The periods of price consolidation occur quite often. During this time you will find lower-highs and lower-lows in the uptrend and the opposite in the downtrend.
The price will range between the levels called the support and the resistance.
The other thing is that the easiness of recognizing the trend depends on the candle timeframe you choose. Everything looks slightly different when you look at the 5-minute or 10-minute interval candle charts. There are two charts below I want you to examine.
You can clearly see that reading the chart with a higher interval is just simpler. The trend is better to identify, the price consolidation areas are narrower. You may also notice the price is moving close to the trend line after the consolidation.
2 trading methods with the use of trend at Olymp Trade
The first thing is to know how to identify the trend. Once you have gotten familiar with that, it is time to use it for finding a good trading opportunity. Here I will share some tips with you. Please remember to trade always along with the trend.
Trade with the breakouts
In the below downtrend the support lines are drawn. You can see sometimes the price reaches them. But your entry point is when the first bearish candle goes beyond the support level.
Trade when the price bounces back
There is again a downtrend in the exemplary chart below. There is a trend line and a resistance line drawn. When the price meets the point of their intersection, it immediately goes further down. This is a confirmation that the price will keep falling and a great moment to make a sell transaction.
A couple of examples more. Look at the chart below.
Number 1. At this point, it is a newly developed trend. After breaking the resistance line the price retrace to the former level which now can act as a support. After the first bullish candle, we have here a nice bullish pinbar testing support level and trendline at the same time. This is a wonderful set up to go long.
In point number 2 the bullish candle touches the trend line giving a signal that the strong uptrend will continue. And again, it touches the support level. A good time to enter a buy position.
Pros and Cons of Using Trend Identification in Trading 📊
- Allows traders to anticipate future price movements.
- Can be used alongside other strategies for enhanced trading decisions.
- Helps identify strong buying or selling opportunities.
- May be difficult for beginner traders to correctly identify trends.
- Price consolidation periods can make trend identification challenging.
- Trends don’t always continue and can reverse, leading to potential losses.
Comparison of Trend Identification on Different Timeframes 🕐
|Trends can appear more volatile and harder to identify.
|Trends are easier to identify and appear less volatile.
|Price consolidation periods can be confusing and may lead to false signals.
|Price consolidation periods are more distinct and lead to fewer false signals.
|Suitable for short-term, high-frequency trading.
|Better suited for longer-term trades and trend following strategies.
Trend identification is a bit of art mixed with science. I recommend using longer candles intervals and also longer charts, from 3 hours up to 1 day. Like this, it will be easier to distinguish a trend.
To draw a trend line join the high-lows in the case of an uptrend and low-highs whenever you notice a downtrend.
The next step is to identify the support/resistance level and observe the price. When it breaks out one of the levels, you may anticipate the trend will continue in the same direction. That is why you should enter a position at this point, according to the trend course.
Check out our guide on Trend Level Signal strategy to deepen your knowledge about trading with the trend.
I hope I now answered my readers’ question about identifying the trend at Olymp Trade. By all means, but the knowledge into practice. However, always be careful of risk. No strategy is completely risk-free, and you must only use any of them after careful consideration and practice.
Tell us how did it go. Use the comments section below.
Wish you success!
Short Q&A 🙋♀️
- Q: How do you identify an uptrend?
- A: An uptrend is identified by higher-highs and higher-lows on the chart.
- Q: What does a price consolidation period indicate?
- A: It indicates a period where the price fluctuates within a certain range before potentially continuing the trend or reversing.
- Q: What are support and resistance levels?
- A: These are levels at which the price tends to find a halt in its movement. Support is the level below which the price does not seem to fall, while resistance is the level the price can’t seem to break above.
- Q: Can trends be identified on all timeframes?
- A: Yes, but they may appear different based on the timeframe. Longer timeframes often provide a clearer picture of the trend.
- Q: Are there any risks associated with using trend identification in trading?
- A: Yes, trends can reverse unexpectedly, and price consolidation periods can give false signals. It’s important to use trend identification as part of a broader trading strategy.
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