How To Determine Strength Of Trending Data

Every trader wants to know how to identify trends and determine their relative strength. It'southward what allows united states of america to trade with momentum rather than against it, which in turn increases the odds of a favorable result.

Unfortunately, gauging the strength of a trend isn't equally straightforward a task as some would hope.

Allow me rephrase that, the plethora of indicators and techniques that have flooded the financial world over the years accept unnecessarily convoluted a relatively unproblematic task.

But I digress…

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Yeah, it is a simple chore. Is information technology piece of cake? Well, that depends on the techniques and tools you lot decide to use.

There are three very uncomplicated techniques that I volition testify yous today that, with enough exercise, will brand determining trend strength a much more than manageable chore.

By the fourth dimension y'all finish reading this lesson, you will have a house understanding of trend characteristics as well as when to know whether to await for a continuation of the current tendency or an imminent breakdown.

Let'southward get started!

Characteristics of a Trending Market

Beginning and foremost, we need to know how to identify a trending marketplace. Traders take complicated the topic for years, just it'due south very unproblematic, I hope.

A trending marketplace is one that is making college highs followed by higher lows or lower lows followed by lower highs.

That's it.

If we transform that statement into its visual equivalent, we get the following illustration.

Pretty bones stuff, correct?

Idea so!

But before you leave thinking you know almost the concept of higher highs, higher lows, etc., in that location are some concepts later in the lesson that may non be familiar to you lot. In fact, I would bet that 90% of Forex traders don't know to look for what I'thou nigh to bear witness you.

In other words, yous may desire to stick effectually.

Now comes the fun part – taking this very basic concept of highs and lows and turning it into actionable data.

For that, nosotros turn to the most bones principle of technical assay.

1. The Highs and Lows Tell the (Whole) Story

Allow'southward get-go things off past just visualizing where the highs and lows on a chart have formed over a period. In short, the relationship among highs and lows as they form over time.

All we are doing with this technique is observing where the extended swing highs and lows are within a given trend.

The GBPUSD daily nautical chart below is a perfect example of how something as simple as watching how the highs and lows of a market interact with each other tin can signal a change in trend.

GBPUSD highs and lows on the daily time frame

Notice how over the form of several months, GBPUSD carved out somewhat of a rounding top, which is a valid technical pattern. Even so, for purposes of this lesson, we're only interested in using the swing highs and lows to place a possible modify in tendency.

In the nautical chart above, the beginning lower high was the first sign that the uptrend was get-go to fatigue. But it wasn't until the first lower low that nosotros had a telling indication that the current trend had reversed.

Keep in listen that trend changes won't e'er be this obvious. But the signs are always in that location; yous may just have to await a scrap harder to find them in some instances.

At this point you may be thinking, this is bang-up and all, just how/where do we enter curt?

For that, we need the highs and lows to interact with a central level in a mode that offers a favorable setup. In other words, we need to turn the toll action you meet in the chart above into actionable information.

2. Distance Between Subsequent Retests: A Killer Way to Determine Trend Strength

Now that we have discussed how to use swing highs and lows to gauge the force of a tendency, allow's add together a fundamental level into the mix.

There is a common (and costly) misconception amongst traders in all markets where technical analysis is a traditional method of trading.

Someone at some indicate in time came up with the notion that support and resistance levels become stronger with each boosted retest.

I hate to be the bearer of bad news, but that'southward a complete and utter fallacy.

Multiple retests of the same level brand that level more than visible, they do non arrive stronger.

And visible and strong are by no means synonymous.

Think about it, if this were truthful – that a level became stronger with each additional retest – information technology would theoretically never break. Considering if information technology didn't suspension on the third retest, why would it pause on the sixth when it's supposedly twice every bit stiff?

It doesn't add together up.

And so if we can agree that multiple retests of a given level do non brand information technology stronger, we can naturally conclude that it makes the level weaker, right?

Well, non quite. While a market that continually revisits the same expanse can eventually break through, we don't accept plenty data to conclude that it is likely.

For that, nosotros turn to (you guessed it), highs and lows. More specifically, the relationship the highs and lows take with our fundamental level.

The illustration below shows a trending market that is respecting a trend line, withal, the altitude between each retest has become shorter over fourth dimension.

Illustration showing shorter distance between retests over time

Note how the market place tested this level every bit back up on 4 separate occasions since its inception. What many traders tend to dismiss, however, is the shorter time span between each retest as the trend extended higher.

The probable outcome for this blazon of price action is as follows:

Shorter distance between retests breakdown

Why does this happen?

In curt, information technology's the market telling you that demand is drying upwardly. When it comes to supply and demand, every bit prices move higher, demand naturally begins to run thin as traders a less willing to buy at higher prices.

At the same fourth dimension, supply increases as market participants unwind their positions to volume profits.

In the case of the illustrations above, that need is drying up more quickly with each subsequent rally from tendency line support. Thus, we get a market that begins spending more time trying to keep its head in a higher place water than making higher highs.

Of course, this concept also applies to a bearish trend where need increases and supply decreases as prices driblet.

The EURUSD daily chart below is a perfect real-world example of a currency pair that began testing support more quickly over the course of 256 days.

EURUSD more frequent retests on the daily chart

Notice how each rally spent less fourth dimension away from support as the trend became extended.

Nosotros all know what happened side by side. The breakdown y'all see in the nautical chart above was the starting indicate of the massive three,300-pip drop that transpired over the next 44 weeks.

If we desire to get fancy, nosotros can combine the two techniques we just discussed to farther the conviction that a breakdown was imminent.

I will exist the outset to acknowledge that the pair was non making lower highs before the technical break. However, the fact that a rise wedge formed indicates that each subsequent rally had less bullish confidence than the last.

3. Clustering Price Action: An Early Warning Sign

Last but non least is when toll activeness clusters nigh a key level. In some ways, this is a combination of the two techniques we just discussed.

I often call this "heavy" price action. The idea of heavy price action is something my members have become very familiar with over the years.

As the term implies, this is when a market begins to put constant pressure level on a cardinal level over a short period.

I suppose I should come upwards with a better give-and-take for it since the word heavy only applies to a pair that is putting pressure on a support level. That would make the reverse "light" toll action, which doesn't have the same band to information technology.

(I'll relieve that for a later discussion with my members.)

At any charge per unit, the idea here is to watch how the market responds to support or resistance within a given period. A typical period would exist a few days or perhaps a full calendar week if trading from the daily fourth dimension frame.

If the market begins to cluster or group for an extended period at a cardinal level, chances are the trend is about to break downwards and opposite.

The illustration below shows what this looks like for a market that is in an uptrend.

Clustering price action at trend line support

Notice how, toward the latter half of the tendency above, the market began to cluster just above support. This type of price action leads to a breakdown more times than non.

The AUDJPY weekly nautical chart below is a perfect example.

AUDJPY clustering price action on the weekly chart

I can't tell y'all how many times I've seen this happen at significant support levels. Unfortunately, those who haven't washed their homework discover themselves entering in the direction of the tendency just before information technology breaks downwardly.

Just don't be fooled into thinking this technique is but useful on the weekly chart. Information technology tin, in fact, be extremely powerful on just about any time frame, even the ane-hr nautical chart.

AUDUSD heavy price action on the 1-hour chart

The annotated chart above is the aforementioned one I posted inside the member's area on November 19, 2014.

Once over again, notice how the price action became heavy toward the latter half of this ascending channel, a clear indication that the bullish momentum was not simply tiring merely that a break was imminent.

The AUDUSD iv-hr chart below paints a fairly dour moving-picture show of what happened side by side. The result of the breakup in the chart to a higher place was a 680 loss over the next 30 trading days.

AUDUSD clustering price action on the 4-hour chart

While it's withal necessary to expect for a shut above or beneath a primal level before considering an entry, understanding how clustering toll action tin atomic number 82 to a pause volition help you avoid beingness on the incorrect side of a trending market.

Final Words

Determining the strength of a trend doesn't need to be a circuitous operation. Something as unproblematic equally the 3 techniques discussed in a higher place are all y'all demand to gauge whether a trend is likely to continue or break down.

Keep in mind that all 3 techniques in a higher place are equally useful in surly markets as they are in bullish markets. The charts and patterns in a higher place were only used to maintain a consistent theme throughout the lesson, but the techniques discussed in a higher place can be utilized in any market and on any time frame.

The best affair any trader can practice for themselves whether they are attempting to decipher trend strength or place key levels is to become dorsum to basics. Every market place has its story to tell, and every story can be translated using swing highs and lows.

As I oft say, your job every bit a trader is not to know what will happen next. Rather, your job is to gather the clues the market leaves behind and assemble them in a style that stacks the odds in your favor; and every possible clue is born from the natural ebb and flow of the market.

Frequently Asked Questions

What is a trend in fiscal markets?

A trend in Forex, the stock marketplace, etc. is when a market moves higher or lower inside a specified period of time. It shows whether buyers (uptrend) or sellers (downtrend) are in control.

How do you identify trends?

The best way to identify trends, in my experience, is to use uncomplicated price activity. Higher highs and higher lows signal an uptrend, while lower highs and lower lows stand for a downtrend.

What are the iii types of trends?

Along-term (secular)tendency is 1 that lasts for 5 years or longer. Anintermediate (primary)tendency is 1 that lasts for one year or longer. Ashort-term (secondary) trend is one that lasts for a few weeks to a few months.

What is the best Forex trend indicator?

It's incredibly subjective, simply ane of the best trend indicators out there is raw cost activeness. At that place'due south little need for other indicators when the swing highs and lows in the market tell you all you need to know.

How do you identify a trend reversal?

Reversals occur when a market in an uptrend (college highs and higher lows) begins to make lower highs and lower lows. On the flip side, a market place in a downtrend shows signs of reversing when it begins to carve higher highs followed past college lows.

Your Plow

How do you currently make up one's mind the force of a trending marketplace? Volition yous be adding any of the iii techniques above to your trading armory?

Share your opinion, go out some feedback or ask a question beneath and I'll be sure to become back to you.