Identifying Trend Change

Recently, I posted an article that talked about using Trend Level Signals with relative strength index (RSI) and support/resistance levels. After a couple of hours, readers started emailing me, asking “how do you spot a trend?” It’s a very good question, and often a neglected one. I feel that experienced traders do it naturally, so most of the instructions out there kind of assumes that readers already have the skill as well. However, beginners often have difficulty in identifying trends. This article then is going to remedy that particular problem, providing you with all the relevant information and the details of what these are and how you can begin trading with trends. Let’s dive right in. The relativism of trends In the most basic sense, a trend appears when the price of a certain asset moves in one particular direction for a time instead of alternating up and down directions. There are two kinds of trends – an uptrend, and a downtrend. An ‘uptrend’ is the term for asset prices which are going upwards – uptrends are characterized by higher price upward peaks and higher lower peaks. In other words, they have “high-highs and high-lows”. Downtrends are the opposite, in that price movement is moving downwards. Downtrends have “low-highs and low-lows” – or they have low upward peaks and low lower-peaks. Seems simple enough – but these do not appear uniformly. Prices do not go from an uptrend to a downtrend. Often, they will also have periods of consolidation that will last for a time, and may even be counter to the initial trend. These ranges often form their own levels of resistance and support. Furthermore, one thing that can affect the identification of trends is the candle intervals that are being used. Observe the charts below. 5-minute interval candles In this chart, you’ll see that there’s a larger gap between the price consolidation points. Let’s compare it to the chart below. 15-minute interval candles chart When using the 15-minute candles, the price consolidation areas are narrower. The trend is also clearer. You’ll see that the consolidation areas are closer together -- and because of this, the trend is easier to see. This is because of the change in the time that each candle represents. Between two examples, you can see that the downtrend is far more easily identifiable with candles that represent longer time intervals. You’ll also see that you can draw a line connecting the highest top points (also called swing-highs), and a line connecting the lowest points (or the swing lows). These areas where the prices seem to bounce in between for the range of resistance and support. 2 methods for trading with trends in Binomo So now you’ve already identified a trend – it’s time to learn how to actually use it. The next step is learning when and how to enter the market based on the trends you’ve already spotted. One mantra that has been repeated since the dawn of asset trading is; “always trade along tends to bounce back the way it came. In this case, the trendline doubles as the support line. This is therefore a good indication of uptrends, and it would be ideal to place a buy order here. There are two main ways that you can trade based on the trends. During price breakouts In other words, when the asset price breaks the support and resistance level. Breaking these usually results in pretty predictable patterns that you can capitalize on by entering the market based on the direction that the prices are moving towards. Take a look at the chart below. The purple line below the candles is the support line, and you can notice that generally, the candles tend to bounce away from them. If that asset is ranging, the tendency is that the prices are also bouncing from a similar resistance line up top – the resistance line. The tactic here is to wait for the first candle to break either line, then trade along that. In this instance, it was a bearish candle that broke the support – so you can expect the price to go down. Enter the market with a sell order. When the price bounces from the supports In the next example, the price has ranged for quite a bit. You’ll notice because the price is bouncing between the two support and resistance lines that I’ve drawn – before it plunged down at the end, breaking the support line. It’s a good time to enter the market when the price has bounced from either the support and resistance line, as there is a certain measure of predictability. You can place a buy order when the price has touched the support line, as it will likely go up. Similarly, place a sell order when the price has touched the resistance line, as it will probably go down. Possible examples of trade entry points Let’s observe the chart below and carefully note the indicated trade entry points using the TLS method. All of these entry points display a green pin bar followed by two consecutive green candles. This would be an ideal place to buy – because oftentimes, bullish candles appearing consecutively is a strong signal for a robust uptrend. You’ll notice green candles just on top of the trendline at the next entry points. As mentioned before, when the price touches either the support or resistance, it tends to bounce back the way it came. In this case, the trendline doubles as the support line. This is therefore a good indication of uptrends, and it would be ideal to place a buy order here. If the candle isn’t touching either the support or the resistance and you see a tall green candle break out of the resistance level created by the candles, it's best to hold off buying. Because this is the first time that broke out of a level, a retracement would likely follow. The best way to enter the market, in that case, is to make a short sell. Now, let’s look at the chart below, which is displaying a downtrend. Note the horizontal lines drawn – they represent support lines, which are areas of resistance. You’ll notice that every time the support line is broken, the trend tends to go down, often steeply. Drawing a trendline makes these areas easier to see. Conclusion There is both a science and an art to trade identification. Sure, it might be difficult at first, but the benefits you will get from mastering this essential skill is enormous – so make sure to study and practice it diligently. If you’re having difficulty in identifying a trend, try using longer time-period charts. Charting a trend simply means connecting peaks; find them and draw a line that passes all of them – the direction that the line is point towards is your trend. Lastly, remember to identify and use support/resistance zones, and enter the market accordingly. Hungry for more? Head over to the Guide to Trading with the Trend Level Signal for more in-depth information about trend level signals in Binomo. And don’t forget to share your experiences below! As always, if you haven't signed up yet for a free demo account on Binomo, feel free to do so right now! Good luck on your trading journey with Binomo!