As new traders, the first effort should actually be to understand trends. When we do, it becomes easy to apply any trading technique and strategy to which we are taught. Trend helps us to first recognize where we are in the market, we will not be utterly perplexed with the number of activities happening on the chart. With the knowledge of the trend, then we have a starting point.
Reading trend is easier with candlesticks patterns or heikin ashi candlestick. The graphical information are designed to pick up vital information on price action.
In this article our focus is on understanding trend. We will understand what trending market means, types of trends, methodologies for trend identification and how to know trend continuation and trend exhaustion.
This is an assessment task, and my presentation will follow the task queries.
Use if images
Unless otherwise indicated, images for this post will be drawn from tradingview demo template. Source
" What do you understand by a Trending market?"
We may confuse the two words, trend and trending market. A trend refers to the identification of a market direction whereas trending market refers to something different.
In cryptocurrency and other financial assets, an asset market is said to be trending when there are lots of activities going on in it. For example, when there are lots of persons buying and selling a crypto asset, we say that the asset market is trending. However, there are dominance, for instance, buy pressures may be higher than sell pressure and vice versa. I will explain more about that in the next query.
What we mean by buy pressure being greater than sell pressure is when people buying an asset are greater than those selling off their possession of the said asset and vice versa. In the price chart, we will notice a swing up and a swing down. These movements represents the actions of sellers and buyers. It is these actions that influence both the chart and the trend.
A long candle for example represents high spontaneous action on the asset market. It occurs when many bought or sold at a time or when a huge amount is plugged in or removed.
Trending market is the period of high volatility in the price of an asset. It is a period when many are buying and and selling at the same time.
In the price chart, trending market is seen as an asset price makes higher highs and higher lows or higher lows and lower lows.
Now let's discuss the trends.
What is a bullish and a bearish trend? (screenshot required)
Just as I pointed above, a market is trending when there are high volatility in the market. Trends are formed due to the battle for dominance between buy and sell presures. When the buy pressure or buyers gets dominance of the market, the direction is seen upwards, conversely, when sellers are dominating the buyers, the chart goes downwards.
However when people are acquiring an asset gradually and holders of the said asset refuses to sell off their positions, we call that consolidation period. At this time the market moves sideways or flat. However when market trends, there must be identified direction, up or down.
Bullish trend occurs when buy pressure is greater than selling pressure. At this point, the market will make higher highs and higher lows.
On the price chart, a viewer will see an upward movement, seen by multiple green candles. Although we will see red candles,but it is obvious that the green is dominating.
Using heikin-ashi candles with it's smoothed appearance, we will notice lined up green candles upwards.
Graphical representation on the price chart will show the above mentioned points.
- The price chart will show higher high and lower low.
- Current high should be greater than previous high.
- Current low should be greater than previous low.
When this sequence is broken it means the current trend is invalidated and another trend is about.
Bearish trend is the same as the bullish but happening in the opposite direction. It is a period sellers are dominating the market more than buyers. It is graphically represented by downward movement with lined up red candles.
- The chart direction points downward.
- The chart makes lower highs and lower lows.
*Current lower high must be lesser than previous low.
- Red candles must dominate.
In even the sequence is broken, we may be going for a trend reversal.
Bullish trend also refers to as uptrend is occurs due to buy pressure dominance of the market. It is often noticed as an upward movement characterized by many green candles lining upwards.
Bearish trend occurs when sellers are gaining momentum. It is often seen on the chart as red candles lined downwards.
Having understood bullish and bearish trends let's see methods to identify them.
- Explain the following trend identification and give an example of each of them. (Original screenshot needed from your chart). Do this for a bullish and a bearish trend.
i) Market Structure.
We have already discussed this in the previous subtopic only that we did not tag it a name. Simply put, we can use how the market are structured to identify if we are in an uptrend (bullish trend) or downtrend (bearish trend).
Is the market making higher highs and higher lows? Is there more green candles? Is the current higher high and higher low greater than the previous? Then we are in an bullish trend.
The opposite is true in the case of bearish trend. The market structure will have more red candles The market will be making lower lows and lower highs.
The current low should be lesser than the previous. When the market forms this structure, then we are on a Bearish trend.
A trend line is a a graphical line drawn connecting two low points when a chart is making higher highs and higher lows in the case of uptrend and two lower high in the case of a downtrend. The line can be vertical or horizontal depending on the formation of the price chart.
Drawing trend line to identify an uptrend.
1• We must find out two low points and connect them using the line.
2• The line must be drawn below the price chart.
This is where some beginners make errors. Some draw trend line above the price chart when trying to identify bullish movement. However, this is wrong, we draw trend line to connect where price reject downward continuation and turn upwards.
We pay attention to when price breaks this sequence, it invalidates the trend and may be a harbinger for reversal.
Drawing trend line to identify a downtrend.
1• We need to identify two upward price rejection.
2• The trend line is drawn above the price chart.
3• we need to watch for a break in this sequence which shows that the trend has ended and a change us about.
Explain trend continuation and how to spot them using market structure and trendlines. (Screenshot needed). Do this for both bullish and bearish trends.
Trend continuation is a broad topic. It refers to a temporary pause in a trend allowing for formation of a pattern and after such pattern has been completed, the trend continues.
Usually the pause means that the trend breakout is support areas. In such a case a likely reversal may be expected, but rather the chart forms a pattern and once the pattern is fully formed, the trend continues to it's direction. Trend continuation can be spotted out by mere observing the structure or applying trend line.
There are various types of continuation patterns, although it is not the focus of this task, let me hint to few of them.
1: Triangular pattern. One is the triangular chart patterns. This continuation pattern are mostly observed when we apply trend line on the support and resistance after breakout.
2: flag pattern. The second is the flag pattern. It occurs on an established trend after which there is a period of consolidation and thereafter the trend continues.
3: Pennants are another continuation pattern that resembles triangles but smaller in size when compared to triangles.pennants has smaller bars that form this chart pattern.
4: Rectangles: Rectangle formation is similar to to the flags but just rectangle in is formation.
How To Spot Trend Continuation
- Pick up any crypto-asset chart and answer the following questions -
i) Is the market trending?
ii) What is the current market trend? (Use the chart to back up your answers).
The chart below met all the characteristics of a trending market.
The below chart shows that we are in an uptrend.
Trending market refers to market with high volatility.
An uptrend refers to upward movement of an asset.
Downtrend refers to a downward movement of an asset.