The tenets of Dow explain the methods of identifying a trend, however for someone starting out they still don’t really answer the question,
There are several ways in which you can define a trending market, there are secondary indicators that can tell you a market is trending according to various data, you can use primary price analysis, whilst there are also a magnitude of combinations of indicators that traders use to define a trend.
We will go through the absolute essentials when defining a trend, as well as some extra combinations that have proved successful in the past.
Higher Highs & Higher Lows OR Lower Highs & Lower Lows
The Definition of a Trending Market is..
The definition of a market in an uptrend is the price is creating higher highs and high lows. The definition of a market in a downtrend is the price creating lower highs and lower lows.
The statement above, is, in a nutshell all you need to use when defining whether a market is in a trend.
A Sideways Market is Defined as..
A sideways market is defined as a price that does not create higher highs and higher lows. If it has created two higher highs, with the next swing low printing a price below that of the previous low, then we can state that the market is sideways, or ranging, or choppy, or however you wish to describe it.
There is always a big confusion with new traders about identifying the difference between a sideways and a trending market. The fact of the matter is that it is nearly always answered by referring to a higher time frame. Elliot Wave theory denotes that markets move in waves, swinging high and low and that within one wave is a series of smaller waves.
This theory should be thought of when trying to determine whether a market has stopped its trend entirely or whether it is simply retracing in a higher time frame to continue in the direction of the trend. The use of multiple time frames in answering this question is essential.
The second problem that often crops up with traders is that one person will identify a high differently to another. Unfortunately, that is the subjective nature or lots of trading strategies. The way to get around this is to be confident in YOUR highs and lows.
If you are consistent and follow the same procedure every time then your trading will follow suit. If you begin taking advice from everyone and not having confidence in your own analysis, you will constantly change how you analyse a market and your trading strategy, giving you no consistency and ultimately no real idea if any of your strategies or techniques actually work.
I like to draw out the highs and lows. This is simply by using a trend line and joining the highs and low together, you then form a zig-zag formation and can begin to understand how the market is moving by eliminating the noise.
When doing this, you should remember one thing:
- A market will trend for 30% of the time and range or go sideways for 70% of the time.
Therefore do not be surprised if you find yourself drawing sideways markets most of the time.
Now that you have drawn the movement of the market, you should get a good idea of how it is moving and the state it is in (trending or sideways). If it is sideways, what are the signs that it is about to trend again?
In an uptrend, the signs that a market is ready to start to trend again is
- The price will fail to break below the previous low
- The price will break the previous high
- You then need to see the market fail to create a new low before confirming the trend is continuing.
Where to Buy
The BEST place to buy is when you have seen a low fail to break the previous low. You simple put an order above the previous high, once that high has been taken out by the price, the market has created a higher low and a higher high.