Identify Trends The Easy Way

No matter what your trading style may be and regardless of whether you buy and sell stocks or foreign exchange currencies, you need to know how to identify trends. Identifying trends is often quite easy but sometime the price action makes trend identification difficult. Consider the following tips that may help you in this process.

 

Try the following ways two methods and see which method works best for you..

 

The Conventional Way for Identifying Trends

An upward trend is characterized by higher highs and higher lows. A downward trend is characterized by lower highs and lower lows. An excellent tutorial on determining trends the conventional way is provided in the tutorial Stock Market Trends. I like this approach because it forces me to closely inspect the price action to identify the highs and the lows. With the highs and lows, it’s clear as to when an upward trend or downward trend is present and it’s clear when the trend has terminated. Once a trend terminates, we won’t know what will happen next until we see further price action.

 

The Easy Way To Identify Trends

If you are a short term trader, you could add three short-term moving averages to your chart such as a 5 period moving average, a 15 period moving average, and a 50 period moving average. It’s up to you as to whether you use a simple moving average or an exponential moving average.

If you’re a long term investor you may want to add three longer term moving averages to your chart such as the 20 period moving average, 60 period moving average, and 200 period moving average.

 

In the case of the short term trend trader:

If an upward trend is present, the 5 period moving average will be above the 15 period moving average. The 15 period moving average will be above the 50 period moving average.

 

If a downward trend is present, the 5 period moving average will be below the 15 period moving average. The 15 period moving average will be below the 50 period moving average.

 

The same logic works for a long term investor.

 

If the positional relationship between the moving averages is out-of-sequence, then a trend does not exist. In this case, Trend traders will have to wait until the start of a new trend.

 

If you’re having trouble identifying trends, you might try one of these methods.