If you hit the google search looking for the term “Trend”, one of the first results should be “A general direction in which something is developing or changing.”. And that is common sense and intuitive. The trend is a dominant bias in any aspect of life. For example, we could say that the trend for classic 19th century men caps is strongly dominant these days. And that basically means that a lot of demand is going on for 19th century men caps that makes them a theme these days, weeks or months….
The same logic is applicable on trading and financial markets(Whether in Forex, Stocks, or any other asset class). A financial instrument is said to be in an uptrend when there is enough demand to make the instrument move higher for period of time. For example, if the EURUSD move higher in value for a period of time , it is said to be in uptrend. And same goes for a downtrend, if there is less demand and enough selling for the euro to make the EURUSD move lower in value for period of time, it’s said to be in a downtrend.
Simply stated, a trend is a directional movement of the price that can be to the upside,downside, or just horizontally(Sideways).
In many cases, a trend can be spotted by bare eyes. However, for professional technicians, it’s not just about the general directional move. It is a structure that must be identified to conclude that a trend is up, down or sideways. So let’s discuss the structures for each trend type.
What is an Uptrend/Downtrend?
An uptrend in its general definition, is a directional move to the upside that can be spotted visually. Technically, an uptrend should have a distinctive structure of consecutive waves, where each wave surpasses the prior wave.
Definition: An uptrend is a series of higher highs and higher lows. Where each high surpasses the previous high, and each low is above or equal to the prior low.
A Downtrend is the exact opposite of an uptrend, it is a series of lower highs and lower lows. Where each low surpasses the previous low and each high is lower or equal to the prior high.
Here is a real life example of a Downtrend on NYMEX Crude Oil Daily Chart. This example is intended to help you identify the downtrend correctly(Same procedure goes for an uptrend). It might look confusing at first sight. However, if you start reading the chart from the left hand side and move with the price action it will make sense in no time.
One more thing, before you continue forward to the example, we need to explain one VERY IMPORTANT term, which is a BREAKOUT!
What is a breakout?
A breakout is simply a move beyond a certain level. Many technician’s have their own methodology to identifying a valid breakout. For some traders, a breakout above or below a level is merely the price ability to trade above or below that level. For example, if a trader identify 1.3000 as an important level for the EURUSD, and the price trades just one pip above that level at 1.3001, he might consider this a valid breakout! Although this approach might be valid for some, it’s not optimal for many technicians.
The Closing Method
Many technicians use the closing technique to confirm a valid breakout. Simply stated, the price must close above or below a specific level on the time interval being analyzed to confirm a valid breakout. And here at The Forex Channel, we prefer this method. For a breakout to be valid there should be a CLEAR(not marginal) closing above or below the level for the time interval being analyzed.
Now, going back to our example, don’t worry If you feel confused, this example should clarify things further.
If you start from the left hand side of the chart and move forward with the price action, you will notice the clear structure of lower highs and lower lows(Downtrend). Which was maintained for the whole period we examined until now. Note that in mid October, there was move higher beyond the prior swing high. However, for us, that wasn’t a valid breakout as the price has marginally closed above the previous high and therefore the structure of the downtrend(lower highs and lower lows) was still intact. As we mentioned earlier, for the breakout to be valid, it should be clear and noticeable. If it doesn’t scream a breakout , do not take it.
False Breakout
A false breakout is simply when a breakout below/above a support and resistance happens but fails to be sustained.
What is Sideways Trend?
When things go undefined, where a technician can’t spot any series of uniform higher highs and higher lows(uptrend). Or lower highs and lower lows(downtrend). Then it is a sideways trend.
When the highs and lows are mixed without a clear sequence, the market is said to be sideways,flat, or trend-less.. All names have the same meaning.
Here is an illustration of a sideways trend.
In the NYMEX Crude Oil example above, there was a period where the price entered a sideways trend. It was a part of the overall downtrend. Zooming into this period between September and early November we can extract the following sideways trend example:
Technician Tips & Tricks
♠ A trend is a dominant theme, trading in the direction of the dominant trend increase the chances of success.
♠ The highs and lows that a trend establishes while forming are called Support and Resistance levels.
♠ Buying near support and selling near resistance is the most appropriate trading technique in a sideways trending market.
♠ In sideways trends, it is common to witness false breakouts above or below the sideways range.
♠ In a strong uptrend or downtrend, pullbacks are shallow and short lived. Therefore, traders can be more aggressive trading in the direction of the trend.
https://blog.thefxchannel.com/2017/04/30/the-ultimate-guide-to-trends-uptrend-downtrend-and-sideways-trend/