One of the most significant skills every trader should acquire is to understand the trends in the market. Trading Forex, crypto, or stocks, the market is never at rest, it is always moving, and either up, down or the side.
When you are able to spot the trend, it becomes very easy to deal with the market since you are going with the market rather than against it.
In this guide, we will refer to the three key categories of market trends in a simplistic way.
What Is a Market Trend?
Market trend refers to the general trend of the price of an asset at a particular point of time.
The prices do not run straight. They come in waves one after another, tapping up, dragging back, and repeating it. However, when we consider the grander picture we are usually able to see the obvious way forward.
Trends are of three broad categories:
- Uptrend
- Downtrend
- Sideways trend
Let’s look at each one.
1. Uptrend (Bullish Market)
An uptrend occurs when the market is persistently rising.
Price behaves in an uptrend as follows:
- Higher Highs (HH)
- Higher Lows (HL)
This implies that buyers have a large bargaining power that forces the price to be increased.
The main Profiles of an Uptrend.
- Price keeps making new highs
- Pullbacks are temporary
- Buyers dominate the market
- Buy trade opportunities are good.
Simple Example
When EUR/USD changes 1.0500 to 1.0700 to 1.0600 to 1.0900 then the general direction is up. Although price drags back occasionally, the trend moves towards an upward direction.
Many traders follow the rule:
“The trend is your friend.”
This implies that it is more probable to trade in the direction of the trend.
2. Downtrend (Bearish Market)
An opposite of uptrend is a downtrend. It occurs when the market continues to fall down with time.
In a downtrend, price forms:
- Lower Highs (LH)
- Lower Lows (LL)
This demonstrates the fact that sellers are stronger than buyers.
Important Features of a Downward trend.
- Price keeps falling
- Minor upward shifts are short lived.
- Sellers control the market
- Sell trades have good chances.
Simple Example
If Bitcoin moves from:
$70,000 → $65,000 → $67,000 → $60,000
The general trend is negative, as there is a bearish trend.
Sellers usually seek buying positions as a market is in a pullback in a downward direction.
3. Sideways Trend (Range Market)
A sideways market occurs when the prices move in a range and there is no clear direction of where it is going up or down.
In the given case, the price continually oscillates around:
- Support level (bottom)
- Resistance level (top)
Both buyers and sellers do not have the control.
The most important features of Sideways Markets.
- No clear direction
- The movement of prices is horizontal.
- Frequent reversals
- Breakouts may occur at any time.
Simple Example
Assuming that the gold continues to oscillate between 2000 and 2050, then this is an indication that the market is in a state of range.
Traders usually:
- Buy near support
- Sell near resistance
Until the market breaks out.
The significance of learning the trends.
The identification of market trend assists traders:
- Trading against the market is a bad idea.
- Find better entry points
- Reduce unnecessary losses
- Improve trading confidence
There is one question, that most professional traders are inclined to ask at the beginning:
“What is the market trend?”
It is only after this that they seek trading opportunities.
Final Thoughts
The basis of trading is market trends. Any trader must know how to identify the direction of the market; down, up and across the board.
To summarize:
- Uptrend Higher highs and higher lows.
- Downtrend The trend is decreasing with low highs and low lows.
- Sideways Price moves within a range.
Learning trend analysis will ensure that you make better decisions about trading and prevent emotional trading.
Note: winning traders do not struggle with the market, they go with the trend.
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