How to Recognize Trends in the Market

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Simply put, short-, intermediate- and long-term trends are the three kinds of trends that we see each day in our study of technical analysis. “A trend is your friend,” is just one of the sayings that have come out of the study of primary as well as secular trends. Some people try to identify trends by looking at averages. Given the understanding that the psychology of the markets actually moves the markets, we can acknowledge that psychology develops and ends the trends we are going to look at today.

Learning how to identify the trend should be the first order of business for any student of technical analysis. Most investors, once invested in an uptrend, will stay there looking for any weakness in the ride up, which is the indicator needed to jump off and take the profit.

Primary Markets
The bull and bear markets are also known as primary markets; history has shown us that the length of these markets generally lasts from one to three years in duration.

Chart Created with TradeStation

Secular Trends
A secular trend, one that can last for one to three decades, holds within its parameters many primary trends, and, for the most part, is easy to recognize because of the time frame. The price-action chart, for a period of 25 years or so, would appear to be nothing more than a number of straight lines moving gradually up or down. Have a look for a moment at the chart of the S&P 500 below. The chart shows the progress of the markets from the 1980s through the mid-2000s, showing the rise of the market leading up to the turn of the century.

Chart Created with TradeStation

Intermediate-Trends
Within all primary trends are intermediate trends, which keep the business journalists and market analysts constantly searching for the answers for why an issue or a market suddenly turns and heads in the direction opposite to that of yesterday or last week. Sudden rallies and directional turnarounds make up the intermediate trends and, for the most part, are the results of some kind of economic or political action and its subsequent reaction.

History tells us that the rallies in bull markets are strong and that the reactions are somewhat weak. The flip side of the coin shows us that bear-market reactions are strong and that the rallies are short. Hindsight also shows us that each bull and bear market will have at least three intermediate cycles. Each intermediate cycle could last as little as two weeks or as long as six to eight weeks.

Long-Term Trends
To determine the long-term trends that appear on the charts of their favorite stocks, veteran analysts will use a stochastics indicator. My favorite, however, is the momentum indicator called the rate of change (ROC) (which you can read about in Rate of Change):

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The normal time frame for ROC measurement is 10 days. The ratio to build the ROC indicator is as follows:

Rate of Change = 100 (Y/Yx)

“Y” represents the most recent closing price, and Yx represents the closing price a specific number of days ago. So, if the price of a stock closes higher today than it did 10 days ago, the ROC value point will be above the equilibrium, thus indicating to chartists that prices are rising in that particular issue. Conversely, if the price in today’s session closes lower than it did 10 trading days ago, the value point will be below the equilibrium, indicating that prices are falling off. It is safe to say that if the ROC is rising, it gives a short-term bullish signal, and a bearish sign would have the ROC falling. Chartists pay great attention to the time period in the calculation of ROC. Long-term views of the market or a specific sector or stock, will use perhaps a 26- to 52-week time period for Yx and a shorter view would use 10 days to six months or so.

You can see that, by changing the number of days or weeks as a time frame, the chartist can better determine the direction and duration of the trend.

The Bottom Line
Markets are made up of several different kinds of trends, and it is the recognition of these trends that will largely determine the success or failure of your long and short-term investing.

In the financial markets, the trend is everything. New traders are taught a popular market slogan very early in their trading careers that the trend is the trader’s friend until it ends.

The binary options market, just like other financial markets, can be traded in a bi-directional basis, with the opportunity to trade and profit when prices are going up or when they are coming down.

There are also trade types which can be used to trade sideways trends. However, the big question is this: which of these binary options trades should you be trading? We will examine how to recognize the trends in binary options, and then do a comparison to show why you should be focusing more on the directional trend-based trades.

Recognizing the trend

Trends are best recognized on long term charts such as the daily charts. A typical daily chart displays price action for an asset over a two or three month period, depending on whether the zoom tool on the chart was used.

You will have a clearer picture of the trend using the daily chart. Short term charts such as the 5-minute, 15-minute or 1 hour chart are intraday charts that show a lot of market noise. You may see a price movement on a one hour chart which may look like a trend, but if you look at the situation on a daily chart, it may just be a retracement from the main trend.

The chances of getting caught out by a reversal will thus be very high. It is therefore essential to first get a picture of what the trend is, and then to place trades accordingly. Three trends exist in the financial markets: Uptrend, Downtrend, and Sidetrend.

Uptrend

An uptrend is seen when prices are heading upwards. An uptrend is characterized by higher highs and higher lows. This is seen in the snapshot on the left. When market is in an uptrend it is also known as a bullish market.

When you’re drawing your trend lines onto your charting window, for an uptrend, you should draw your line below the low data points as these would potentially be your entries if you’re trading with the uptrend. If you are trading against the trend (reversals) you could draw your trend line above the high data points.

The binary options trade which is used to capitalize on rising prices as seen in an uptrend is the CALL trade contract. It is also known as BUY, HIGH, ABOVE or UP binary option, depending on which platform is used. This trade is made expecting the expiry value of the asset to be higher than the market/entry price of the asset.

Downtrend

A downtrend is seen when prices are falling. The candlesticks which constitute price action are therefore seen to form lower highs and lower lows. This is seen in the snapshot on the left. When market is in an downtrend it is also known as a bearish market.

When you’re drawing your trend lines onto your charts, for a downtrend, you should draw your line above the higher data points as these would potentially be your entries if you’re trading with the downtrend. If you are trading against the trend you could draw your trend line below the lower data points.

The binary options trade which is used to profit from falling prices as seen in a downtrend is the PUT trade contract. It is also known as SELL, LOW, BELOW or DOWN binary option, depending on which platform is used. This trade is made expecting the expiry value of the asset to be lower than the market/entry price of the asset.

Sidetrend

Then there is the sidetrend, which is seen when prices are in consolidation i.e. stuck in a tight range. The high prices are at almost the same horizontal level and the low prices are also at a horizontal level. The sideways trend is the basis of the IN/OUT or BOUNDARY trade, which is a bet on whether the price will stay within the constituted range (IN) or will step out of the range (OUT).

Different brokers have their definitions for the IN or OUT trade. Some brokers define OUT as price completely stepping out of the price boundaries, while some will include price touching the boundaries as OUT. This trade type is very tricky because price will always break out of any range either to the upside or downside, no matter how long it has been range bound. It is merely a question of time.

Trading binary options in a sidetrend is very risky and it is advisable to trade only during an uptrend or downtrend. You will have a lot more winning trades when you enter the markets during those times.

A simple way of trading a trend either to the upside or to the downside is to use price channels. Channels are formed when the trend lines which join the high prices is parallel to the trend line which connects the low prices.

When we have higher highs and higher lows and the trend lines connecting them are parallel, this is an ascending channel which can be used for CALL trades.

If the trend line connecting the lower lows and that connecting the lower highs are parallel to each other, then this is a descending channel which can be used to trade the PUT option.

CALL option

To trade the Call option, check to see if the trend on the daily chart is upwards. Then step down to a lower time frame chart and see if an ascending channel has been formed. If yes, aim to trade the option when the price has bounced off the lower trend line so that the rising price can put the option in profit.

The entry must be timed properly. Once the candle approaching the lower trend line from up downwards has bounced off the trend line without closing below it, the entry must be made at the open of the next candle as close to the lower trend line as possible. At least three candles must be allowed to elapse before the trade expires, so the expiry must be set to three candle lengths, equivalent to the three times the time frame of the chart.

PUT option

To trade the Put option, check to see if the trend on the daily chart is downwards. Then step down to a lower time frame chart and see if an ascending channel has been formed. If this is the case, aim to trade the option when the price has been rejected at the upper trend line so that the falling price can put the option in profit.

The entry must be timed properly. Once the candle approaching the upper trend line has rejected at the trend line without closing above it, the entry must be made at the open of the next candle as close to the upper trend line as possible. At least three candles must be allowed to elapse before the trade expires, equivalent to the three times the time frame of the chart.

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How to Identify a Trend

At some point in your investing career, you are most likely going to hear the cliche “the trend is your friend.” While this statement is true and seems simple enough, actually identifying a trend can be deceptively tricky–especially if you are new to technical analysis. And of course, the trend is only your friend if you can properly identify it.

How Do You Identify a Trend?

Technical analysts have come up with many different ways to identify a trend. Some look at how moving averages are interacting with each other, some look at technical indicators that have been specifically created to identify trends and others–like me–prefer to look directly at the price action.

Stocks rarely move straight up or down. Rather, they move up and down in a stair-step fashion. In other words, they move up and down and up and down but ultimately move higher or lower.

Whenever a stock moves up and then starts to turn around and move back down, it creates a new high–or a peak.

Whenever a stock moves down and then starts to turn around and move back up, it creates a new low–or a valley.

You can use these highs and lows–or peaks and valleys–to help you determine the trend.

A stock is in an up trend when the price is making a series of higher highs and higher lows. For instance, if a stock moves up $1.00, then down $0.50, then up $1.00 and then down $0.50 again, it creates a series of higher highs and higher lows.

A stock is in a down trend when the price is making a series of lower highs and lower lows. For instance, if a stock moves down $1.00, then up $0.50, then down $1.00 and then up $0.50 again, it creates a series of lower highs and lower lows.

A stock is in a sideways trend when the price is making neither a series of higher or lower highs nor a series of higher or lower lows. For instance, if a stock moves down $1.00, then up $1.00, then down $1.00 and then up $1.00 again, it creates no distinguishable pattern of highs and lows.

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