How to Determine When the Market is Really Trending

[tradingadvantagetm 10]

How often have you looked at a chart and tried to determine whether or not the market is really trending? How many times have you been fooled by your Stochastics or RSI indicators? How many times have you sold because your oscillators were screaming overbought then watched the market dip a little and then continue higher, stopping you out for another loss? One of the most important things you are probably trying to figure out with any given market is if it is in a trend, and in which direction that trend is moving.

 

Find the trend and make friends with it

 

Swimming upstream is difficult, and that kind of battle is probably why you’ll often hear traders say, “The trend is your friend.” But spotting a real trend can be tricky, especially for first time traders and chart observers. You don’t need really fancy calculations or trading software to spot a trend in a market, and if you find it, don’t fight it.

Guess who bought the dip? That's right, the floor traders and the other professionals

 

If a market is really trending, there will always be reactions against the prevailing trend. Those are the signals most floor traders love. They know that many investors in the general public will fall for the "fade" nearly every time. So how do you know whether or not what you are seeing is a real trending market or not?

The basics are very simple. A market in an uptrend will likely have higher highs and higher lows. The opposite is true for a downtrend. Lower highs and lower lows tell you when the market is in a downtrend.

 

You never want to go against these situations.

 

IMPORTANT TRADING RULES:

 

1) We never get long or buy in a downtrending market.

2) We never sell or go short in an uptrending market.

 

It's just like stepping in front of a freight train.

 

A market on a move higher will attract new buyers and selling forces will help establish higher highs. When the price dips, more buyers will come in on what they perceive as a value entry point, delivering those higher lows. On the downside, selling pressure will cause lower lows and any move above those results in more sales, topping off those lower highs.

 

Find support and resistance and find trading opportunities

 

Once you have determined the overall trend, you can look for support and resistance points. Knowing these price levels can help you follow the trend, buying on dips in a market that might be trending higher or selling on pops when the prevailing trend is likely lower. It doesn't get any better than that!

 

Best trades to you,

 

Larry Levin

[method 10]

So....how to determine when the market is really trending?

[chulaihuey 10]

The way I read it:

"A market in an uptrend will likely have higher highs and higher lows. The opposite is true for a downtrend. Lower highs and lower lows tell you when the market is in a downtrend."

[chulaihuey 10]

My question is what the following sentence really means: "They know that many investors in the general public will fall for the "fade" nearly every time."

So does "falling for the fade" mean that in an uptrend if there is a pullback the general public is taking this to be a trend reversal, and entering short while the smart money "knows" this is just a pullback and they are going long on the pullback's low. So the smart money is buying from the gen pops short selling.

Do I have this right? Or am I all wet???

If I do have this right what are the signals then that this is a pullback to the prevailing trend as opposed to a true trend reversal?

[Tradewinds 12]

What does 'Trending' mean? If up trending means one higher high, then the trader needs to wait until the next higher high to believe that an uptrend has started. The next higher high means that there have been two highs. So I've already missed both those highs.

 

If the downtrend has not ended until the uptrend has started, then do I need to wait to exit the short until the next higher high? How do you trade that situation? If I wait to exit the short until the next higher high, in a lot of situations, I could be back to breakeven or even at a loss. That doesn't make any sense to me.

 

Explaining market behavior in terms of 'Trends' can be extremely misleading. What a trend is could mean different things to different people. And even if there was a consensus about what the definition of a trend is, it's still all meaningless unless the trader understands what usually makes price do what it does. There needs to be a positive correlation between what price does and some underlying reason. For example, price doesn't do anything because the close just crossed an MA line. Maybe if enough people THINK that price SHOULD do something because the close crossed an MA line, then something will happen. But that is because of human behavior, not the trend line. Trend lines don't make the price do anything. My point is, that we all get caught up in thinking that price is going to do something for reasons that have absolutely nothing to do with why the price is really doing what it's doing.

 

It's meaningless to come up with trading rules unless a trader has some knowledge about what makes the price do what it does. Unless I read about the reasons for price doing what it does, and it is then proved to me, then there is no point learning the strategy rules. Why learn strategy rules and have no idea what the rules are based on?

 

It's absolutely meaningless to talk about trends unless there is a specific definition for what a trend is. And then the strategy rules need to fit the trend definition.

 

If a definition of a trend is that the price is going in one direction for "quite a while", then by the time you identify it as a trend, then "quite a while" has already gone by. It's a "Catch 22" situation. By the time the price has met that definition of a trend, it could be ready to start moving the other direction. So depending upon a trader's definition of a trend, and what the rules are to the strategy, you could always be late to enter.

[SIUYA 11]

if you are trend trading you will need your own definition for what constitutes a trend and this is needed for your systems entry and exits.....but you dont necessarily need to know why it is trending.

Having a philosophy/theory of the way the markets work in terms of overall structure is important to understand how you intend to capture profits from the markets, however the in depth analysis of these people are buying here, those people are selling here for these or those reasons is largely irrelevant....just like magical trend lines. The market does not care why people are doing things, it merely reports that they are being done.

 

If you really think you can track why people are doing things as opposed to how market patterns seem to repeat and continue and how you can put the probability of those patterns repeating in your favour then become an economist.

If you choose trend following then it is simple - you think the market will continue in the same direction you think it is trending in....the rest becomes money management. Worrying about missing the first two higher highs is missing the point if you think those higher highs will continue.

 

The markets are always trending - it depends on YOUR time frame.

[PiP.Squeak 10]

  SIUYA said:

The markets are always trending - it depends on YOUR time frame.

 

This is exactly right and what I refer to as fundamental truth. I believe good trading strategies are built on fundamental truths because, when things go bad, and they always seem to sooner or later, fundamental truths are always still the same. It seems like when you base a strategy on fundamental truths you gain confidence.

 

In my mind the most important part is not just being able to determine if the market is really trending by identifying higher highs or lower lows, but being able to identify the trend early on rather than after the fact.

 

I've found that almost always a trend can be can be identified on the smaller time frame first using the same method of identifying higher highs or lower lows. Then I draw a hard trend line across the bottom/support of an up trend or the top/resistance of a down trend. In order to do this there has to be at least two retracements.

 

Then I wait for it to come back one more time and retest my trend line. If it holds then I take the trade. From there on its about stop loss management. I try to do that on the larger time frame moving to just below or above my trend line as the trend develops.

 

I seems like if I try to wait until the trend is clearly recognizable on the larger time frame most of it has already passed me by.

 

I also try and get a feel for why the market is moving. For example; If Italy just announced that they may default on their debt there's a pretty good chance we're going to trend until the end of the day!

 

It also seems like we have longer faster moving candles in the direction of the trend and short slow moving candles in the retracement.

 

That's what seems to work for me, but I'd love to hear what others do to identify a trend early on.

[bobcollett 10]

  Tradewinds said:

What does 'Trending' mean? If up trending means one higher high, then the trader needs to wait until the next higher high to believe that an uptrend has started. The next higher high means that there have been two highs. So I've already missed both those highs.

 

If the downtrend has not ended until the uptrend has started, then do I need to wait to exit the short until the next higher high? How do you trade that situation? If I wait to exit the short until the next higher high, in a lot of situations, I could be back to breakeven or even at a loss. That doesn't make any sense to me.

 

Explaining market behavior in terms of 'Trends' can be extremely misleading. What a trend is could mean different things to different people. And even if there was a consensus about what the definition of a trend is, it's still all meaningless unless the trader understands what usually makes price do what it does. There needs to be a positive correlation between what price does and some underlying reason. For example, price doesn't do anything because the close just crossed an MA line. Maybe if enough people THINK that price SHOULD do something because the close crossed an MA line, then something will happen. But that is because of human behavior, not the trend line. Trend lines don't make the price do anything. My point is, that we all get caught up in thinking that price is going to do something for reasons that have absolutely nothing to do with why the price is really doing what it's doing.

 

It's meaningless to come up with trading rules unless a trader has some knowledge about what makes the price do what it does. Unless I read about the reasons for price doing what it does, and it is then proved to me, then there is no point learning the strategy rules. Why learn strategy rules and have no idea what the rules are based on?

 

It's absolutely meaningless to talk about trends unless there is a specific definition for what a trend is. And then the strategy rules need to fit the trend definition.

 

If a definition of a trend is that the price is going in one direction for "quite a while", then by the time you identify it as a trend, then "quite a while" has already gone by. It's a "Catch 22" situation. By the time the price has met that definition of a trend, it could be ready to start moving the other direction. So depending upon a trader's definition of a trend, and what the rules are to the strategy, you could always be late to enter.

 

Hi Tradewind

A thought provoking post

So if you dont enter after the second higher high, when are you going to enter?

 

regards

bobc

[uexkuell 10]

  SIUYA said:

The markets are always trending.

 

Just true.

 

Means: There are always big orders being worked.

When there are only small orders price isn't moving / there is no volume.

 

 

  tradingadvantagetm said:

IMPORTANT TRADING RULES:

1) We never get long or buy in a downtrending market.

2) We never sell or go short in an uptrending market.

 

Maybe true for some ways to trade.

 

 

The way I found most profitable is just opposite:

- In an uptrend set your short entry at the price where trend may reverse.

- If price moves against you immediately (which happens rarely if using appropriate method) reverse trade (to long)

- If price moves into green move stop loss to break even (never let winner turn into looser)

- Let winners run

 

This usually takes 2-3 tries until you succesfully jumped into the (new) trend.

 

 

Vice versa for downtrend.

[johnw 10]

  uexkuell said:

.........................................

- If price moves against you immediately (which happens rarely if using appropriate method) reverse trade (to long).............................................

.

 

May I ask what is the appropriate method

[SIUYA 11]

  uexkuell said:

J

 

Maybe true for some ways to trade.

 

 

The way I found most profitable is just opposite:

- In an uptrend set your short entry at the price where trend may reverse.

- If price moves against you immediately (which happens rarely if using appropriate method) reverse trade (to long)

- If price moves into green move stop loss to break even (never let winner turn into looser)

- Let winners run

 

This usually takes 2-3 tries until you succesfully jumped into the (new) trend.

 

 

Vice versa for downtrend.

 

How do you determine where the trend will reverse?

How do you let the winners run if you are trading against the trend?

Why when you are trading against the trend as it so profitable would you cut and reverse?

 

Basically - Why make it so hard for yourself trading against the trend, if you rarely have any losers using the appropriate method, why not make it easier for yourself and use the same techniques trading with the trend?

[Roger Felton 10]

  Tradewinds said:

What does 'Trending' mean? If up trending means one higher high, then the trader needs to wait until the next higher high to believe that an uptrend has started. The next higher high means that there have been two highs. So I've already missed both those highs.

 

If the downtrend has not ended until the uptrend has started, then do I need to wait to exit the short until the next higher high? How do you trade that situation? If I wait to exit the short until the next higher high, in a lot of situations, I could be back to breakeven or even at a loss. That doesn't make any sense to me.

 

Explaining market behavior in terms of 'Trends' can be extremely misleading. What a trend is could mean different things to different people. And even if there was a consensus about what the definition of a trend is, it's still all meaningless unless the trader understands what usually makes price do what it does. There needs to be a positive correlation between what price does and some underlying reason. For example, price doesn't do anything because the close just crossed an MA line. Maybe if enough people THINK that price SHOULD do something because the close crossed an MA line, then something will happen. But that is because of human behavior, not the trend line. Trend lines don't make the price do anything. My point is, that we all get caught up in thinking that price is going to do something for reasons that have absolutely nothing to do with why the price is really doing what it's doing.

 

It's meaningless to come up with trading rules unless a trader has some knowledge about what makes the price do what it does. Unless I read about the reasons for price doing what it does, and it is then proved to me, then there is no point learning the strategy rules. Why learn strategy rules and have no idea what the rules are based on?

 

It's absolutely meaningless to talk about trends unless there is a specific definition for what a trend is. And then the strategy rules need to fit the trend definition.

 

If a definition of a trend is that the price is going in one direction for "quite a while", then by the time you identify it as a trend, then "quite a while" has already gone by. It's a "Catch 22" situation. By the time the price has met that definition of a trend, it could be ready to start moving the other direction. So depending upon a trader's definition of a trend, and what the rules are to the strategy, you could always be late to enter.

 

The first thing you learn in trading is that no one has ever come up with a universally accepted definition of a trend that has any real value. Some "trends" only last for a couple of cycles while others can last a great deal longer. One trader's uptrend can occur in another traders downtrend...which can both occur in yet another trader's uptrend. Who's right? Does it matter?

 

Mr. Levin did a superb job of creating an interesting post title without providing any useful information concerning trends. What is the specific moment when a market move becomes a market trend? How can we identify when a trend is actually over?.

 

Tradewinds makes some interesting points, but the questions raised have a thousand answers. What is a trend? I have more definitions than you'd believe. What makes price do what it does? To answer that, you'd have to tell me what specific market and what precise moment in time are referenced...and then give me a year or more to research the thousands of variables and market forces that were exerting their influence at that particular time on the market. Sort of like the "Butterfly Effect", if you will. After all that work, you would have a huge list of thousands of random events and their individual effect on thousands of traders that caused the market to move up or down for a few bars or cycles.

 

Imagine two identical leaves at the top of a tree one inch apart. Both fall at exactly the same moment from the same height. Why will they never land one inch apart? Why, with all the computing power in the world, can we not predict exactly where they will land? If you understand the unpredictability of the leaves, then you'll understand the difficulty of predicting the markets when so many random forces are affecting it simultaneously.

 

The market does what it does because it is the cumulative result, moment by moment, of the fear and greed of every single participant. If anyone had the unique ability to access that information and know at any given moment what the resultant market reaction will be, they would own the world. Traders who try to "trade on news" are usually wrong more times than right.

 

The point I'd like to make here is that a universally accepted definition of a trend is actually not that important nor is knowing specifically what is making a market do what it is doing. That's the wrong approach. Many traders do just fine just knowing that the market will go up and it will go down and why is not important. Traders who have a decent understanding of charting, market behavior (specific patterns) and proper use of strong Technical Analysis techniques can enjoy good, long-term consistent success. The market will tell you the precice moment when a trend is born and when it's exhausted. Takes work and a lot of practice, though.

 

But, for what it's worth, if I do happen to discover the "one and only definition of a trend", I'll pass it along. Then I'll be glad to show you why you don't really need it.

[uexkuell 10]

  SIUYA said:

How do you determine where the trend will reverse?

How do you let the winners run if you are trading against the trend?

Why when you are trading against the trend as it so profitable would you cut and reverse?

 

Basically - Why make it so hard for yourself trading against the trend, if you rarely have any losers using the appropriate method, why not make it easier for yourself and use the same techniques trading with the trend?

 

 

It's all about finding the soft spots:

Where are the points that have a high probability that price does either

turn against current direction or continue?

But no matter which direction it goes it should do it for some time and shall not return before it makes at least some significant move.

 

Hit such a soft spot this morning at 01:58 EST in EUR/USD.

So far +110 pips.

 

 

I never know when price will reverse.

There are only high probability turning/continuation points.

At some point usually I get it right and jump on the train.

(Btw it's not hard - just try and error. But error with small penalty. )

 

Going with the trend is much more unprecise in my approach.

It is more that I always let a small portion of the position stay over longer time frames (up to 10 days) and sometimes this results in a nice surprise.

[zdo 20]

  Roger Felton said:

... But, for what it's worth, if I do happen to discover the "one and only definition of a trend", I'll pass it along. Then I'll be glad to show you why you don't really need it.

 

Any chance you would open a thread and show why you don't really need it before you discover the one and only definition of a trend?

[SIUYA 11]

  uexkuell said:

It's all about finding the soft spots:

Where are the points that have a high probability that price does either

turn against current direction or continue?

But no matter which direction it goes it should do it for some time and shall not return before it makes at least some significant move.

 

Hit such a soft spot this morning at 01:58 EST in EUR/USD.

So far +110 pips.

 

 

I never know when price will reverse.

There are only high probability turning/continuation points.

At some point usually I get it right and jump on the train.

(Btw it's not hard - just try and error. But error with small penalty. )

 

Going with the trend is much more unprecise in my approach.

It is more that I always let a small portion of the position stay over longer time frames (up to 10 days) and sometimes this results in a nice surprise.

 

well done - if you only traded once for 110 pips in a range of about 130....multiple trades maybe different but still well done.... however ....

how is going with the trend more unprecise?

 

I am sorry - but if you can find the soft spots - the high prob turning points - who cares how (there are many ways to do it) and are happy to let things run -, then what you say does not make much sense.

I ask as it goes against prevailing wisdom - plus what works for me,- and the fact that you let things run when you say you are better at picking turning points would suggest that it would make more sense to pick those turning points that give you the greatest possible gains would it not? Maybe trading around with taking profits and re-entering can add to that, but how is going with the trend more unprecise?

thanks.

(of course I am assuming you are going long the EURUSD (6.58 UK time 1.58 EST time appears to be the low for the day--- and I believe that its in a downtrend of late)

Edited November 16, 2011 by SIUYA

[steve46 12]

Markets, like people have much in common AND also have characteristics that set them apart as "individuals".

 

Trend is sustained directional movement....simple...and depending on the individual market that sustained movement can be a few ticks or 20 points....Does it matter?....I would suggest that if you do not understand your target market.......yes it does.....however to the extent that you DO understand your target market.....then no....it matters not....in fact to the extent that a participants really KNOWS a market, all that matters is identifying when that market is getting ready to reverse direction....

 

For folks who understand markets.....eventually they get to the point where they recognize a circular logic that operates on every level...

 

reversal.....continuation.....trend......reversal.....continuation....trend.....and so on

 

The point I make is that if you understand (really understand your market) then all you have to have is an entry or starting point (mine is the reversal)...and the rest takes care of itself....

 

In my case I can anticipate or "see" the reversal and knowing that it is going to happen provides me with a point of entry at a reasonable risk....once that happens, all I care about is whether the subsequent "continuation" (which eventually turns into a trend).....lasts long enough to pay me reasonably well. In the case of my market of choice (the S&P Futures) once I have my entry, I am know I am going to have one of four outcomes....3 point win.....5 point win...10 point win or 2 point loss.....

 

The attached chart shows a recent reversal point...my students use a similar process and they tell me that they are right about 50% of the time....for this orientation, I am seeing about 65% winners...(defined as hitting at least one of my profit targets).

Edited November 16, 2011 by steve46

[steve46 12]

Here is the trade as it stands now...at 10:47 PST

 

I am really tired and will cut this one short, even though it is not quite at my 10 point target

 

Clearly not all of them work out like this but...this is one example of how one can use the concept of reversal, continuation, trend and then reveral....as the basis of a systematic approach to markets.

 

Now I need to get some sleep

 

Best of luck to all

[zdo 20]

The Best Way to Determine When the Market is Really Trending (up) is to take a (short) position.

The Best Way to Determine When the Market is Really Trending (dn) is to take a (long) position.

 

:smilie for that not invented yet:

 

[bobcollett 10]

  zdo said:

The Best Way to Determine When the Market is Really Trending (up) is to take a (short) position.

The Best Way to Determine When the Market is Really Trending (dn) is to take a (long) position.

 

:smilie for that not invented yet:

 

 

Dear zdo

You are still talking in riddles

Kind regards

bobc

[zdo 20]

  bobcollett said:

Dear zdo

You are still talking in riddles

Kind regards

bobc

 

The VERY Best Way to Determine When the Market is Really Trending (up) is to take a (short) position.

The VERY Best Way to Determine When the Market is Really Trending (dn) is to take a (long) position.

 

 

Mischievous maybe, but no riddles. Take it literally

(and I should preface my remarks with this: In no way am I demeaning any of the methods or any of the posters above. Seriously - I appreciate their contributions)

 

One up (or dn) bar, one outside close, etc. IS a trend.

It may last only this or a couple more bars or it may last for years - literally. So re "determining" - Even if you know where all the “big orders” are, etc. you still can’t know when more and /or even bigger countervailing orders are coming, etc…. same with SR etc., same with ALL the tricks for “finding” trend, etc.. (and, yes, some methods are better than others ...)

 

And the one bar "trend" is as ‘strong’ a trend, in each moment, ( ie now ), as is a trend that has 5 higher high and higher low ( or vice versa for dn) swings behind it - because each one of these trends, the one bar ‘trend’ and the ‘established’ ‘trend’, could end on the very next tick.

 

From this moment of needing to determine when the market is really trending, you could do further analysis, projections, calculate targets and zones, apply multi methods, etc. to “Determine When the Market is Really Trending” or if it is apparently in an uptrend, just short it :rofl: and find out / "Determine When" for sure

 

:haha: Just ask zdo. He’s been shorting the yen for over 18 months now and can without any hesitation tell you he has determined without any doubt at all it is still in an uptrend. ZERO DOUBT! (… and also no doubt that this particular trend could end tomorrow )

 

 

yogi said it best “when you get to the fork in the road, take it”

Edited November 16, 2011 by zdo

[zdo 20]

for bobc - rephrasing “The VERY Best Way…”

Shorting a ( possible) uptrend is a slightly better way of determining when the market is trending than is going long in a (possible) uptrend (and vice versa for possible dn trends)… better because of increased internal ‘sensitivity’

:the wry smilee hasn’t been invented for this one yet either:

 

 

re: “and can without any hesitation tell you he has determined without any doubt at all when it is still in an uptrend”

by the same token, that’s also how I started getting long PM’s pre 2000…

and added to the positions many times during subsequent “downtrends” over the years.

and recently lifted PM hedges, especially in Silver

…

 

…learning to keep it simple. In trend trading – which I’m not very good at (and fortunately don’t have to be) – keeping it simple is simple. With trend trading, the outliers literally ARE the edge!

 

 

 

“The markets are always trending”. … most often they are trending sideways :jaded: :smilee:

[RealDemo 10]

Interesting discussion.

 

From a novice trader viewpoint I use the simple HH HL/LH LL rule applied to the timeframe being traded, and honestly I don't want to sound trite when I say that.

 

I trade intraday so my main focus is on the shorter trends but that doesn't mean I can't also be aware of the bigger picture. Often my entry plan into one of these intraday trades needs to expand as the outlook has become more favourable and the risk needs to be taken to maybe leave 1 or 2 lots on to run. Recent EURUSD short from 1.3750 down to 1.3470 that I got stopped out of yesterday as an example.

 

My intraday trade may have ended but the higher TF is still trending in my favour so I try and keep with it and ride it a bit further. Same definition different timescale.

 

As I said I find this an interesting discussion, but personally in my own trading world I need a black and white definition that I can apply without hesitation, like an on/off switch.

Sometimes it takes me out to early, sometimes it saves my bacon but either way it is unconditional and keeps my trades framed and safe from my trading ego.

[zdo 20]

...continuing...

 

The second Best Way to Determine When the Market is Really Trending (up) is to take a (long) position.

The second Best Way to Determine When the Market is Really Trending (dn) is to take a (short) position.

 

:duh smilee that's not doh concussining his forehead:

 

"When you get to the fork in the road, take it" Yogi B

[zdo 20]

… continuing…

(In my own experience…)

The third best way to Determine When the Market is Really Trending

is to measure if and how closely price is moving in phase with (a properly selected and constructed summation of activated) cycles.

 

:wtf? smilee: