Knowing the overall trend in a market is vital to trading successfully. If you don’t know the trend then you could be going against the momentum that the market currently has and this is a bad way to trade. Trading against the trend can work out but it is a lot riskier and usually not as successful. So it is key before you enter any trade that you know the markets overall trend.
How-To Identify
Being able to identify if a market is trending is a very easy and simple thing to do but is very important. The way you identify is by seeing if higher highs and higher lows are made in an uptrend, and lower lows and lower highs in a downtrend. The chart below will better explain the concept of identifying a trend.
See how on this chart the downtrend is clearly definable because prices are making lower highs and lower lows. This is extremely easy to spot and is a very reliable way to identify trends in a market.
The lower highs and lower lows almost act as a stepping stone downward. Obviously the exact opposite of a downtrend would a uptrend and it uses the same thing to identify. Except this time it is with higher lows and higher highs forming.
Below you see a simple example of an uptrend that was easily spotted by higher highs and higher lows.
How-To Use Trends to Your Advantage When Trading
When you are looking at a possible trade, identifying the trend is going to help you immensely. The reason for that is because you will know where the momentum in the market is at. Is it with the bears or bulls?
The best way to trade is with the trend so that you will have the momentum behind your trade. This will greatly increase the trades success rate.
One way to use the trend in trading is to wait for a pullback and then a price action trade setup. This is one of the most effective ways to trade the market. Add this with support and resistance and you will be trading with confluence. Which is the best thing you can do when trading.
The chart below shows that the market is in an overall uptrend and when it pulled back to a support and Resistance zone a bullish engulfing bar was printed. This is a great trade setup.
There are other ways that you can use the trend to trade but the example above is the best way and the way we do it here at Trading With Price Action.
Now you don’t always have to trade with the trend but it will make trading a lot easier. Counter trades can be very profitable if you know how to identify a proper setup for one.
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