All traders want to know how to identify the trends and know the relative strength successfully. This is why we trade with momentum instead of against it, to increase the odds of favorable outcomes. Even so, strength gauging a trend is always the safest method. We look at some of the simple techniques that can help you determine trend strength better.
Knowing how to identify trending markets is the first step to understanding trend strength. A trending market makes lower lows followed by the lower highs or the higher highs, followed by higher lows. We look at some of the simple techniques that can help you determine trend strength better:
1. Pay Attention to The Highs and Lows
Traders should always pay attention to the relationships among the lows and highs and how they have formed over time. This technique aims to observe where the extended swing lows and highs are within a trend. This is one of the simplest ways to signal changes in trends.
The first lower high in a chart is the first signal that an uptrend was starting to fatigue. However, the first lower low is what indicates the reversal of the current trend. Hence, trend changes aren’t always noticeable, but there are still signs. All you need to do is pay more attention, and you could identify them in some instances.
2. Notice Early Warning Signs: Clustering Price Action
This is commonly referred to as heavy price action, which occurs when the market starts to put pressure on key level over a short duration. This technique aims to watch how a market is responding to support or resistance within a certain period. The obvious period is a few days or a full week if you trade from the daily time frame.
When you notice that the market is clustering or grouping for a consistent period at a key level, then there is a high chance that the trend is headed for break down and reversal. More times than not, such price actions lead to breakdowns.
Without doing your home, you could find yourself entering in the direction of a trend right before it breaks down. This technique isn’t just useful for weekly charts; it can also be helpful at any time, including the 1-hour charts.
The aim is to pay attention to how the price action becomes heavy near the latter half of ascending chances. This is often a clear indication that the momentum was tiring and the break was unavoidable. While traders insist on waiting for a close below or above key levels before an entry option, you can avoid being on the losing side of a trending market if you understand how clustering price action leads to a break.
3. Determining Trend Strength Using Distance Between Subsequent Retests
There is a false belief among traders that support and resistance levels grow stronger with each additional retest. This is a fallacy because the same level multiple retests make the level more visible but not stronger.
It is not definitive that a market continually revisiting the same area will break through eventually. The best thing is to pay attention to the relation between the key level’s highs and lows. Also, avoid dismissing the shorter time span between the retests even when the trend starts to extend higher.
The market has a way of telling you when the demand starts to dry up. Prices tend to move higher in supply and demand because when demand starts to run thin, fewer traders are willing to buy at high prices. On the other hand, supply increases market participation because traders will unwind the positions that will book profits.
Determining the strength of a trend doesn’t have to be a complex operation. These techniques will help you gather whether a trend will continue or break down. The best thing you can do for yourself, whether you are attempting to identify key levels or decipher trend strength, is to get back to trading basics. Each market has a story to tell, and you can use swing highs and lows to translate every story. Your job is to know all the clues the market is leaving behind, then assemble them to stack the odds in your favor.