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Trading basics: How to identify trends

by , 21 July 2015

Every successful trader knows that the trend is your friend. Trading with the trend is one way to increase your chances of making profits in the market.

So how can you find out when a trend started? And how do you know when a trend ends?

To find this out, you need to use trend lines.

Read on to find out more about using trend lines…


How to find trends on charts


Trends are at the very crux of technical analysis. You want to find a trend, trade with it and exit your trade when the trend looks like it’s coming to an end.

Apart from when the market is highly volatile, you can usually spot trends in different markets and assets. This includes shares, indices and currencies.

Take currencies for instance. The forex market is the place to find major trends that can continue for months at a time.

The best way to spot a trend is to use trend lines. Trend lines reveal what the overall trend of the price is. In other words, it’s trending upwards, downwards or sideways.

Take an upwards trend or uptrend. The signs of an uptrend are higher highs and lower lows. Or take a downward trend or downtrend. The signs of a downtrend are lower highs and lower lows.

Take a look at the basic chart below showing a downtrend on a chart…

 

Chart showing a down trend
 

What are trend lines?


Trend lines are straight lines that connect either the top or the bottom limits of a price range, Frank Hemsley in Profit Watch explains. The trend line reveals the overall trend of the price.

To establish a trend line, there must be a minimum of two tops if it’s a downtrend or two bottoms if it’s an uptrend.

The more points that touch a trend line, the more significant and stronger the trend is.

It’s really easy to add trend lines onto your charts using a basic charting package.

You can use trend lines to check a trend is continuing or looks likely to change.

So there you have it. How to identify trends.

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Trading basics: How to identify trends
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