With the exceptions of boundary and no touch trades, most trading typically depends on movements in the price of assets. Whether you make or lose money will hinge upon your ability to spot trends and make wise investment decisions. There will be times when markets range too greatly for you to observe trends in price movement; however, the experienced, knowledgeable investor can often spot trends.
The key is knowing precisely what to look for and how to create the right trading strategy. This guide will introduce you to some techniques for spotting trends and discuss different trading methods that can be of benefit to you and potentially increase the success rate of your trades.
Prior to the start of a trend, prices of assets are ranging, meaning that they are fluctuating with no discernible pattern within invisible barriers of support and resistance. This area where the prices tend to fall on any given day is known as the channel. A channel may be completely flat, or it may have some upward or downward movement. Breakouts happen when the price of an asset moves outside of its regular channel and can signal a trend.
Being Wary of Fake Outs
A fake out is a term for a movement in price that at first appears to be a breakout but actually is not one. Fake outs are quick movements of price above or below the usual price channel. You may at first believe these movements to be breakouts; however, they are actually just high or low spikes in price. Within a very short period of time, the price moves back within the channel and remains there. On a candlestick chart, you can spot fake outs as candles with long top or bottom wicks but bars that remain within the usual channel.
It can take time to develop the skill needed to tell a fake out from a real breakout. Quick research into the asset can sometimes help you determine whether the price of an asset is really going to trend in a new direction or if the price movement is an anomaly. You’re most likely to encounter fake outs when market conditions are choppy.
Knowing what a retracement is important for any investor. You may not have heard the term before, but if you’ve ever looked at an asset chart, you’re sure to have seen them. A retracement is a very slight dip or peak in the price of an asset that goes contrary to the prevailing trend or a very brief reversal in the price movement of an asset. The price moves in the opposite direction for a short period of time and then corrects and continues on its previous trend. They can occur at any time during a trend and sometimes immediately precede trends.
Retracements can be used to your advantage when you’re involved in trading. Investors often wait until they see a retracement with a strong correction before investing in a trade, as retracements can provide proof that a trend is underway and that price movement is likely to continue in the same direction.
As an example of how a retracement can impact a trade, let’s say that you are thinking about a trade of Google stock because you received a signal indicating that the price was going to break out and trend upwards. If you immediately make your trade for an Up position, you run the risk of a retracement suddenly occurring and losing your investment. There is also a possibility that the signal is incorrect, and the price move is just a fake out that will end up in an unsuccessful trade.
Waiting until the first retracement in Google’s stock price occurs will allow you to know for sure that you’re looking at a breakout and not a fake out. In addition, to decrease the risk of counter movement occurring.
The Importance of Trading Methods
In order to identify a potential breakout, you need to have a definite trading method in place. A trading method is the way that you examine current events, price patterns or indicators to help you identify trends and invest accordingly. Without a trading method, you’re essentially guessing about how the price of an asset will move over time, so even if you’re only investing for fun and not to make a living, it’s important to choose one. Here are the three most common trading methods:
1. Fundamental Analysis.
Also called the shadows, the wicks are the narrow lines that stick out of the top and bottom of the candlestick chart. The top wick shows you the highest price that an asset traded at during the time period represented, while the bottom wick indicates the lowest traded price. When you see a long wick, you know that there was a shift in behavior, such as a sudden selloff, spike in price or slowing of trading.
2. Technical Analysis.
With technical analysis, you plot different indicators on financial charts and then use the plot points to identify potential breakouts.
3. Price Action.
With price action, you use information about the price movement of assets to identify breakouts and spot trends. The simplest way to do this is with the help of candlestick charts.
Identifying Support and Resistance
With any of the three trading methods, being able to mark the support and resistance on a financial chart is essential to spotting breakouts. The support and resistance levels make it possible to anticipate where price hesitation may occur in the future and to know where it is occurring in the present. The resistance and support are known as the pivot levels, and they are very beneficial for deciding what expiry times to choose when you’re making trades.
The support level of a price is the lowest price that an asset typically falls to, while the resistance level is the highest price than an asset typically rises to. If the value of an asset falls below the support level, that level typically becomes a new resistance level. When the value of an asset rises above the resistance level, the pivot level usually becomes a support level.
While it’s possible to plot resistance and support levels on your own, it’s a lot easier to use a charting software program to do the job. All that you need to do is make a horizontal line in places where you see price hesitation. Normally, you can look back and see a trend of the price hesitating at those levels other times in the past.
Making Trend Lines
After you master the ability to add resistance and support levels to your financial charts, it becomes possible to plot your own trend lines. A trend line is drawn on a chart either diagonally upward or downward or horizontally. A sideways trend represents a channel. Prices that continuously move up or down inside a channel are known as ranging prices. When a ranging price moves outside of its channel, it is breaking out and may start trending upwards or downwards.
When an upward trend is occurring, you’ll draw a diagonal line that travels along the bottoms of candles, while downward trends are drawn diagonally along the tops of candles. Then lines can be added along the tops of upward trends and bottoms of upward trends to make channels. Once the channels are clearly identified it becomes easier to spot breakouts.
Once you are able to readily identify breakouts on charts, it becomes much easier to get in on lucrative trading opportunities. When prices break outside of their channels in upwards and downwards trends, you also have the chance to make wise trades, as those movements often indicate a reversal.
As previously discussed, it’s always important to keep retracements in mind when you’re using plot points to spot breakouts. Mistaking a retracement for a true reversal in price can lead to unsuccessful trades. Unfortunately, it does take practice and experience to become good at telling retracements apart from reversals, but the more that you practice and invest, the more skilled you will become.
Recognizing Market Conditions
For both recreational and serious investors, being able to identify market conditions can be highly beneficial. Just as the weather changes with distinct patterns, markets also tend to fluctuate following certain patterns. On occasion, markets become very smooth and easy to predict. Other times, they become more turbulent and irregular. Knowing what the current market conditions are like will help you determine whether or not it’s a wise time to invest. Well developed trading methods can help identify market conditions, but for best results, it’s important to be able to understand, identify and interpret the current state of the market associated with the asset that you are interested in for trading. There are three main types of markets with which you should become familiar:
1. Ranging Markets
A ranging market is one where the prices aren’t doing much fluctuating at all. In a raging market, the prices of assets may move up or down, but they do so within a channel with predefined support and resistance markets. In some cases, the levels may be spaced far apart for more dramatic movements in price or closer together for smaller fluctuations in price. What’s important is that the resistance and support levels are not being breached. A price may be moving throughout the time period being studied, but it’s not going beyond the levels. Ranging markets are really the norm or the default in today’s economy.
For investors, ranging markets make it difficult to earn a profit, but with trading, it’s still possible to earn a good return even in a ranging market. The trick is to choose a broker that offers trade types that are conducive for ranging market conditions.
One type of trade that is ideal for ranging markets is the boundary or range trade. With this type of trade, you predict whether or not the price of an asset will move outside of certain boundaries. Because there are usually clear points of support and resistance during ranging market conditions, you can make an educated guess about whether or not the price will break out of the designated range
Another type of trade to consider in a ranging market is a no touch trade. With a no touch trade, you invest based on the presumption that the price of an asset will not reach a certain value. As long as the price never reaches that value from the time that you make your investment until the expiry time, the trade is successful, and you’ll get the payout promised. With a ranging market, it’s easier to determine the likelihood that an asset will no touch a particular price. To get the best payout, you’ll need to set a no touch price that is close to the current value of the price. This is where it’s beneficial to have a strong understanding of support and resistance lines so that you have a good idea of where to place the price point.
2. Trending Markets
In a trending market, the prices of assets are moving in an obvious direction, either upwards or downwards. During a trading period, you may spot reversals and plateaus, but overall, the price will be clearly going up or down. Trending markets are profitable for many different types of investing. With trades, clear trending markets are ideal for Up / Down type trades, as you can be confident that the price is likely to continue moving in the direction of the trend. Of course, it is always possible for a plateau to occur or for a retracement to happen, but there is generally less risk involved when making Up / Down trades in trending markets. The biggest payouts come early in the trend, which is why it’s important to be able to identify breakouts and invest at the right time.
3. Choppy Markets
A choppy market looks something like a ranging market, but it is not the same. With a choppy market, the price isn’t moving in a specific upwards or downwards trend; however, price movements are extreme. In a choppy market, you’ll see spikes, whipsaws and other erratic markings instead of prices fluctuating within clearly defined channels.
with bars can make it easier to see choppy markets. Since most brokers do not provide these charts, it’s wise to invest in charting software that will allow you to see financial information in different ways.
are especially helpful for seeing choppy market conditions. During periods of choppy price movement, candles will usually have very long wicks with shorter bodies. The size of the wicks shows you that the prices have been soaring or plummeting to test the market but are still closing out within their usual range.
Unfortunately, it’s usually not wise to invest in choppy markets. By their nature, choppy markets are unpredictable. If you invest in an up or down trade, the price could end up moving in a direction you never anticipated, and the volatility of the price movement means that touch / no touch and boundary trades are too risky. With pricing not consistently moving in one direction or remaining within pre-defined channels, it’s just too difficult to choose the right way to come down on a trade.
If you don’t want to wait for a choppy market to resolve itself, you can consider looking into another asset. It may be that all markets are choppy due to uncertainty about economic conditions or a world event; however, in some cases, you’ll find that another market is either ranging or trending upwards or downwards. Of course, if you don’t know enough about the market to make a wise investment decision, the best course of action will be to wait until the choppy market either settles down and become a ranging market or begins to trend
The Key to Success
There really is only one way to become good at recognizing market conditions and spotting trends–and that is to practice. Don’t worry about the risk of losing money while you gain experience. Today, most brokers offer demo accounts that make it possible for you to test out different trading methods and strategies without investing a penny. Once you feel ready to trade with real money, you can start with very small trades, such as $5 or $10 investments until you feel confident in your ability to predict market behavior.