Trend following is one of the most basic trading strategies employed by traders. Here are four of the simplest ways to determine a price trend.
Trend lines are a commonly used technical analysis tool in trading to identify and follow a price trend.
Trend lines are drawn with a line connecting the lows in an uptrend or the highs in a downtrend. As long as price stays relatively above the trendline, then an existing uptrend is considered to still be in place. The trend is only considered to have ended when the trend line is significantly broken through by price movement – such as when price falls well below the trendline in an uptrend, closes below the trend line, and remains below the trend line thereafter. Conversely, for a downtrend to remain intact, price should remain below a falling trend line connecting the highs.
As an example, you can see that the trend line drawn on the 4-hour GBP/USD chart below remains intact for quite some time, but appears to indicate a possible trend change when one large down candle on the right hand side of the chart takes price well below the trend line.
Moving averages are almost like an automatically generated trend line. This is illustrated below by adding a 20-period moving average (indicated with a red line) to the previous chart. It can easily be seen that the 20-period moving average, at least in this instance, follows a path close to that produced by drawing a trendline.
Like the trend line previously drawn, the trend determined by the 20-period moving average is significantly broken by the one large down candle on the right hand side of the chart.
Another technical indicator that is frequently used to determine the overall price trend of a security is volume. Trading volume is a technical indicator that is employed by many traders in many markets – stocks, commodities, forex, and options. A trading volume indicator can easily be added to any time frame chart used in trading, from one minute charts to monthly charts.
Using volume to determine a price trend is a relatively simple procedure. One simply compares the amount of trading volume on 'up candles' to the amount of trading volume on 'down candles'. A precise calculation of the trading volume is not usually necessary. The relative amount of trading volume can be easily determined with a glance.
Particularly high volume days stand out visually when looking at a chart. If most of the highest volume trading periods occur when price is moving up, that indicates an uptrend. Conversely, if the highest volume trading periods are alongside down-candles on a chart, then this indicates a downtrend.
The trend indicated by volume would ideally be confirmed by looking at other technical indicators such as moving averages.
Up vs. Down Periods
Another simple method of determining a price trend, particularly for a long-term trend, is by comparing the number of 'up time periods' relative to the number of 'down periods'. For an uptrend to stay in place, for example, the number of time periods during which price advances typically well outnumbers the periods during which price declines.
This can easily be seen by referring back to the 4-hour chart of GBP/USD shown above. During the uptrend, the number of blue, up candles considerably outnumbers the red, down candles. However, as the trend appears to begin to fail with a price decline, the number of red, down candles begins to predominate.
There are any number of ways to determine a price trend. The four discussed in this article are four of the simplest and most frequently used.