Author: Alexander Vladimirov
This article's topic is on how to be able to spot a trend in its beginning and make sure you don’t miss the ride. Being able to catch a trend as it begins is probably the most sought out peace of information and the leading skill aspiring traders want to possess. Catching a trend is what makes trading easy and really profitable. Of course, in practice it’s much different because Identifying a trend is only easy when it has already happened, and you need to arm yourself with a lot of patience if you’re going to be able to do this correctly. The key is to identify a trend that is just about to take off. So, in this article we’ll discuss 4 methods for identifying an early trend and hope that at least one of them will suite you.
#1 - Moving Averages
MA’s are a very simple and great tool for identifying a trend. You must be cautious about the way you set up your MA’s though. The length or period of your MA’s highly impacts when you get a signal for a new trend. Different strategies use different MA’s. My personal favorite MA setup is with 3 EMA’s at 50, 100 and 200 periods. However, these usually take long to fully cross over (which is a pre-requisite for a new trend), so I mostly use them as support and resistance (S/R), until I can really see them start to cross over each other. A higher period MA may be used to identify the primary price trend, a shorter MA period to identify the secondary S/R level, and your shortest MA period to identify the minor S/R level. Here's an example:
As mentioned, my MA's are slow, so if you want to catch the trend more towards the beginning, and MA's are your only indicator, I would wait for the pullback towards the 200 MA, after all MA's have crossed, like so:
Highs and Lows
You can add this concept to your MA's. As seen in the charts above, one common trait of a trend is that it has higher highs and lower lows and vice versa. Fibonacci retracement really helps in identifying where those levels would be. Use high and lows to create channels and trend lines in order to give your outlook further structure.
#2 - Bollinger Bands
Bollinger bands indicator is one of the best indicators to use for counter-trend strategies, and one of the simplest ways to identify a trend. It's also a volatility indicator.
The rules are simple - when the price is ‘hugging’ the upper Bollinger band and the bands are flaring out its an UPTREND.
When the price is hugging the lower Bollinger band and the bands are flaring out (volatility increased) it is DOWNTREND.
#3 - Time Frames
First thing you need to look at is your time frames. Daily, weekly trends can be running for weeks and months and provide opportunities for 1000+ pip trades. So these are the time frames you want to focus on. Generally, chart structure is the same on all time-frames with the difference being that there is more noise on the lesser time frames, which make them more uncertain since anything can happen. However, if you think that a new trend is starting soon and want to try to enter it a bit earlier, you would want to look at the smaller time frames.
Typically these are the three phases that a market can be in on any time frame:
#4 - ATR
ATR (average true range) is one of the best indicators to use in trading. Initially, the indicator was designed for commodities, as ATR measures volatility, and commodities used to be more volatile. Before looking into how it works, it’s important to remember that ATR does not provide an indication of price direction, only volatility.
Here’s a simple illustration of the basic understanding of ATR:
Here’s a really good real life example of how you could’ve used ATR (with 14-day period) to catch the most recent EUR/USD down trend on the daily:
The price was stuck in a range and surely needs to breakout, either up or down. We can see that the ATR is low, so we would be expecting that it will start to rise. Usually, only when the ATR is starting to rise again can we expect some volatility. Keep in mind that there can be weeks of low ATR and low volatility, however, this price break gives an indication that the ATR will continue upward. Similarly, when ATR is high it doesn't necessarily mean that volatility is expected to decrease.
Hope you find one of these methods helpful in your quest for catching trends. If you would like to see how we catch trends using our bots - sign up for our free 30-day trial below: