In this article, we will discuss a proven price action based way to identify the market trend.
❗️And let me note, before we start, that no matter what strategy do you use in your trading, you should always know where the market is going and what is the current trend. Your judgement should be based on strict and objective rules that proved its accuracy.
There are a lot of ways to identify the market trend. One of the simplest and efficient ones is price action based method.
This method relies on impulse legs.
The market never goes just straight up or down, the price action always has a zigzag shape with a set of impulses and retracements.
The impulse leg is a strong directional movement, while the retracement is the correctional movement within the boundaries of the impulse.
UPTREND
📈The market is trading in a bullish trend if 3 conditions are met:
1️⃣the price forms an initial bullish impulse,
2️⃣retraces, setting a higher low,
3️⃣then starts growing again and sets a new high with the second bullish impulse.
Once these 3 conditions are met, we consider the market to be bullish, and we expect a bullish continuation in such a manner.
Take a look at a price action on USDCAD. According to the trend-analysis rules, the pair is trading in a bullish trend.
DOWNTREND
📉The market is trading in a bearish trend if 3 following conditions are met:
1️⃣the price forms an initial bearish impulse,
2️⃣retraces, setting a lower high,
3️⃣then drops lower and sets a new low with the second bearish impulse.
Once these 3 conditions are met, we consider the market to be bearish, and we expect a bearish trend continuation.
According to the rules, NZDUSD is trading in a bearish trend on the chart above.
CONSOLIDATION
➖The third state of the market is called consolidation. The market is trading in a consolidation if the conditions for bullish or bearish trend are not met. The price chaotically forms bullish and bearish impulses, usually trading within the range.
Above is the example of a sideways, consolidating market, where the price sets equal or almost equal highs and lows and conditions for bullish/bearish trend are not met.
Knowing the current trend, one always knows whether a current trading position is trend-following or counter trend, or it is a sideways consolidation trade.
Learn these simple rules and try to identify the market trend with them.
