What exactly is a trending market?
A trending market is one in which price moves in just one direction.
Sure, the price may occasionally deviate from the trend, but examining at larger time frames reveals that these were simply retracements.
In an uptrend, “higher highs” and “higher lows” are frequently documented, whereas in a downtrend, “lower highs” and “lower lows” are usually noted.
When trading a trend-based strategy, traders typically use the major currencies, as well as any other currency that uses the dollar, because these pairs tend to trend and are more liquid than other pairs.
In trend-based methods, liquidity is critical. The more liquid a currency pair, the greater the movement (also known as volatility).
The more a currency moves, the more potential for price to move dramatically in one direction rather than bouncing about within limited ranges. In addition to observing price activity, you can utilize technical methods acquired in previous sections to evaluate if a currency pair is trending or not.
ADX In a Trending Market
The Average Directional Index, or ADX for short, can be used to identify whether the market is trending.
This indicator, created by J. Welles Wilder, employs values ranging from 0-100 to detect whether the price is moving significantly in one direction, i.e. trending, or simply ranging.
Values greater than 25 typically suggest that the price is trending or has already entered a strong trend.
The greater the number, the more pronounced the trend.
The ADX, on the other hand, is a trailing indicator, which means it does not always anticipate the future.
It is also a non-directional indicator, which means it will reflect a positive value regardless of whether the price is heading up or down.
Consider the following scenario…
Despite the fact that the ADX is more than 25, the price is definitely going downward.
Moving Averages in a Trending Market
If you don’t like the ADX, you can alternatively utilize simple moving averages.
Look at this!
On your chart, draw a 7-period, a 20-period, and a 65-period Simple Moving Average.
Then, wait for the three SMAs to compress together and fan out.
If the 7 period SMA is above the 20 period SMA and the 20 period SMA is above the 65 period SMA, the price is rising.
If, on the other hand, the 7 period SMA fans out below the 20 period SMA, and the 20 period SMA is below the 65 period SMA, the price is falling.
Bollinger Bands in a Trending Market
One tool that is commonly used for range-bound strategies can also be useful for trend detection. We’re talking about Bollinger Bands, sometimes known as Bands.
One thing to keep in mind concerning trends is that they are quite infrequent.
Contrary to popular belief, prices typically range between 70 and 80 percent of the time.
In other words, the price range is the usual.
So, if prices differ from the “average,” they must be part of a trend, right?
The standard deviation calculation is included in the Bollinger Bands. But don’t be concerned about being a nerd and figuring everything out.
Here’s how we can utilize Bollinger Bands to spot trends! Prepare for the unexpected.
Place one set of Bollinger Bands with a standard deviation (SD) of “1” and another set with an SD of “2”.
You will observe three sets of price zones: the sell zone, the buy zone, and the “No Man’s Land”.
The sell zone is defined as the area between the two bottom bands of the standard deviation 1 (1SD) and 2SD) bands. Remember that the price must close within the bands to be regarded in the sell zone.
The buy zone is defined as the space between the upper bands of the 1SD and 2SD bands. To be deemed in the buy zone, the price must close within the two bands, as it did in the sell zone.
The market struggles to establish direction in the area between the standard deviation bands.
If the price is truly in “No-Land,” Man’s it will close within this range. Price movement is largely unpredictable.
The Bollinger Bands make it easy to visually validate a trend.
When the price is in the sell zone, a downtrend can be confirmed.
When the price is in the buy zone, an uptrend can be confirmed.