Trading with the Trend

"The trend is your friend." This statement is one of the most common pieces of advice you will hear from experienced traders – and for a good reason. The market moves in certain directions, and understanding these movements can help traders better time their entries and exits from positions.

1. How to trade with trends?
2. Tools for identifying trends

What is a Trend?

A trend refers to the overall direction of the market's movement over a specific period. The market can develop in three main directions:

• Upward (bullish trend) – when prices rise and the market shows increasing momentum.

• Downward (bearish trend) – when prices fall and the market moves downward.

• Sideways (range-bound trend) – when prices fluctuate within a certain range, with no clear upward or downward direction.

Regardless of your chosen style, learning to identify and classify trends as they form can lead to successful trading.

Trends exist in three main types:

• Primary (Major) Trends

Represent the dominant direction of the market's movement over the long term.
Can last from several months to several years.

• Secondary (Intermediate) Trends

Occur within primary trends and represent temporary movements in the opposite direction.
Last for a shorter period, such as a few weeks to months.

• Minor Trends

Appear over a short-term horizon, often within a single day or a few days.
They are common in day trading and can be less predictable.

For example, if the market has been rising significantly over the past 18 months, it is in a primary (major) upward trend. However, during this bullish trend, there may be a temporary stagnation or correction lasting several weeks or months before the market resumes its upward movement. This situation represents a secondary (intermediate) trend.

On an even shorter level, within a single day, there may be smaller upward or downward movements, known as minor trends, which occur within day trading. Thus, the market may experience short-term bullish or bearish fluctuations during the day, even though the overall direction remains unchanged.

How to Trade with Trends

The type of trend a trader follows depends on their trading strategy.

Long-term investors, such as position traders, primarily focus on primary trends. They seek significant price movements that allow them to maximize profits over a longer period.

Medium-term traders, like swing traders, focus on secondary trends that last from days to several weeks.

Day traders and scalpers concentrate on short-term trends, monitoring minor price movements over the course of a single day or a few hours.

Contrarian View

It is not always necessary to trade in alignment with the trend – many traders opt for a contrarian approach. Instead of following the current market direction, they seek to identify potential reversals and profit from a trend change.

However, with this approach, timing entries and exits is key to success. Being in the right phase of the trend and closing the position before a reversal can significantly increase profit margins.

Tools for trend trading

Technical analysts use various tools and indicators to help identify and classify trends.

Trendlines

One of the most suitable methods for determining bullish or bearish trends is through trendlines.

They are applied to price charts to visually represent the direction and strength of the trend.

Trendlines help reduce fluctuations in price action, allowing for a clearer view of the main trend.

They filter out market noise, giving traders a better understanding of whether bulls or bears dominate the market.

An upward trend can be identified when the price consistently creates higher highs and higher lows.
To use a trendline on a chart where you anticipate an upward trend, follow these steps:

• Draw a line connecting at least three of the lowest points in the market – these are points where the price reached a minimum and then began moving upward.

• If the trendline is ascending, it confirms the trend.

• The steeper the line, the stronger the trend.

Conversely, downward trends are characterized by lower highs and lower lows.
To identify a bearish trend, draw a line connecting at least three of the highest points, where the price reached a peak and then started to decline.

If the trendline is descending, it indicates a downward trend.

Although you can draw a trendline using only two points, at least three touches are needed to confirm the trend.

Did you know?

After a trend has already formed, its identification becomes easier. This is why attempting to catch the entire movement is often unrealistic. Most traders don’t try to precisely time the market's top or bottom, but instead aim to capture as much of the trend as possible.

If the trendlines are horizontal, it means the market is moving within a range (range-bound market), without a clear upward or downward direction.

When the market respects its trendline, traders can take advantage of this by entering new trades, thereby maximizing profits within the trend.

Channels

To identify channels, trendlines are used, with the channel formed by two parallel lines within which the market price moves.

To draw a channel, connect the two highest points with a trendline and the two lowest points with another trendline.

If the price moves between these two lines, you can trade within the channel – selling at the upper line and buying at the lower line.

Patterns

Many traders also use chart patterns to identify trends.

When the market is in an uptrend or downtrend, its chart often resembles an ascending or descending staircase pattern.

This means that each new high or low exceeds the previous one, confirming the continuation of the trend.

There are many chart patterns that technical traders consider as signals of a potential continuation or reversal of a trend. The most common include triangles, flags, and wedges. These patterns are covered in more detail in the lesson on candlesticks and chart patterns.

Volume

Trading volume is a useful tool in identifying trends, as it shows the number of units of a given asset traded over a certain period.

A strong volume during an uptrend indicates that the movement has strong support in buying and may continue.

However, if the market is rising but volume is low, it could suggest that the trend lacks sufficient strength to sustain over the long term.

Indicators

Technical indicators can help traders better analyze market trends and time their trade entries.

• Moving Averages (MA) – These calculate the average price over a specific period and can signal the beginning of a new trend.

• Relative Strength Index (RSI) – This measures the current price movement and helps identify overbought or oversold conditions in the market.

Although indicators can be helpful in finding trading opportunities, they are not always necessary. Therefore, it is crucial to manage money and control risk to minimize potential losses.