Srading.com

Menu
  • Home
  • Markets
    • Forex
    • Stock
  • Fundamental Analysis
    • Economics
    • Money & Banking
  • Technical Analysis
    • Drawing Tools
    • Chart Patterns
  • Tools
    • Online Charts
    • Economic Calendar
    • Interest Rate Today (Live Widget)
    • Forex Market Hours
    • Currency Indexes Chart
    • National Holiday Calendar
    • CoT Chart
    • Quotes
Home
Technical Analysis
Drawing Tools
What Is Trend in Finance? How to Determine a Trend?
Drawing Tools

What Is Trend in Finance? How to Determine a Trend?

June 27, 2022 Zafari

You Will Continue Reading

Toggle
  • Introduction
  • How to Determine a Trend?
    • Determining a Trend Using Moving Averages
      • Example of Trend Reversal Recognition Using MA
    • Trend Determination by Specific Percent Rise and Fall in the Market 
    • Determining a Trend by Trendlines
    • Determining Direction of a Market by Patterns
  • The Slope of a Trend
  • Trade With Market Direction
  • Trend Channel
  • Bottom Line

Introduction

A trend is the price direction behavior of a financial asset either upward or downward. When it goes sideways, there is no trend.

An uptrend in the financial market is also called a bull market. And a downtrend is also called a bear market.

Uptrend in Financial Market

All participants of every financial market use trends in their analysis. It does not matter what financial asset you are trading. And, here what you read can be applied to all of them.

A trend can be a long-term trend or a short-term. A longer period (timeframe) shows a long-term trend, and a shorter period shows a short-term trend.

Trends commonly used for analysis are monthly, weekly, daily, four hourly, hourly, 30 minutes, 15 minutes, 5 minutes, and 1 minute.

Investors use different periods for trend analysis. Long-term investors rely on the longer period charts, and short-term investors rely on shorter periods.

Traders commonly use shorter periods, and investors use longer periods. Traders are those who actively buy and sell financial assets. Investors are those market participants that keep their positions for months and years.

How to Determine a Trend?

There is no strict rule on how to determine a trend.

Generally, investors determine a trend in four ways: using moving averages, a specific percent rise and fall, trendlines, and patterns. And my favorite one is the pattern technique.

Notice that the direction of a market needs to be confirmed by other tools and techniques. None of the techniques that you will read below; can make you a successful trader alone.

Determining a Trend Using Moving Averages

Some traders prefer to determine a direction in the financial market simply by using a moving average.

They believe that if on average, the price is rising, there is a bull market, and if it is falling, there is a bear market.

Price crossing Moving Average

Different traders apply various periods (number of candlesticks) in a moving average to determine a trend. However, the 52 moving average and 32 moving average are more common among investors.

In a 32 Simple Moving Average chart, when the price falls below the moving average, there is a downtrend (bear market). On the other hand, if the price rise above this MA, there is a new uptrend.

Example of Trend Reversal Recognition Using MA

Here is a chart that shows both successful and failed recognition trend reversal using Moving Average (MA).

Trend recognition
Trend recognition in MT5 by MetaQuotes Software

In the above chart, you see that a MA successfully recognized a trend reversal only once (marked with a rectangle shape) but failed four times (marked with circles).

Recognition of a trend and trend reversal using MA is risky. It crosses frequently in a sideways period, making a trader confused about whether to place a trade or not.

If you use this method, it is helpful to combine your analysis with other techniques. In the above chart, on the left side, after the price crossed the MA line, it also formed a small correction pattern, and the MACD indicator confirmed that bears are in power.

Trend Determination by Specific Percent Rise and Fall in the Market 

There is a type of investor who determines a trend by a specific percent rise and fall in price.

Commonly, stock investors use this type of analysis. Other investors such as forex and commodity don’t use this method, because these assets do not fluctuate 20% easily.

For example, if an index drops 20% from its last major high, the trend has changed from an uptrend to a downtrend. And, if an index rises 20% from a recent low, the trend has changed from a downtrend to an uptrend.

20% drop means trend reversal

In March 2020, all major indexes in the USA fell 20% and started a new trend for a short period.

Bear and Bull markets
SP 500 Chart by TradingView

In the above chart, you see that SP 500 fell below 20% and continued going down for some time. This direction did not last for a long time, and a bullish market resumed again in April 2020.

Generally, in the stock market, an uptrend lasts longer than a downtrend. On the other hand, in the forex and oil market, the market direction changes frequently. Thus, recognition of a trend by a specific percent fall and rise is not useful in other markets except the stock market.

Determining a Trend by Trendlines

Some traders determine the direction of a market by drawing trendlines.

In an uptrend, investors draw the trendline by connecting two or more bottoms in the chart. On the other hand, in a downtrend, a trader draws a trendline by connecting two or more tops to determine market direction.

In this method, as the time pass, a trader should adjust his trendlines because the market moves in a way that a trader cannot control.

Price crossing the trendline is change in the trend

Determining Direction of a Market by Patterns

The pattern technique is my favorite method for the recognition of market direction. In my opinion, this method is the best one.

In this method, you just look at the chart for correction patterns. And you may need to drag the trendline to draw the patterns.

If the price direction is upward and the market makes a bullish correction, then the market is still in an uptrend. On the other hand, in an uptrend, if the market pulls back, makes a bearish consolidation, and finally breaks the correction pattern downward, then the trend has changed.

In a downtrend, if the price is falling and then make a bearish consolidation pattern, it indicates that we are still in a downtrend. Conversely, in a downtrend, if the market pushes back, makes a bullish correction pattern, and finally breaks the pattern upward, then the market trend has changed from a downtrend to an uptrend.

Pattern method for recognition of trend in Finance

The Slope of a Trend

Trend slope can be steep and shallow. When the trend slope is steep, the volume of trading activities is high, and when the trend slope is shallow, the trading volume is low. And, when trading volume is very low, the market moves sideways, which is not any trend in the market.

Trade With Market Direction

Trends usually continue for a very long period.

When a trend is established, no one knows how long it will continue. That is why you have to trade with trends.

However, a direction does not mean that it continues forever. It can reverse from upward to downward and downward to upward. The job of an investor or trader is to act according to trends.

If the trend is established after a big fundamental change, it is very likely to be a bad idea to trade against the trend. Because, as mentioned, no one knows the end of a direction in the financial market.

Trend Channel

Traders draw trend channels by drawing two parallel lines, one at the top and the other at the bottom of a trend. On the top, the line is drawn by connecting higher points and the bottom line by lower points.

Trend channels help traders to understand how volatile the market is. A wider channel reflects a more volatile market, and a narrower channel reflects a less volatile market.

Trend channels cannot be perfect or even cannot be drawn in a trend that volatility changes over time, so you should not stick strictly. For example, if at the start of the trend volatility is high, and at the end of the trend volatility is low, a trend channel will not exist. Instead, by drawing lines at the top and bottom of the graph, you will get a nice pattern.

Bottom Line

A direction can last from days to years. So, to become a successful trader, you have to trade with the trend.

The difficult part of trading the price direction is the recognition of the trend.

There are various ways to determine price movement directions. However, we found that the best method among all of them is the pattern technique. Pattern technique is easier to trade, more reliable, and helps you to manage your emotion better.

Share
Tweet
Linkedin
Pinterest
Reddit
Email
Prev Article
Next Article
Tags:Forex Stocks Technical Analysis

Related Articles

What is Fibonacci Time Zones & How to Use It?

What is Fibonacci Time Zones & How to Use It?

Momentum Indicator: Calculation and How to Trade

Momentum Indicator: Calculation and How to Trade

What is A Fibonacci Expansion & How to Use It?

What is A Fibonacci Expansion & How to Use It?

Bollinger Bands Indicator: Strategy, Calculation & Examples

Bollinger Bands Indicator: Strategy, Calculation & Examples

What Are Fibonacci Arcs and Do They Work?

What Are Fibonacci Arcs and Do They Work?

Linear Regression: Calculation and How to Use It in Trading?

Linear Regression: Calculation and How to Use It in Trading?

About The Author

Zafari

Zafari is a professional trader and has been in the financial market since 2014. He has a bachelor of public economics and an MBA. For some reason, he does not show his face. And he loves you all!

Leave a Reply Cancel Reply

Recent Posts

  • Capitalism: The Definitive Guide
    What Is Capitalism? Capitalism is an economic and political system …
  • Trading Checklist: What It Is, Info-graphic, and …
    What Is a Trading Checklist? A trading checklist is a …
  • Private Equity (PE): What It Is, How …
    Private equity is an investment in a private company. The …
  • Government Spending: The Definitive Guide
    Government spending refers to the government’s total expense and the …
  • Three Basic Economic Questions Explained in Simple …
    Three basic economic questions are: Who answers these questions? The …

Popular Posts

    Srading.com

    QUICK LINKS

    • About
    • Cookies Policy
    • Terms & Conditions
    • Disclaimer
    • Privacy Policy
    • Contact Us

    LATEST POSTS

    • Capitalism: The Definitive Guide
    • Trading Checklist: What It Is, Info-graphic, and PDF
    • Private Equity (PE): What It Is, How It Works, & How to Get In
    • Government Spending: The Definitive Guide
    • Three Basic Economic Questions Explained in Simple Words

    FOLLOW US ON SOCIAL MEDIA

    • Facebook
    • Twitter
    • LinkedIn
    • Instagram
    • Pinterest
    • Telegram
    • Reddit
    • YouTube

    Trading financial assets are risky. Everything you read on this website is just for educational purposes or personal opinions only. Read our DISCLAIMER!

    Copyright © 2025 Srading.com
    Call on WhatsApp

    Ad Blocker Detected

    Our website is made possible by displaying online advertisements to our visitors. Please consider supporting us by disabling your ad blocker.

    Refresh
    We use cookies on our website to give you the most relevant experience by remembering your preferences and repeat visits. By continuing this website or clicking “Accept”, you consent to the use of ALL the cookies.
    Do not sell my personal information.
    Cookie SettingsAccept
    Cookies Policy
    Manage consent

    Privacy Overview

    This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience.
    Necessary
    Always Enabled
    Necessary cookies are absolutely essential for the website to function properly. These cookies ensure basic functionalities and security features of the website, anonymously.
    CookieDurationDescription
    cookielawinfo-checkbox-analytics11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Analytics".
    cookielawinfo-checkbox-functional11 monthsThe cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional".
    cookielawinfo-checkbox-necessary11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookies is used to store the user consent for the cookies in the category "Necessary".
    cookielawinfo-checkbox-others11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Other.
    cookielawinfo-checkbox-performance11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Performance".
    viewed_cookie_policy11 monthsThe cookie is set by the GDPR Cookie Consent plugin and is used to store whether or not user has consented to the use of cookies. It does not store any personal data.
    Functional
    Functional cookies help to perform certain functionalities like sharing the content of the website on social media platforms, collect feedbacks, and other third-party features.
    Performance
    Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors.
    Analytics
    Analytical cookies are used to understand how visitors interact with the website. These cookies help provide information on metrics the number of visitors, bounce rate, traffic source, etc.
    Advertisement
    Advertisement cookies are used to provide visitors with relevant ads and marketing campaigns. These cookies track visitors across websites and collect information to provide customized ads.
    Others
    Other uncategorized cookies are those that are being analyzed and have not been classified into a category as yet.
    SAVE & ACCEPT