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November 14, 2022

How to correctly identify trends in technical analysis

Accurately identifying the trend in technical analysis is an important key to help you open the first door in predicting the direction of the price.

One of the three axioms of Technical Analysis clearly states that "price moves with the trend", so how to determine the price trend? Or more precisely, at a specific time frame (1 specific analysis period) how to accurately determine the trend? And which method to use to determine the right trend?

You may have heard a lot of ways to identify a trend, for example through technical indicators: Moving Averages, Bollinger Bands, Ichimoku, MACD, Parabolic SAR,... However, today I would like to share with you a very simple method to determine the correct trend, which is the HIGH AND LOW method. This method is not new, almost anyone who learns about Technical Analysis has approached, but in this article I have mentioned a few content that you may have never noticed, or never seen know. 

As I mentioned in previous posts, the trend is only temporary, that is, when it comes to trends, we only talk about a specific timeframe because each timeframe has its own trend.

=> The way to determine is simple as follows:

UP TREND: A market state in which the price fluctuates creating new highs higher than the old high and new lows higher than the old low (old high and old trough here is understood as the peak and trough closest to the current price).

DOWN TREND: A market state in which the price fluctuates creating new lows lower than the old low and new highs lower than the old high (old high and old trough here is understood as the peak and trough closest to the current price).


Now let's start looking at new points that you may not have noticed or heard of.

For example, in the 2 illustrations above, if the current price is at the end of the last arrow, do you think the current trend has changed or not? With an uptrend, the price has broken out of the last old bottom and is in the process of creating a new low below this low. In the downtrend, the price has also risen past the last old peak and is in the process of creating a new higher high. So how do you know if the trend is up or down? How do you know if the trend has changed or not?

To determine exactly this, today I will give a name that is "Valuable High/ Low" (or "valuable top/ bottom") - It has the following characteristics:

- It is used to determine the exact trend.

- It is equivalent to 1 resistance or support level.

- There is usually an increase in trading volume - That is, the price reacts, expressed through volume.

- Note 1 thing: ONLY CONSIDER IN 1 SPECIFIC TIME FRAME - Because each timeframe has its own trend. The combination of multiple time frames to produce final analysis results is the step after completing trend identification.

- To make it easiest, practice looking at tops/ bottoms and trends with a simple beginner's perspective.

An example of a EUR/USD currency pair at the M15 timeframe (15 minutes) is as follows:


Looking at the price chart, it is easy to see that points A, B, C, D, E, F, G, H are Valuable High and Low (top and bottom), these points form a trend in the M15 frame. So from A to C is a sideways trend, from B to F is an uptrend, and currently in your opinion is the trend up, down or sideways?

A lot of you will say right away that the trend has reversed and is now in a downtrend. However, this is an incorrect statement. The current trend is a sideways trend, because the price after making the top F has formed a bottom G, but the bottom G is only equal to the old (closest) bottom E, and then forms a low H. higher than the peak F. So, the downtrend must satisfy 2 conditions: forming new highs lower than the old one and the new bottom lower than the old one. With the current situation, there is only one condition that is satisfied: the new high H is lower than the old peak F, the new bottom G is only equal to the old low E but not lower, and the bottom K at the current price has not been established yet. completed, so we don't know if it's lower than the bottom of G. Therefore, the downtrend has not been established, currently it is just changing from Uptrend to Sideway.

Read more: How to use metatrader4

Turning it around, what if you say that the bottom G is already lower than the bottom Q (closer to bottom E)? I would like to answer that the Q bottom with the timeframe under consideration is M15 will not have much value because it is not a "valuable bottom", it is just a price fluctuation during the price run. from the bottom of E to the top of F, because at Q the trading volume did not increase. In the case of viewing on a smaller time frame like the M5, the Q bottom is a "valuable bottom" and it will be valuable in determining the trend of the M5 frame alone.

Similar to Q, at the peak P is also not valid considering the trend of frame M15. Therefore, the fact that the price increases from G to H even if it surpasses the peak of P, it cannot be concluded that the trend has continued to rise again, because the peak of P is not a "valuable top".

In summary, with this example, it can be concluded that: At the M15 frame of the EU pair, the current trend is sideways. If the price breaks down through the bottom of G definitively (must remove the noise) then the official downtrend is established. If the price rises above the peak of H but has not yet crossed the peak of F, a sideways trend is still present (because then the peak of H is not a valuable top). If the price rises above the peak F, the uptrend will continue to be established.

Above is how to identify trends in technical analysis, applications for forex trading, which I am applying myself. Hope to receive many shares and constructive suggestions from readers. See you in the next posts.

Best regards,

CaPhiLe.Com

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