In the previous post, we discussed market trend definitions, types, and how to determine them. Therefore, in this post, we will discuss market trend directions, strategies that you can apply to take advantage of the trend, and the different ways to trade market trends.
I’ll begin with the market trend directions – the market moves in three main directions: up, down, and sideways. There is a trading technique for each trend, which will be the subject of this post.
A bull trend always brings new high levels to the eyes. While the price continues to rise, it takes a break, which is known as a market correction. As a consequence of the bull trend, the market continues to repeat the pattern of continuously achieving new high levels and lowering toward the last top or above, which will become a new bottom.
A bullish trend-buying strategy: after defining a bull market trend, traders wait for a price correction before placing new buy orders, motivated by their expectation of continuing bull market trend. The following graph illustrates the buy opportunities in the bull market trend.
Breakout strategy: It’s the opposite of a bullish trend-buying strategy. In this strategy, traders wait for the price to break through the ascending trend line. When this occurs, traders will look for a retest of the ascending trend line to confirm that it is indeed strong enough to prevent the price from climbing toward earlier levels. Following a decisive rejection from the ascending trendline, traders place their sell orders.
Breakout Strategy Example
The advantage of applying the relative strength indicator (RSI) for the breakout strategy is that when the index tumbles into the oversold zone, it indicates the bear’s momentum strength. Therefore, the probability of a breakout increases. As a result, sellers hold off on placing sell orders until the relative strength index drops below 40 on the value line.
Moving Average Crossover: This strategy indicates the direction shift of the price. It simply occurs when the moving average’s short–period line crosses over the long–period line, and the market participants place a buy order.
A bear market is the flip side of a bull market. As a consequence, the market continues to follow the pattern of progressively sliding towards new low levels and rising near the previous bottom or lower, which will become a new high in the bear market. Traders are waiting for a market pullback before placing new sell orders in the market’s direction.
Sellers in a bearish trend wait for a market correction or rebound before placing their sell positions. Furthermore, the target distance should be twice as long as the stop-loss distance in pips.
Selling in bearish market example
Breakout strategy: In this strategy, traders wait for the price to break through the descending trend line. When this occurs, traders will wait for a retest of the descending trend line to confirm that it is strong enough to prevent the price from tumbling to the previous levels. Traders place buy orders following a decisive rejection from the descending trendline.
Moving Average crossover strategy: This strategy indicates the future market trend; simply, when the moving average’s short-period line crosses below the long-period line, market participants place a sell order, as seen in the example below.
The advantage of applying the relative strength indicator (RSI) is that when the index rises onto the overbought zone, it indicates bull momentum strength. Therefore, the probability of a breakout increases. As a result, buyers hold off on placing buy orders until the relative strength index climbs over 60 on the value line.
During a sideways trend, prices move in a narrow horizontal range for an extended period. Strong resistance and strong support are both barriers that prohibit the price from breaking out of this range. Meanwhile, after the formation of strong resistance and support, the tops and bottoms define the price range.
The advantage of using the Relative Strength Index is that it increases the probability of knowing the next market move. If the RSI value–line stays in a neutral zone, which is over 40 and below 60, that means the price has a better chance of staying in a narrow range without making a significant move soon that may result in breaking out of the range.
In a sideways market, traders could use one of two strategies: using resistance as a selling zone or using support as a buying zone. This is illustrated in the graph below:
The second strategy fits traders who prefer to trade in a trending market. Therefore, in this technique, traders are willing to wait for a breakout. Once a break–out occurs, traders wait for the new support, which was the resistance that prevented the price from rising in the previous period. Once the resistance shows a strong defense, traders place buy orders.
On the other hand, Sellers are ready to wait for a downward breakthrough. When a break-out happens, traders look for the new resistance, which was the prior period’s support that kept the market from falling. Furthermore, traders put in buy orders when the new barrier demonstrates its power in keeping the market from reverting to previous levels.
Hopefully, this post was beneficial to you. As you have read, there are many ways to trade market trends. I have mentioned a variety of strategies in this post. As a result, before entering the market, compile statistics based on historical data and trade on a demo account in the strategies that best suit you and are the most profitable.
Meanwhile, to save your time, using more than one indicator at once will make receiving trade signals take a longer time, as well as using fewer indicators will make trades less efficient. So, give yourself enough time to study strategies for trading market trends on a demo account before putting real money on the table.
This article was written by Mohammad Quqas from mohammadquqas.com
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