Being able to successfully identify the flow of the market is probably one of the most important parts of your analysis. Despite the fact that getting this bit right is not difficult, many traders still manage to get it wrong, as the market can be moving in three different directions for a given currency pair on three different time-frames. Let’s have a look at how you quickly and correctly identify the trend of a given market.
Time-frames are quite important when identifying a given market’s direction. As a general rule it can be said that the higher the time-frame the more significant the trend or lack thereof. Typically, the first chart I pull up is almost always the daily, as this particular time-frame is often in the minds of the majority of traders. When identifying market flow, it’s important to remember which characteristics signify that prices are moving in one direction or another. For example, in an up-trend, prices must be reaching higher highs and higher lows. How do you know if a staircase leads you up or down? The top of the first step is the bottom of the next and so on. The same applies for down-trends only in the opposite direction: the bottom of the current step becomes the top of the next. In the image presented below, you might find it easy for yourself to imagine walking down the red steps and up the green. If the tops and bottoms of market swings/steps are both increasing, then you’re in an up-trend. If the tops and bottoms of market swings/steps are decreasing, you’re in a down-trend.
Doesn’t the trend of this pair appear so unmistakably clear now? I haven’t added any marks to the last portion of the chart but I’m certain that you, based on the previous two trends, will easily be able to identify the market flow. The problem with identifying market flow is that many traders spend too much of their valuable time looking at masses of technical indicators, which are based on various calculations of price action, instead of the price action itself. Clean charts enable you to see what you should be focussing on, price action. Would you base the decision of buying a house on a drawing of it or would you prefer to see the house itself?
The same can be applied to any time-frame but keep in mind that the higher the time-frame, the more significant the trend. I rarely look at the small time-frames, as the movements on such charts rarely represent genuine trends and tend to reflect market noise.
What if the market is making neither higher nor lower highs and lows? This is the sideways market. The easiest this to do here is to identify the market flow by seeing what it isn’t, but you can also look for patterns, which enable you to confirm the sideways market, the pennant and the megaphone. Pennant patterns start off with higher highs and lower lows and continue with lower highs and higher lows until price breaks to the up- or down-side. Here is an example:
Now we can see a down-trend beginning to emerge above. The beginning of a megaphone pattern will start off with lower highs and higher lows and continue with higher highs and lower lows, almost as if the pennant was turned around. Sometimes the market simply trades within a range, back and forth between a high price and a low price. Here is an example:
Being able to spot the trend will enable you to open higher probability trades, as you’ll have the force of the trend to support you. The most beautiful part about being able to spot the direction of a given market is that you’ll know when to be in a position and when not to be, and not being in a trade means you get to keep your money.
Knowing what direction the market is likely to move is an exceedingly good thing to know. If you can positively say that the market is up, or down, then you are really reducing your chances of losing money and increasing your chances of gaining some. Make sure that you’re certain about the market trend before you move on with your analysis and if you’re not, then find another pair or go for a walk. Sideways markets are often identified by what they are not rather than what they are; if the market is not up, nor down, then it’s probably sideways. Keep at it and before you know it, you’ll be spending only moments to on this.