Almost every trader knows this rule: The trend is your friend until it ends. Trading with the trend is one of the most common trader rules. As such, identifying the market trend is an important factor to be considered when making trading decisions.
There are three trends in the market: uptrend (bullish), downtrend (bearish), or horizontal trend (sideway). Identifying the trendline is where it all begins.
As shown in the picture below, in order to identify the market trend in channels, a trader needs to find major support and resistance levels, as well as draw the trendlines.
The top of the channel (red line) is shown by a trendline that connects the points representing a market’s highs over a period of time. The bottom of the channel (blue line) is identified by connecting the points representing the market’s lows.
In this example, the overall market performance is trending upwards, with the red line representing resistance level and the blue line the support level. For trend traders, they would prefer to buy stocks at the lower level of support (bottom of the channel) and sell them near resistance (top of the channel).
When the price touches the blue line (support channel), it presents a buy opportunity. On the other hand, when the price touches the red line (resistance channel), it is a sell signal.
However, as mentioned at the beginning, the trend is your friend until it ends. It means a trend may reverse and a new trend emerges. When the market breaks out of the channel, it may experience a large movement in the direction of the breakout.
Based on the latest market performance in the chart above, the support channel has been breached and broken through. Is this a buying opportunity? An additional indicator or reference is needed to make a better trading decision. In this example, a 50-day moving average (green line) is applied.
Currently, the market performance is supported at a 50-day moving average. If the market cannot hold at a 50-day MA, it may indicate the current trend is ending and going into the consolidation period.
For trend trading, it is always best to find an established trend and look for a high probability entry point to buy.