What is a ‘trend’ in the financial markets?
Head and Shoulders Pattern To give you an example, an uptrend would represent higher highs and higher lows in a series of numerical progressions and will tell us that there is an overall rise in the price of the asset. If it keeps the same direction, then we have a trend.
The situation with the downtrend is the polar opposite — we get lower highs and lower lows but its still easy to identify. As you can see in the example, we have a progressive series of highs and lows and its clear that the overall price of the asset is going up.
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The trend keeps up as long as each low is higher than the one before. If the successive low is lower than the one that preceded it, then we are talking about trend reversal.
Types of Trends The types of trends we know are three. You already know about uptrend and downtrend.
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In the uptrend, each successive low is higher than the one before it, which means we are talking about an overall upward direction of movement, hence the name.
In the downtrend, each successive high is lower than the one before it, which means that the overall direction is downward. There is a third type of trend we havent talked about yet, and that is the sideways trend also known as horizontal trend.
There has been some dispute as to the validity and existence of such trends at all. While some traders consider them an important part of the decision making process, others think that there should be no existing definition for those trends because they are more technically a lack of trend.
Unlike the uptrend and downtrend, the horizontal trend offers little to no movement which is why some traders dont consider it a trend.
Its a moment of stability. Whether you think its a trend or the lack of thereof, its important to acknowledge when the market reaches an episode of stagnation. The Importance of Trends Identifying and using trends to a traders advantage is one of the most important aspects of trading.
Even though it may sometimes be complicated, the process of spotting and properly trading based on a trend is in the heart of the successful business transaction.
Technical analysis relies heavily on the analysts ability to perform those duties well and even though it may not seem like it sometimes, if you manage to identify a trend and use it, how to determine the trend of binary options can make a lot of money even though there are still risks.
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