Back to Basics (Reviewer Series): Identifying Trends

Trend in chart is simply the direction of where the market is moving in to.

There are three types of trends:

  1. The UPTREND
  2. The DOWNTREND
  3. And the SIDEWAYS

The trends can be identified by using

  • Moving Average
  • Channel Line
  • And the most important tool: Price Action

In the examples below, I’ll show you how to identify trends using the above mentioned weapons.

Let’s start with the easiest to trade, the UPTREND.

If you love traveling like I do, you can remember this as the trend that goes from South West to North East based on the Intermediate Direction, hehehe!

Identifying UPTREND using the Moving Averages

You can see in the chart sample of the PSEi below that the direction is Uptrend by identifying the position of the MAs and how they are aligned. The 20MA (Red Line) is above the 50MA (Magenta Line) and both are above the 100MA (the Blue Line).

And a very important note: it is important that the price (candles) is moving above the 100MA.Back to Basics 1 Trend Identification

Identifying UPTREND using the Channel Line

In this exact same chart sample of the PSEi we can identify that the stock is on an uptrend by plotting a channel line (Blue line).

To confirm the trend, you must plot the line from left to right by finding the points of support or the area where the stock is pulling back to.

To confirm if the stock is on an uptrend, the channel line must be angled up from left to right. Back to Basics 1 Trend Identification channel lines.JPG

Identifying UPTREND using Price Action – This is the best indicator!

By looking at the bare chart, the same example as the previous two, identify where the price is making a New High and a New Low.

If the price is making Higher Highs and Higher Lows starting from left to right, it is confirmed that the stock is in an Uptrend. Back to Basics 1 Trend Identification price action

 

Now let’s move to the Downtrend.

In Intermediate Direction, this is the trend that goes from North West to South East, hehehehe!

Identifying DOWNTREND using the Moving Averages

In the chart below, we use PSEi again as an example. We will know if the direction is Downtrend by identifying the position of the MAs and how they are aligned. The 20MA (Red Line) is BELOW the 50MA (Magenta Line) and both are BELOW the 100MA (the Blue Line).

And again, the position of the price (candles) against the 100MA is very important. If the price is moving BELOW the 100MA then this is a definite downtrend.

Back to Basics 1 Trend Identification downtrend mas

Identifying DOWNTREND using the Channel Line

In the exact same chart sample of the PSEi we can identify that the stock is on a downtrend by plotting a channel line (Blue line).

To confirm the trend, you must plot the line from left to right by finding the points of RESISTANCE or the area where the stock is resisting to.

To confirm if the stock is on an downtrend, the channel line must be ANGLED DOW from left to right. Back to Basics 1 Trend Identification downtrend channel

Identifying UPTREND using Price Action – This is the best indicator!

By looking at the bare chart, which is still the same example as the previous two, identify where the price is making a New Low and a New High.

If the price is making Lower Lows (Green Lines) and Lower Highs (Blue Lines) starting from left to right, it is confirmed that the stock is on a DOWNTREND. Back to Basics 1 Trend Identification downtrend price action

 

Lastly, the SIDEWAYS

This one can be found the Cardinal Direction, it is the trend that goes flat from West to East, hehehehe!

Identifying SIDEWAYS using the Moving Averages

In the PSEi sample chart below, we can easily identify if the trend is going SIDEWAYS or consolidating, if the Moving Average lines are in chaotic order and the price navigates inside the MAs.

In ZFT, the sideways MAs are also called spaghetti because of they appear to be tangled like the famous noodles.

Back to Basics 1 Trend Identification sideways mas

Identifying SIDEWAYS using the Channel Line

In the same fashion as plotting downtrend and uptrend, using the channel line to identify sideways is also by finding the areas where the price is supporting. In this chart, you will see that the support line is flat or even if we angle it up a bit to exactly touch the support it barely lifts up from its previous base.

Back to Basics 1 Trend Identification sideways channel

Identifying SIDEWAYS using Price Action – This is the best indicator!

In this bare chart, we can see that the price makes Equal Highs (Blue Line) and Equal Lows (Green Line). Simply put, it is resisting on the same Previous Resistance Area and it is supporting on the same Previous Support Area.

In the ZFT system, the box area you see in this chart sample is also called the Lower High Area.

Back to Basics 1 Trend Identification sideways price action

That’s it!

I hope you learned something, and I hope you will use this for its purpose – as a reviewer of the basics, which are very important as these are the foundations or our jump-off area.

Woah! I can’t believe it’s 2:02AM in my location already, I got so enamored with reviewing I lost track of time.

With this, I leave you with this fun, unconventional song, hahaha!

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