Determining a trend on a price chart involves analyzing the price movements over a certain period of time to identify the predominant direction in which the price is moving.
Here are some commonly used methods to determine a trend on a price chart:
1. Visual Inspection
One of the simplest ways to determine a trend is through visual inspection of the price chart. Look for a general pattern of higher highs and higher lows in an uptrend or lower highs and lower lows in a downtrend. A sideways trend may exhibit more horizontal price movements without a clear upward or downward direction.
There are market structures that do not emphasize a sideways trend and only emphasize a rise-and-fall structure.
Trendlines are drawn by connecting the swing highs or lows on a price chart. An uptrend is characterized by an ascending trendline drawn along the swing lows, while a downtrend is indicated by a descending trendline drawn along the swing highs.
There are several methods of building trend lines, but one of the best methods is definitely the Victor Sperandeo method. Victor Sperandeo, also known as Trader Vic, is a renowned trader and author known for his trading strategies and insights. Two of his notable concepts are the "Trend Lines" and the "1-2-3 Change of Trend" pattern.
Trend Lines by Victor Sperandeo:
Sperandeo suggests that a valid trend line should have at least two touchpoints to confirm its significance, and after the second touch, the price should update the extremum. If the extremum has not been updated yet, this point is not taken into account.
As a result, it can form several trends at the same time with different speeds, and the price will usually attract these lines like a magnet.
3. Support and Resistance Levels
In an uptrend, old resistance levels often become new support levels. In a downtrend, old support levels often become new resistance levels.
Prices bouncing off these levels can indicate the strength of the trend.
4. Technical Indicators
There are many technical indicators which help to determine the trend. The most famous of them are:
- Moving Averages;
- Moving Average Convergence Divergence (MACD);
- Ichimoku Cloud;
- Bollinger Bands.
Surely, every Forex trader has heard these names and used them in practice. But today, we would like to show one more technical indicator, which is an alternative solution in determining the trend and is not inferior, and in some moments, even better in determining the trend and reversal. It’s WATR. This indicator is free and available for both MT4 and MT5 platforms.
The weighted Average True Range Indicator (WATR) indicator is a simple MT4 indicator that shows the market trend and signals potential price changes. It is an enhanced version of the Average True Range Indicator. The indicator smooths the ATR by integrating a weighting factor.
To determine the best indicator parameters, overlay the indicator on the chart and change the WATR_M and ATR parameters so that the price chart respects the lines
Ideally, you should get a graph like this:
It's important to note that no single method can guarantee accurate trend identification, and different traders may use different approaches. It's often recommended to combine multiple techniques and indicators to increase the reliability of trend analysis. Additionally, it's crucial to consider the time frame being analyzed, as trends can vary across different time frames.