What are Market Trends in Forex and Other Markets: Trend Types
Knowing how to identify financial market trends is an essential skill in technical analysis in trading. Why? Because they allow us to identify the direction of market movements, draw conclusions and make decisions based on them.
In this article we will discover:
- What are market trends?
- Trend Types - Bull Market, Bear Market, Sideways Trend
- How to spot market trends in trading
- How to trade in favour of the trend
- How to operate countertrend
What are the Trends in the Financial Markets?
We can define the market trend in trading as the direction in which a market moves in a sustained manner during a certain time interval.
▶ The movement will never be in a straight line but prices tend to vary upward and downward, forming kind of waves that, together, will determine the trend.
In the following image we show this concept in a simple way:
Market trend analysis is essential in trading as it provides us with very valuable information for forecasting financial markets to help us decide when and how to take positions. For this, we have the help of technical analysis and all its graphical tools to identify patterns, but we’ll see this later.
To identify trends in the stock market, it’s also important that you define your trading style and the time frame in which you are going to operate.
↳ For example, if you are going to practice scalping with a certain instrument and your charts are 5 minutes long, the trend in that period of time will be different than if, for example, we trade long-term and study weekly or monthly charts.
But before we make a financial markets forecast, we must know the types of trends that exist.
Types of trends - Bull market vs Bear market vs Lateral
In general, trends can be grouped into three large groups according to their direction: uptrend (bull market), downtrend (bear market), and sideways (lateral) or no trend.
Let's see each of them in detail. By the way, with the MetaTrader trading platform you can identify trends, and apply what you’ve learned in this article. It’s also free! Try it out by clicking the banner below:
Bull market or ‘Bullish trend’
An uptrend refers to a sustained upward movement of prices in a certain period of time. This trend is also known by the Anglicism 'bull market' and is characterized by a feeling of optimism, confidence and, because the pressure of demand exceeds that of supply, it reflects a rise in prices.
↳ The bull is a symbol of vitality and strength.
An uptrend generally begins after a period of indecision and doubts in the market and then chaining lows and highs to the upside.
In an uptrend we can detect three phases, according to the Dow Theory:
1️⃣ Accumulation. Investors have a moderate attitude, of some caution, with little volume in the market, and some uncertainty, so sales take place.
2️⃣ Participation. Confidence begins to return to the market little by little, investors return to seek profitability, volume increases and prices begin to rise. The graph below shows how the highs and lows are increasing.
3️⃣ Distribution. The bullish period gradually comes to a halt as large investors and more experienced traders believe that it’s time to exit the market and sell while the less experienced buy thinking that they will achieve quick and easy returns.
Let's look at an example of a bull market trend in Forex:
Source: Admirals MetaTrader 5 Supreme Edition. H4 EURUSD chart. Data range: April 29, 2020, to July 2, 2020. Prepared on August 6, 2020. Please note that past performance is not a guarantee of future performance.
Bear market or 'Bearish trend'
The downtrend, or bear market trend, refers to the moment in which the price begins to decline steadily. Pessimism begins to spread through the market along with fear of losing money. Investors begin to exit the market and the selling pressure outweighs the buying pressure. The highs and lows are decreasing.
In the same way as the uptrend, a downtrend of the market has three phases:
1️⃣ Distribution. The price reaches its absolute maximum and from that peak begins to fall when the first sell orders appear.
2️⃣ Participation. Prices fall more steeply as sellers (also called bears) take over the market. Pessimism spreads and investors are looking to get out of the market quickly.
3️⃣ Panic. Fear leads traders to dump their assets at whatever price.
Let's look at an example of a bear market trend in Forex:
Source: Admirals MetaTrader 5 Supreme Edition. H4 EURUSD chart. Data range: January 28, 2020, to April 2, 2020. Prepared on August 6, 2020. Please note that past performance is not a guarantee of future performance.
Side trend or Market without trend
We speak of a lateral trend when the market cannot decide between an uptrend and a downtrend. The price of the asset oscillates in a narrow range, between supports and resistances, without there being great variations over a certain period of time.
Source: Admirals MetaTrader 5 Supreme Edition. H4 EURUSD chart. Data range: August 1, 2019, to August 17, 2019. Prepared on August 6, 2020. Please note that past performance does not guarantee future performance.
During a side market, large returns are not usually achieved, of course, since the price hardly moves within a very small range, so investors do not usually like this trend.
However, keep in mind that if it is a long-term trend, you can always find small upward and downward trends as in the image above, which can serve us modest opportunities. On the other hand, when it comes to stock market trends, we can always benefit from stock dividends.
Other types of market trends
Market trends can also be classified based on their duration over time. Again, we talk about three types of trends:
- Main or long-term trend. The Dow Theory considers that these last more than a year.
- Intermediate or medium-term trends. This would last around three months.
- Immediate or short-term trend. Less than three weeks.
Source: Admirals MetaTrader 5 Supreme Edition. H1 EURUSD chart. Data range: January 4, 2018, to March 9, 2020. Prepared on August 6, 2020. Please note that past performance does not guarantee future performance.
We must always bear in mind that each trend is always part of a larger one and that, in turn, this trend will be made up of other small short-term trends.
If you want to go deeper into this or Forex trading, you can register for our free Zero to Hero trading course. You will learn online from the hand of market experts!
How to spot market trends
To identify trends in financial markets on a graph, the most logical thing to do is use trend lines, a very simple but valuable tool for drawing conclusions.
How can we draw a market trend line in Forex correctly? We must first determine, at first glance, whether we are facing an upward or downward trend.
➨ If the trend is bullish, we will find at least two consecutive rising lows
➨ If the trend is bearish, there will have to be two consecutive decreasing highs.
➨ To confirm both trends, ideally there is a third high or a third low.
The trend lines should be drawn by joining the highs and lows:
Source: Admirals MetaTrader 5 Supreme Edition. H1 EURUSD chart. Data range: June 12, 2020, to June 30, 2020. Prepared on August 6, 2020. Please note that past performance does not guarantee future performance.
How can we detect a change in trend? Once we have marked the trend, the line will help us determine if there will be an upcoming change of direction: as long as the line does not break and the lows remain above or touching it, it is common for it to continue. In case the price breaks the line, it can be interpreted as a signal of change, as if it were a resistance or a support.
The MetaTrader 5 Supreme Edition trading platform, the exclusive Admirals plugin, has numerous trend indicators that help us identify them and find entry signals. Here are some of them:
The best way to learn how to use them is with a demo trading account. You can work with virtual funds, so you can practice without risk. Ready to try your skills in a risk-free environment? Just click the banner below:
Market trends - Trend trading
When we talk about trend trading, we refer to a way of operating in which we try to achieve profits by following the movement of the market. Basically, this consists of opening a position at the lowest possible point, during corrections, and keeping it open until a change in trend occurs.
This technique works for any type of asset, be it Forex, stocks, commodities, etc. and it is based on the popular statement 'the trend is your friend'.
To operate with a trend we must follow some guidelines:
- Identify the trend, following the advice in the previous section.
- Choose the time to enter the market. The idea is to buy low to sell high in long trades, and vice versa in short trades.
- Place a stop loss. It is best to place it on the previous support and then use a trailing stop to avoid premature closures.
- In our trading plan, set the conditions that must be met to close the position.
Let's see this with a very simple practical example in an uptrend:
Source: Admirals MetaTrader 5 Supreme Edition. H1 EURUSD chart. Data range: June 12, 2020, to June 30, 2020. Prepared on August 6, 2020. Please note that past performance is not a guarantee of future performance.
You can learn more about forecasting financial markets and how to trade market trend lines and identify bullish and bearish trends in the following video:
Market Trends - Counter trend trading
Trading against the trend is considered by most traders to be a very risky technique and difficult to spot. Therefore, they do not recommend it for beginner or risk-averse traders. Basically, it consists of trading on price rebounds in resistance: if the movement is bullish, the trader sells, if the movement is bearish, the trader buys.
This strategy is complicated because the trader has to determine that a trend is exhausting itself and is at the end. This is why they adopt a position contrary to it. That is, they position themself against the majority of the market: they buy when the majority sells and sell when the majority purchase. In the following example, we can get an idea of how the operation works and how risky it can be.
Source: Admirals 5 Supreme Edition. FTSE100 daily chart. Data range: June 15, 2020, to June 24, 2020. Prepared on August 6, 2020. Please note that past performance is not a guarantee of future performance.
In the image above we see the possible points of sale when the price is in a bullish channel. If the trend were downward, the lower part of the channel would indicate the purchase points.
If you want to start practising strategies based on trends and a financial markets forecast, you can do it with a demo account using virtual money. Then, once you have learned enough, you can move to a real account. If that’s where you are now, then click on the banner below to get started:
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.