How to Identify a Strong Trend in Financial Markets
The attached image explains an important concept in technical analysis of financial markets, which is how to identify a strong trend using simple but effective analysis techniques. This analysis is based on monitoring price movement and relying on moving averages to determine potential entry points in an upward or downward trend.
What is a strong trend?
A strong trend is a sustained movement of price in a specific direction (up or down) for a long period with constant momentum. This type of trend reflects the presence of significant buying or selling power affecting the price movement.
Characteristics of a strong trend:
1. Higher Highs and Higher Lows:
•In an uptrend, the price is rising steadily, making higher highs and lows than the previous one.
2. The price is above the moving average:
•The price being above a moving average (such as the 20 SMA) indicates strong upward momentum.
•In a downtrend, the price is below the moving average.
3. Clear wound:
•The price movement is stable with clear buy and sell signals.
Using the Moving Average (SMA 20):
• Simple Moving Average (SMA) is a technical analysis tool that helps smooth price action and identify trend.
•In the picture:
•The 20-day moving average (SMA 20) is used as a dynamic support line.
•Whenever the price touches this line in an uptrend, there is a potential buying opportunity.
Entry Points (Potential Buy Trade):
1. Approaching the moving average:
•When the price approaches the moving average (SMA 20) without breaking it, this is considered a potential buying opportunity.
2. Confirmation of higher bottoms:
•If the price bounces off the moving average and makes a higher low, this reinforces the buy signal.
3. Candle movement:
•The presence of a bullish candle after touching the moving average is an additional confirmation to buy.
How to determine direction using this method:
1. Monitoring peaks and troughs:
•Check for higher highs and lows forming in the uptrend.
2. Using the moving average:
•Make sure the price is moving above the moving average in an upward direction.
3. Determine points of purchase:
•Look for bounces from the moving average to enter buy trades.
Benefits of this strategy:
1. Ease of use:
•It relies on simple and easy-to-understand tools such as moving averages.
2.Risk management:
•The moving average helps to determine stop loss levels below the line.
3. Continuity:
•Suitable for markets with a clear trend.
Conclusion:
Relying on higher highs and lows and using a moving average such as the 20 SMA is an effective way to identify a strong trend and enter into high probability trades. This method gives traders a clear view of entry and exit points, which
Help them improve their trading strategies and achieve better returns.
