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Trend Analysis

Difficulty beginner

Definition

A trend is the general direction of price movement. Trends persist until clear evidence of reversal emerges.

Trend Types

Uptrend (Bullish)

Sequence of higher highs (HH) and higher lows (HL). Trend continues as long as the structure holds.

price                                                  HH3 ●
  │                                                   ╱
  │                                            HH2 ●╱
  │                                              ╱
  │                                   HL2 ●────╱
  │                            HH1 ●        ╱
  │                              ╱╲       ╱
  │                    HL1 ●───╱   ╲    ╱
  │             HH0 ●        ╱      ╲ ╱
  │              ╱╲        ╱         ●
  │     HL0 ●──╱   ╲     ╱
  │            ╲    ╲  ╱
  │             ●    ╲╱
  └──────────────────────────────────────────────────────→ time

Downtrend (Bearish)

Sequence of lower highs (LH) and lower lows (LL). Mirror image of an uptrend.

price                                                       
  │  ● LH0                                                  
  │   ╲                                                     
  │    ╲     ● LH1                                          
  │     ╲    ╱╲                                             
  │      ╲ ╱   ╲      ● LH2                                 
  │       ●     ╲    ╱╲                                     
  │       LL0    ╲ ╱   ╲     ● LH3                          
  │               ●     ╲   ╱╲                              
  │               LL1    ╲ ╱   ╲                            
  │                       ●     ╲                           
  │                       LL2    ╲   ● LL3                  
  └──────────────────────────────────────────────────────→ time

Sideways (Range)

Price oscillates between fixed support and resistance. No directional bias.

price                                                       
  │ ───────────────────────────────────────  resistance     
  │       ╱╲       ╱╲       ╱╲       ╱╲                     
  │      ╱  ╲     ╱  ╲     ╱  ╲     ╱  ╲                    
  │     ╱    ╲   ╱    ╲   ╱    ╲   ╱    ╲                   
  │    ╱      ╲ ╱      ╲ ╱      ╲ ╱      ╲                  
  │ ──────────●──────────●──────────●─────────  support     
  └──────────────────────────────────────────────────────→ time

ADX Method

ADX > 25 = Strong trend
ADX < 25 = Weak trend/ranging
+DI > -DI = Uptrend
-DI > +DI = Downtrend

where: ADX average directional index, a non-directional measure of trend strength on a 0–100 scale · +DI positive directional indicator, magnitude of upward price movement · -DI negative directional indicator, magnitude of downward price movement. does: separates trending markets from ranges and identifies the dominant side. Traders gate trend-following systems on ADX > 25 (only take trend signals when the trend is real) and use the +DI / -DI comparison to confirm direction — long bias when +DI is on top, short when -DI is on top. Falling ADX from a high reading warns of trend exhaustion.

Trendlines

Drawing Trendlines

Uptrend Line: Connect at least two higher lows Downtrend Line: Connect at least two lower highs

Rules: 1. Need minimum 2 touches to draw, 3 to confirm 2. Don't force the line — price should respect it 3. Steeper trends are less sustainable 4. The more touches, the more significant

price                                                            
  │                                                ●  ← breakout 
  │                                              ╱   (close above)
  │                                            ●                
  │                                          ╱                  
  │                                    ╲   ●                    
  │                          ┄┄┄┄┄┄┄┄┄┄ ╲╱┄┄┄┄┄┄┄┄ trendline    
  │                              ●   ╳ touch 3                  
  │                            ╱  ╲ ╱                           
  │                ┄┄┄┄┄┄┄┄┄ ●┄┄┄┄ ●  ← touch 2                 
  │              touch 1   ╱                                    
  │            ●╱                                               
  │           ╱                                                 
  └──────────────────────────────────────────────────────→ time

Trading Trendlines

Entry: Price approaches trendline and bounces Stop: Beyond trendline Target: Previous swing point or measured move

Trend Strength Indicators

Indicator Strong Trend Weak Trend
ADX > 25 < 20
MA Slope Steep Flat
Price vs MA Far from MA Close to MA
Volume Increasing Decreasing
Higher TF Alignment Same direction Conflicting

Trend Trading Strategies

Trend Following

Entry: Pullback to moving average or trendline in direction of trend Stop: Below pullback low (uptrend) or above pullback high (downtrend) Target: Previous high/low or trailing stop

Breakout from Consolidation

Entry: Price breaks out of range in trend direction Stop: Back inside range Target: Measured move (range height)

Trend Exhaustion Signals

Signal Description Action
Divergence Price makes HH but indicator makes LH Watch for reversal
Extended MA Price far from MA Expect pullback
Volume climax Extreme volume after long trend Possible top/bottom
Candlestick reversal Shooting star, engulfing at top/bottom Consider exit
ADX decline ADX falling from high levels Trend weakening

Practical Guidelines

  1. Trade with the Trend — The trend is your friend until it bends
  2. Higher Timeframe First — Identify trend on weekly/daily before trading
  3. Don't Fight the Trend — Counter-trend trades have lower probability
  4. Use Pullbacks — Enter on pullbacks in trend direction for better risk/reward
  5. Trail Stops — Let winners run in trending markets
  6. Trends End Gradually — Watch for loss of momentum before reversal
  7. Not All Markets Trend — Some are mean-reverting; adjust strategy accordingly

Next Steps