You can use a combination of confluences to confirm the direction of a trend.
To start there are 3 types of phases in the market and two of them are considered trends
In this article I will discuss what tools I use to identify Up Trends and Down Trends.
- Up Trends
- Down Trends
- Consolidations or side ways price action
As a price action trade the #1 tool I use is price itself. Before looking at any indicators or moving averages you should start your analysis by analyzing the current price action.
To confirm an Up Trend I look to see if price has made at least one:
- Higher High
- Higher Low
For example in the chart below by making at least one high lower give me the opportunity to draw a trend line .
To confirm a Down Trend I look to see if price has made at least one:
- Lower High
- Lower Low
As show in the chart below, we look for the opposite of what we see in an up trend. We want to see price making at least one Lower High.
Moving Averages (MA)
Moving averages are a great tool to use to identify trends within a market. There are several ways you can use MA’s to analyze price action.
One of the ways is to decide if price is trending above or below a certain MA.
The first step of identifying a trend is to confirm it with price action, Higher High and Higher Lows or Lower Highs and Lower Lows. Only after confirming the trend using price action, should you consider the behaviour and the placement of the MA’s.
You can use MA’s several different ways to confirm the direction of a trend.
The most simple way to confirm a trend using MA’s is to see if the MA is above or below the closing price of a Forex pair or any security.
- Price > MA = Bullish
- Price < MA = Bearish
Different MA’s will confirm the trend types. For example, price closing above the 50MA will let you know that the medium – long term trend now Bullish. But price closing above the 20 or 13 MA will indicate that the short-term trend is bullish.
For an example:
When a short-term MA crosses above the long-term MA, this indicates a Bullish trend and when the Short-term MA crossed below the long-term MA this indicates a Bearish trend. For an example:
- 20MA crosses above the 50MA = Bullish
- 20MA crosses below the 50MA = Bearish