BTC has been in a trading range for 3 months and is now out of it! We could be seeing a resumption of the bullish trend.
If you’ve ever wondered what a trend is and more importantly, how to trade during a trend, you’ve come to the right place because that’s exactly what this article is about.
What is a trend?
As you may have noticed if you have ever looked at a stock chart, prices do not move in a straight line but rather in oscillations. They alternate between rising and falling phases.
When the price increases for a certain period of time, the downward phases will tend to be shorter than the upward phases. We will then say that we are in a bullish trend. The opposite is also true for a downtrend, the downtrends will be longer than the uptrends.
Is the market always trending?
That would be far too easy, wouldn’t it? All we have to do is look for signs that the trend is ending and move to the other side to benefit from it every time. No my dear friends, price behavior is much more complex than that. When prices reach the end of their run, after an uptrend for example, they will tend to rest, and move flat.
This is called a trading range! It is extremely important to be able to recognize them, otherwise your gains during the trend will evaporate. Indeed, a trend following system will not work during a range and will give many false signals.
How to recognize a trend?
I mentioned above that there are up and down phases in a trend. When an uptrend ends, it marks a high point and when a downtrend ends, it marks a low point.
In the case of an uptrend, there must be a sequence of higher and higher highs as well as a sequence of higher and higher lows. The opposite is true for a downtrend
On the chart below, we can distinguish higher and lower high points and lower and lower low points indicating that we are in a bearish trend.
How to trade during a trend?
There are many ways to trade a trend, and we will discuss some key indicators that will help you to see more clearly and filter out some of the false signals.
The SuperTrend is an excellent trend indicator and can be used in different ways: to set stop-losses, to identify support and resistance areas and to get buy or sell signals.
Volume is one of the most relevant indicators in technical analysis. They allow you to judge the strength of a movement. In the context of trend following, they should be used to confirm a breakout from a previous high point. A breakout without volume is likely to be wrong.
An approach could be to enter a SuperTrend long signal, only if we can observe higher high and higher low and to filter that with the volume. If the volume is above its average at the time of the signal, we can open a long trade.
Trend following is one of the easiest things to implement in the trading world. However, the key to success will again lie in your creativity and rigorous backtesting. Follow your strategy once it is confirmed, and don’t succumb to FOMO!