What is trend in crypto trading: how to identify and why it's important to trade with the trend?
By Yaroslav Krasko Updated November 12, 2022
A trend is one of the basic and important topics. If you have already studied concepts such as what price is, issues affecting price movements, you already know how to open orders and make money on rising and falling prices, the next important question is to fully understand what a market trend is, what the types of trends are, why 90% of novice traders lose money trading against the trend.
- what is a trend in trading?
- what is a trend in crypto trading?
- how to identify the market trend?
In this article, we will answer all these questions and explain what a trend is, what types of trends there are and why it is important to follow a trend.
What is a trend in trading?
A trend is a vector of the market that indicates the potential direction of price movements. Understanding the market trend can most likely predict future price behavior. The main task of any trader is to timely and correctly determine the movement of the trend and its change. Quite often you can hear similar advice from successful traders: "follow the trend or trade with the trend". Based on many years of experience, it is safe to say that this is true, trend trading is the main source of profit, and anti-trend trading in most cases will bring only unprofitable trades.
Types of trend
In trading , the market trend can be clearly divided by direction and scale. According to the direction of the trend it is divided into: upward, downward and sideways (consolidation). The scale of the trend can be clearly divided into global and local.
Upward trend (bullish) - as you may have guessed from the name, the upward trend is a rising price trend.
This type of trend is characterized by constant rising lows and highs.
Most traders trade and earn money in an upward trend, as markets have been constantly growing throughout their existence, periodically changing to short-term consolidations and adjustments (known examples: S&P 500, Bitcoin, NASDAQ).
If you have clearly identified an uptrend, you should look for good entry points and open buy positions (Long) . When opening deals at the price of higher lows can be a good additional prerequisite to your trading strategy.
It is a big mistake of some traders to follow the trend, or try to catch the maximum of the trend, as a result of which the trend continues to move in the same direction, and traders lose money and get their accounts liquidated. During the uptrend, the breakout trading strategy works well.
Downward trend (bearish) - the downward trend is completely opposite to the upward one and tends to decrease in price.
This type of trend is characterized by constant declining lows and highs.
As we have already noted, the vast majority of the time the trend is upward, but periodically it changes to downward (short) and consolidation (range). The downward trend or short trend in most cases lasts a short period of time, which is why it got this name (Short). During the downward trend, it is worth opening positions to lower the market and make money on its fall. We talked about how to make money on the fall of the market in this article . During the downtrend, the following strategy works very well - a false breakout .
In addition, it should be noted that the downward trend is quite a difficult period of trade, at this time the main task is to preserve equity and minimize unprofitable trades. Even highly experienced traders often get a lot of unprofitable trades during this trading period.
Sideways trend (consolidation or range) - the upward and downward trend almost in most cases turns into a sideways one, during which it accumulates strength to continue or start a new trend. The price trend at this time remains unchanged.
This type of trend is characterized by the same level of lows and highs.
During this period of time, these strategies work quite well: breakout , rebound and false breakout . We took this chart from our article, where we described a good example of the range trade in a real situation.
Also, the trend can be clearly divided by scale into local and global .
The chart below clearly shows that the global market is moving in an upward trend, and locally is constantly changing to upward, downward and consolidating.
By switching between timeframes, you can clearly identify local and global trends, according to your trading timeframe.
How to determine the beginning and change of the trend?
There are many different ways to determine the beginning and change of a trend. These may include: methods of technical analysis, indicators or fundamental metrics. Below we will consider some of them.
Define by using technical analysis - trend lines, one of the main tools of technical analysis for most traders. They can show us the direction of price movement and its change. Breakout of the trend line is often the beginning of a change in trend. A trend line test can be a good opportunity to open a deal to continue, a breakout on the contrary is a good opportunity to open a position in the opposite direction.
Breakout of the downward trend line
Breakout of the upward trend line
Define by using means of fundamental metrics - liquidation, one of the main fundamental metrics in the cryptocurrency market. Historically, liquidation spikes signaled the end of a downward or upward trend, and were a good opportunity to open positions.
Define by using DOM and Footprint - the book of orders and the depth of market show quite accurately large trade orders for the purchase and sale of cryptocurrency. Such applications determine the highs and lows of the market with great accuracy. You can find out what DOM and Footprint is and how it helps determine the direction of price movement in this article .
Define by using indicators - indicators show the overbought or oversold market quite well. Which in turn can be a useful tool for determining the beginning or change of a trend. One such example is VWAP, these indicators indicate the direction of the trend quite accurately, especially when using weekly and monthly VWAP. You can read more about this system in this article .
Another good example is our Greenwich automated trading system, which accurately determines the beginning and end of a trend. More details in this article .
In conclusion, we can definitely emphasize that the trend is your friend. It is worth learning to detect the beginning and change of the trend in time. And the most important thing is to use this time, because the trend is the main source of profit. You have also received our personal tips for identifying the trend, we recommend adding them to your trading strategy. By combining different models, you can increase the probability and improve your trading results.