Trending is when there are continually higher or lower prices (on average on the number of periods) in the price chart. If there is an upward trending market, then, the price fluctuates up and down, but the average is going higher.
On the other hand, there is a downward trending if the market ends periodically lower. You will commonly see these trending behavior in any asset class.
Defining the Trending Market
Efficient Market Hypothesis suggests that we cannot predict the market, not even with any prior information, like price data. Thus, from that model, trends seem to be an anomaly. Yet, it is not. Trends are a common thing in any asset class. You will find random data creates a trend.
There are multiple trading opportunities for investors, traders, and technical analysts in a trending market. The technical analyst usually indicates the trending direction by creating a chart of the security’s or market index’s price pattern.
Meanwhile, investors usually use a trending direction as a benchmark of a specific security. In that situation, the trending market lines will act as the overlay for that security price. Later, the lines form an additional indicator for the market trends.
Technical analysts put their highest interest in trending markets. They believe that this market has some level of predictability and regularity. Besides, they also believe that the correct usage of this trend can significantly affect their return on investment.
Ways to Identify a Trending Market
To identify the direction of a particular security’s trending market, traders usually utilize various trendlines and patterns. There are two types of trending market, the short-term and long-term.
To identify the security trends, traders need to draw several trading channels. Here are the common trading channels used by traders.
In ascending channels, there is a bullish trend of security. Two positive sloping trends and lines above that security’s throughs and peaks represent this trend.
There is a bearish trend on this channel. Two negative sloping lines above and below the candlestick pattern represent this channel.
There is a possibility for the security or market index to have a sideways channel. The trends will be flat in this channel. There are two zero slopping trend lines on the security peaks and throughs in this channel.
Traders can use support and resistance to find the right time to purchase or sell a security if the price of the security will stay in its traded pattern.