Trading the trend is one of the most widely used concepts in trading. Trading the trend is forgiving of a less than perfect trading strategy. In other words, if you trade the trend, even if your strategy is less than perfect you are more likely to make a profitable trade.
There are several different ways of identifying a trend. Always remember that the market does one of three things; it goes up, it goes down or it goes sideways. It really is that simple, so again, a market can go up, it can go down, or it can go sideways.
One of the easiest ways to see the trend in the market is by just looking at the chart. Is the chart showing a flow higher? Or a flow lower? Are we seeing a series of higher highs and higher lows? Are we seeing a series of lower lows and lower highs? If you can see this when you look at the chart, then the chances are that the market is ranging. You are seeing a mix of highs and lows.
So just by simple observation you are able to tell whether a chart is trending up or trending down.
However, you might want to use trend lines to confirm your initial assessment.
Trend lines are extremely simple to use and very effective if drawn correctly.
To draw an uptrend
An uptrend line is a line that has a positive line, formed by connecting two lows, with the second low being higher than the first. Looking at the chart identify two swing lows, two valleys on the chart. Join these two points with a line. If this shows a positive line. This is your trend line showing an uptrend. You only need to valleys or swing lows to draw a trend line. If you have three points where the price touches this trend line (so one more in addition to the two used to draw it) then this confirms the trend. As long as the price remains above the uptrend line, the uptrend remains in place. A break below the uptrend line indicates that a change of trend could be imminent.
To draw a down trend
A downtrend line is a line with a negative slope. It is formed by connecting two high points, the second being lower than the first. Looking at the chart identify two swing highs, two peaks on the chart. Join these two points with a straight line. The is your trendline showing a down trend. Again, as with the uptrend, if three points touch the line then the trend is confirmed, it is tested; however, you only need two peaks to draw the trend line. As long as the price remains below the downtrend line, the trend remains in place. A break above the downtrend line indicates that a change of trend could be imminent.
These trend lines could then be extended into the future to act as support or resistance lines in trading. The downtrend line would act as a support line, whereas an uptrend would act as a resistance