Determining the start of a new trend is not something you can truly do. Only when the trend has actually started in a new direction can you say “look, a new trend”.
You must also add to that what – what trend are you talking about? There is not only one trend as the time frame you are trading can have a different trend than one on a lower or higher chart.
What about knowing when a trend is ending?
While that would be an excellent way to virtually print money as you get on right at the beginning and ride until it ends, you will never really “know” until the direction of the market has changed.
What we can look for his a higher probability of X happening over Y.
For example, if the chart you are trading is in an uptrend direction, can we see something on the chart that may show the market has a high probability of reversing?
Yes.
Is it also possible that the reversal is setting up a change in trend?
Yes, that is also possible. You would not know at that point though that a trend change is underway.
Let’s look at 4 ways you can be “on alert” for a change of market direction and perhaps even the start of a new trend.
Moving Averages
Moving averages are the most common and obvious choice for many traders as virtually every charting platform has them.
Here is a quick rundown on how to use the moving average to alert you to the “potential” start of a brand new trend direction.
- If price price crosses a moving average and travels above it, there’s a chance that now an uptrend has just started.
- If price crosses a moving average indicator and goes below it, it can be taken as the start of a downtrend.
One of the most common ways is to combine two moving averages, for example, the 9 EMA and the 18 EMA and whatever direction the faster moving average (in this case, the 9 EMA) crosses the slower moving average, that is taken as a confirmation that a new trend is in progress.
Always remember the technical indicators lag price. Moving averages can give you, at a quick glance, the state of the last X number of candlesticks averaged out. For example, a 20 period moving average will average out, usually the closing prices, of the last 20 periods.
Depending on the length of the moving averages you are using, you will be late to any trend change so at best, you will get into a new trend not at the beginning, but close to.
All you are seeing with a moving average is the increase or decrease in the average price which can change for a variety of reasons. Still, moving averages, especially the direction of the 200 period moving average, are popular indicators to use to show a change in the trend.
Support and Resistance Level Breaks
Support and resistance is a really solid way to to determine the end/start of a trend because it uses the mechanics behind how a trend actually works.
- In an uptrend, price will be making higher highs and higher low. If a higher low is intersected and price closes below it, this signals that the uptrend has ended and downtrend may be starting.
- In a downtrend, price will be making lower highs and lower lows. If a lower high get intersected and price closes above it, this may be the start of an uptrend market (which means the end of the downtrend).
The main problem with using support and resistance to indicate a trend change is the bigger the time frame, the further out you may have support and resistance levels.
On a daily chart in Forex for example, it is not unusual to see a price swing of 200 pips to the upside from support. In order to change the trend to a down trend, price will have to travel at least 201 pips to the downside to indicate a trend change.
Support and resistance is popular but you can see that just like moving averages, you will not get the beginning of a trend change, the actual turn.
Is it that important?
What if you had to wait 201 pips for a downtrend to form but price trends to the downside for 2000 pips? Is it worth the wait?
Trendline Breakout
One of the best ways to determine the end of a trend is to use a trendline…more specifically, the breakout of the trendlines.
- If you draw a falling trend line in a downtrend and if price breaks it and closes above it, you should take notice because this means that the downtrend is most likely ending.
- Similarly, if you draw a rising trend line in an uptrend market and if price breaks that trend line and closes below it, then it is one of the most reliable signals telling you that the uptrend is most likely ending.
Trend lines can be highly subjective among traders and there is usually multiple trend lines covering the overall trend. This is called fanning trend lines. You will have a shorter term trend line, an intermediate trend line and a long term trend line.
Deciding when to trade in the other direction from the main trend can drive you crazy!
Exhaustion Thrusts – Failure Tests
You learned you can use indicators and market structure to determine trend changes but this method – failure tests – is my favorite methods to catch turns.
The beauty of this method takes into account overly extended strong momentum in a market that ends with a pullback and test of highs or lows.
While I usually only expect to see a counter trend move and not a complete trend change, there have been times where an overall trend reversal has taken place.
This market was in an uptrend for a few years and went into consolidation. Once price broke out, it ran with momentum only to be capped and reversed setting up a change in trend.
- Price is moving with momentum as seen by not only price action, but by Keltner Channels as price runs out the top.
- Price stalls briefly (weekly chart) and then pushes above the small consolidation
- Heavy rejection takes place with a bear candlestick that engulfs the previous 3 weeks of trading. You can trade the break of the momentum candlestick or my favorite, seeing some consolidation and trading inside of that.
- After a strong thrust downwards, price retraces and this is a move you can trade in the direction of the thrust leg.
You need a market that has been in a prolonged trend. What is happening is the dying breathe of a market and with the one last gasp, it tries to continue only to be slammed.
Using this method, you not only can see when a trend is ending (potentially) but can also find a way to get into virtually the beginning of a new trend.
