Trends - Technical Analysis of Trend Trading

A common adage in market trading suggests that "the prevailing market direction is your ally." This is due to the established fact that trading in alignment with the trend proves to be a significantly more dependable market approach when contrasted with alternative technical analysis methodologies. Therefore, traders ought to ground their technical evaluations in the market trend of the specific stock index they are engaged with.

The financial market is arguably a superior arena for short-term speculation concerning market fluctuations, rather than for long-term investment in prevailing market trajectories. While participants can certainly track and trade in long-term movements, this online resource will primarily concentrate on intraday trading methodologies and approaches, which are inherently short-term tactics.

For our examples and our we shall use the 1 hour chart time-frame, example below shows where to set the 1H chart on your software.

To see the 1H chart, just click on the chart menu shown above, then click periodicity, and then pick the 1 hour time-frame.

After selecting the one-hour chart timeframe, the next step involves determining the direction - up or down - of the stock index you trade, which will inform your decision on whether to initiate a buy or sell position.

First let us look what is an uptrend and what is a down trend

Upward Trend

The upward market trend means the general market direction of a stock index is upwards such as shown - when the market trend is upwards traders will open buy trades also known as "going long".

Upward Trend - Open Buy Trade or Going Long

Downward Trend

A downward trend indicates a general decline in the market direction of a stock index, as shown below. When the market is bearish, traders typically open short positions by selling.

Downward Trend - Open Sell Trade or Going Short

Methods of Determining the Trend Direction

Various methods used to figure out the general market direction of a stock index.

One of the most common methods of determining the market trend in any market is the use of trend-lines. But for index the use of trend lines isn't the best method therefore we shall not look at this method on this tutorial instead we shall look at the moving average crossover method which is the best method to figure out the trend direction of index.

Moving Average Crossover Method - Trend Trading

The moving average crossover approach to trading involves employing two moving averages to ascertain the prevailing market trend direction. A signal to either buy or sell is generated when these two moving averages cross paths. A buy signal arises when they are both moving upwards, whereas a sell signal appears when they are both descending.

Moving Averages - Buy Signal

The moving averages (MAs) crossover technique generates a buy indication the moment the two averages cross and begin to trend upwards, as illustrated below. This juncture is where a trader would typically initiate a long position, anticipating the continuation of this upward momentum. A position closure would then occur when the MAs cross back in the contrary direction.

In the setup below, the second indicator confirms the uptrend. When the RSI sits above 50, it means prices are moving up and closing higher than they open.

MAs - Sell Signal

The moving averages crossover way to trade gave a signal to sell when the moving averages crossed and started to go down, and the downward trend kept going, as shown by the moving averages. A trader should wait for the moving averages to cross in the other direction to end this sell trade.

The RSI indicator says to sell as long as the RSI is under 50, which means prices are going down and closing at a lower price than when they started.

You may use this as the foundation of your choices when trading the online stock market after you have mastered the skill of identifying the market price's trend direction.

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