What is a Trending Market?
How do you know when you’re dealing with a trending market? Many traders like to see a trending market far more than they would like to see a ranging market.
Either market condition can be potentially profitable for a trader who knows what they’re doing. However, a trending market tends to provide the biggest opportunity for large gains and potentially minimal risk. What you want to make sure of is that you are actually viewing a trending market rather than a minor correction in one direction or the other, known as a retracement. We will look at some ways that you can tell.
What you will generally see with a trending market is a series of higher highs or lower lows depending on if the market is in an uptrend or downtrend. When you see this type of market movement, you can be pretty sure that the currency pair you are looking at is trending.
A major advantage of a trending market is the fact that there tends to be an increased amount of liquidity in the market at that time. That said, they also tend to be a lot more volatile in the market, so the best traders need to be willing to adapt to the conditions as they change.
There are a few things that you can do to try to determine if you are looking at a trending market that may be better than simply eyeballing it and attempting to figure it out from there. The best thing that you can do from the start is to look at a series of indicators to see what is really going on in the market.
You may want to use your moving average tool to see how the current price action in the market relates to the trend that you believe you see forming. To set your moving average indicator, first create the parameters for it to show you 7, 20, and 60 simple moving average periods. This will help you determine if there is a crossover between the shorter time frames and the larger time frames.
When the crossovers occur, you may be viewing the beginning of a trending market and you may want to place a trade in order to get yourself positioned to take advantage of those steep movements that can happen in those markets.
The ADX Indicator is a great way to try to determine if you are looking at a trending or a ranging market. An ADX reading of greater than 25 tends to indicate that the market is trending in one direction or the other. The stronger the trend, the higher the number you will see on your ADX indicator.
If the ADX is reading below 25 you should assume that the market is in a ranging environment and avoid placing any trades that you may place in a trending market.
The Bollinger Bands tool is fantastic in the sense that it will either contract or expand based on the trends of the market. A contracting Bollinger Band would indicate that the market is ranging.
However, when the Bollinger Bands begin to expand, this is typically an indication that the market has begun trending.
For the most part, prices tend to range about 70-80% of the time. Thus, it is very exciting to see Bollinger bands expand and indicate that a ranging market may be coming to an end and in a trending market may be about to begin.
Double Bollinger Bands are comprised of two standard deviations. Most traders that use a Double Bollinger Band strategy tend to think of the market in three areas:
1. Sell area: The zone between the bottom two bands. Downtrends hang out in the sell area.
2. Buy area: The zone between the upper two bands. Uptrends stick to the buy area.
3. Range area: The zone between the two middle bands. Ranging markets are right in the middle range area, where the market is trying to find which direction to go.
The use of all of these tools put together can help you both determine when a trending market appears to be getting started and when you should place your order to take advantage of the newest trends in that market.
As always, you should use a number of these tools in combination with one another in order to determine. When a ranging market has finally come to an end and a trending market has begun.
Disclaimer: All information provided here is intended solely for study purposes related to trading financial markets and does not serve in any way as a specific investment recommendation, business recommendation, investment opportunity, analysis, or similar general recommendation regarding the trading of investment instruments. The content, in its entirety or parts, is the sole opinion of SurgeTrader and is intended for educational purposes only. The historical results and/or track record does not imply that the same progress is replicable and does not guarantee profits or future profitable trading records or any promises whatsoever. Trading in financial markets is a high-risk activity and it is advised not to risk more than one can afford to lose.