Why Knowing The Direction Is Important

Trading with the trend is trading with the flow. When the prevailing trend is up, why would you want to look for short entries when buying might result in much smoother trades? Many amateur traders, even when facing a long lasting trend that has been going on for months, can’t stop looking for signs that the trend is over, whereas they could have made so much money by simply joining the trend.
Even more important, trading with the trend is independent from your overall trading strategy. Identifying the overall market direction and only trading in that direction can serve as a first filter for your trading strategy.

What Are You Looking For?

Before we start going over how to identify the trend, we should be clear about what we are looking for. Markets can do one of three things: go up, go down, or move sideways.

The picture above shows you the three possible scenarios, but knowing what has happened after the fact is always the easy part. The hard part is finding out what is currently happening when markets are moving in real time and the space on the right is empty – that’s where this article comes in. In what follows we show you 5 ways how you can identify the prevailing trend and the direction. To be clear, the article is not meant to show you how to identify trading entries, but to understand price and trends in a more efficient way.

1. The Simple Way: Line Graph

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