How to Evaluate Trends

An ideal trend is a series of consecutive price bars that move in the same direction in every aspect. In an ideal uptrend, every open, close, high, and low is higher than the previous one. In an ideal downtrend, every open, close, high, and low is lower than the previous one.

Especially swing traders need to pay attention to every bar to determine whether the current movement has still enough energy left or whether it will end and reverse soon.

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Evaluating trends

As with any aspect of trading, reality leaves little room for perfection. When you find a trend, there will be a number of stray periods that move in the wrong direction. Sometimes, these periods will be a mere result of insignificant market movements. Sometimes, however, they will be a legitimate indication of a weakening movement.

Your job as a trader is to determine one situation from the other in real-time trading. This job is not easy, and especially new binary options traders often feel nervous when one bar does not fit their prediction, which will cause them to make bad decisions.

To successfully determine whether a trend and a movement are still intact and valid, you need to use your judgment in several ways:

1) Significance

There are significant market movements, and there are market movements that mean nothing. You should have a rule that clearly defines what significance means. As a swing trader, you could get out of any movement, as soon as one period closes a certain percentage higher (in a downtrend) or lower (in an uptrend) than the preceding period.

How far does a single bar have to move for you to stop trusting the movement? Which percentage you choose should depend on your time frame (the shorter the time frame, the smaller the percentage) and your experience with the asset. If you want to automate the process, you can use momentum indicators such as the average true range or Bollinger bands.

As a trend follower, you need a similar rule. If an uptrend creates a high that is lower than the preceding high, do you stop investing, or do you wait for the trend to break the trend line or the previous point 2? Having a clearly defined rule will help you make an easy decision when the situation arises.

2) Majority

In an upwards movement, not every bar will be a perfectly rising bar. Some bars will even be perfect down bars. Still, most bars should be rising bars. As a swing trader you have to define a certain amount of directional valid bars every movement needs to have for you to invest in it.

If the movement has too many outliers, it is probably not a good fit to be traded with your strategy and you should ignore it. Similarly, trends will not always move perfect. They will create new point 3 that have not moved further than the previous point 2, and sometimes they create a new point 2 before creating a new point 3.

As trader you have to be aware of that and define an amount of imperfection you allow every trend to have. As long as the trend moves within these limits, you can still trust it and invest in it. If it has left these limits, it is smarter to look for better trends elsewhere.