This article explains how to identify market directions using trend analysis and candlestick patterns to make better trading decisions.
When trading in the share market, many investors only focus on predicting where the price will go. However, the most basic of technical analysis is to identify the direction market is moving. This direction is called trend.
Trading without understanding the trend is like guessing. Selling quickly in a rising market thinking that it has gone up too much, or buying in a falling market thinking that it has already dropped a lot can be very risky. This is why there is a famous saying in technical analysis that trend is your friend until it ends.
What is a Trend?
In simple words, trend is the continuous movement of a share price in a certain direction. Mainly, there are three types of trends in the market which are bullish, bearish, and sideways.
In a bullish trend, the price keeps making new highs. Even if the price falls a little, it stops above the previous low. This pattern is known as Higher High (HH) and Higher Low (HL) structure.
Opposite to this, in a bearish trend, the price makes new highs that are lower than before, and new lows that are also lower. This creates a series of Lower High (LH) and Lower Low (LL) on the chart.
On the other hand, if the chart shows a mixture of Higher Highs, Higher Lows, Lower Highs, and Lower Lows, the market is not in a clear direction. This means the market is moving sideways.
How to Identify a Bullish Trend
If the price is continuously making new highs and every correction stops above the previous low, we can understand that there is a bullish structure. For example, if the price makes a high and then corrects, but stops above the old low and goes up to break the old high, the market is making a Higher High and Higher Low structure.
In this situation, traders can look for buying opportunities around the area where the Higher Low is formed. After that, you can use candlestick patterns, chart patterns, fractals, or other price signals to confirm if the market is ready to go up again. In a bullish trend, following the flow of the market is the most important strategy.
What to Look for in a Bearish Trend
In a bearish trend, the price continuously makes Lower Lows and Lower Highs. If the previous Higher Low of a stock is broken and the price starts making new Lower Lows, it is a signal that the old bullish structure is getting weak.
After that, even if the price goes up a little, it stops below the previous high. If it starts falling again, it shows the bearish structure is getting stronger. In such situations, if you are holding a position, you need to think about risk management and exit options. In markets where short selling is allowed, traders also use strategies to catch bearish moves from the Lower High.
Why Sideways Market is Difficult for Making Decisions
In a sideways market, the price does not go clearly up or down. It goes up for some time, then comes down, and keeps moving within a specific range. Since there is no clear bullish or bearish structure, it is hard for a trader to make decisions. However, a sideways market and a non-tradeable chart are not the same thing.
If the price is moving up and down nicely between support and resistance, range-bound trading is possible. But if the price is stuck in a very narrow range for a long time without any big movement, that chart might not be attractive for trading.
What is Range-bound Trading?
In a sideways market, the price usually moves within a fixed range. Here, the lower range is called Support and the upper range is called Resistance. If the price reaches the support area and shows signs of turning back, it can be a buying opportunity. Similarly, looking for selling opportunities when the price reaches the resistance area is called Range-bound Trading.
But trading just because the price reached support or resistance is not a good idea. You must look if there is a real sign of reversal from those levels.
How Breakout Trading is Different
The market does not stay in one range forever. After moving in a range for a long time, the price can break that range either upwards or downwards. If the price breaks the upper resistance and starts going up clearly, it is called an Upside Breakout, where you can look for buying opportunities.
On the opposite side, if the price breaks the lower support and goes down, it is a Downside Breakout. Trading after such a break from the range is called Breakout Trading.
Understanding Trend Changes from Candlesticks
Candlesticks are very important to identify trend changes. A single candle is made of four main prices which are Open, High, Low, and Close (OHLC). The thick middle part of the candle is called the Body. If the difference between Open and Close is big, the body is long, and if they are close, the body is small.
The lines above and below the body are called Upper and Lower Shadows or Wicks. If a candle has an extremely small body, it can form a structure called Doji. A Doji usually shows that neither buyers nor sellers have control, meaning there is indecision in the market. Therefore, we should not quickly assume the market will reverse just because a small candle or Doji appears.
How Heikin Ashi Helps to Understand Trends
Heikin Ashi is another useful candlestick method. While normal candlesticks only use the current price, Heikin Ashi uses averages of the previous period too, which makes the chart look much smoother. This makes it easier for beginner traders to identify trends.
Continuous green Heikin Ashi candles signal a bullish move, while red candles signal a bearish move. However, instead of making trading decisions only based on Heikin Ashi, it is better to combine it with other price signals. Especially when the candles get smaller, it means uncertainty is growing, and it might be better to wait and watch.
Why Time Frame is Important for NEPSE
A trend depends on the time frame you are looking at. A stock can look bearish on a Daily Chart but might have a different structure on a Weekly or Monthly Chart. In technical analysis, market movement is divided into three levels.
The Primary Trend shows the main direction of the market, which is seen on a larger time frame like the Monthly Chart. The Secondary Movement is seen on the Weekly Chart as a reaction inside the primary trend, and this can last from a few weeks to a few months. The Minor Movement is seen on the Daily or smaller charts, which is often called market noise and lasts for only a few days or weeks.
Therefore, just because a stock looks bearish on a Daily Chart does not mean the company is bearish for a long time. However, if all three time frames show the same direction, it gives a very strong trend signal.
What Should a Trader Look First on a Chart?
Instead of looking at a long list of indicators immediately after opening a chart, it is important to understand the basic structure first. The very first question should be whether the chart is tradeable or non-tradeable.
If the chart has enough movement, price is moving up and down in a nice rhythm, and there is a clear structure, then it is tradeable. After that, the next question is to identify the trend. If it is bullish, you can use a Trend Continuation Strategy. If it is sideways, you can use a Range-bound Strategy, and if there is a clear breakout, you can plan for a Breakout Strategy.
Conclusion
One of the biggest mistakes in the share market is ignoring the trend. Trying to buy continuously in a bearish market just because the price has fallen a lot, or trying to sell in a bullish market because it has gone up too much can be dangerous. The market trend is like a river flow. It is easier to swim in the direction of the river, while going against it takes too much struggle.
To start trading, you must first understand if the chart is tradeable, what trend it is in, and what time frame is being used, rather than relying on complex indicators. Patience to wait for the right structure and good risk management are much more important than rushing to make quick profits.
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AI Disclaimer: This article was originally published on https://bajarkochirfar.com. It has been translated with the help of AI. For the best understanding and accurate facts, we recommend reading the original Nepali version.
