48: How to tell a Trending Market vs a Consolidating Market
So yesterday I got a rather funny email from someone asking me how to tell the difference between a consolidating market and a trending market. The question itself wasn’t funny, but the email in whole was actually very amusing.
Now one of the very first subjects I teach most new students of mine when it comes to analysis is actually how to tell a consolidating market from a trending market. I usually cover this either within the structural analysis section of our training, or in a completely separate section all together.
This is an incredibly important aspect of trading that I see people get wrong all the time. I see trader after trader, trade the markets thinking that they are in a trend when in reality, they are in some sort of sideways market. They wonder why they are loosing money in a trending market, while using a trend following system just to come to the realization later that they were not actually in a trend in the first place.
But why is it so difficult for people to see that. I think one of the major reasons it is difficult for some is based off of the timeframe they are trading off of. Every broker under the sun and 90% of the so called “gurus” out there talk about scalping and trading timeframes like the 5 minute and 1 minute.
The problem is that you can’t know if you are trending or in consolidation within those short timeframes. It may look like you are in trend for those timeframes, but in reality you back out to a 15-minute timeframe for 1-hour, or daily and come to find out you are actually moving sideways.
So let’s do an example here. you are trading off of the 5 minute timeframe with your entry actually off the 1 minute. You are in a downtrend on those timeframes so you place a trade to go short. Not two seconds afterwards the market rallies right through your stop.
Why? What happened? Well there was a strong daily support level right at the area you placed to go short. And you didn’t know because you were down on those short timeframe levels only.
Now I am not saying not to trade on those timeframes. Although, I can in no good conscience actually recommend to trade those short timeframes. I have yet to meet a single person, ever, that has made a substantial living from scalping.
But what I am saying is that if you are going to trade those timeframes to look on the higher levels for support and resistance levels that could affect your trade.
So the first recommendation to help you distinguish a trend from consolidation is to look at the higher timeframes.
The second recommendation is to look at price action.
Really I guess this should be number one. But darn it, I’m different and I changed it up. HA!
So essentially what you are looking for is when you believe their is an uptrend, to look for higher highs and higher lows. And when in a downtrend you are looking for lower highs and lower lows.
Now a big question I often get is how to know when the trend could potentially be over. Well, if you are in a bullish trend, look for at least one, preferably two, occurrences back to back of lower highs and lower lows. And the opposite in a bearish trend. This will immediately tell you if the market direction is changing.
The third way is moving averages.
Now I’m not saying here to use the moving averages as some sort of entry signal or exit signal in order to get into the market. Just as a guide to show you if the market is trending or not.
If the market is in trend, the moving averages will be moving side by side in that direction. If not, the moving averages will be moving horizontally.
This is a great way to visually see if the market is trending or not.
Now I will say this, everything needs to be used in combination with everything else. Especially if you are using moving averages. You can not rely on the moving averages alone to determine trend.
So that’s the basics of how I identify if the market is truly trending or not or in some state of consolidation. If you are interested in learning a lot more about the subject and every other subject within Forex trading, go right now to SuperChargeYourTrading.com and sign up for our next Ultimate Forex Trading Master Class Online Coaching Course.
I will personally be your coach for 8-weeks and take you by the hand through every aspect of trading and how I find some of the best trades that most people wish they could find. You can ask whatever question you want, have access to our 24-hour chatroom. Take part in our Daily Live Trading Room and even get some really awesome extras, ON TOP OF the already amazing material you are going to be learning.
So again, that website is SuperchargeYourTrading.com. Go there right now and check it out.
So until next time, I encourage you, to take everything you do in trading, to the next level.
Good Luck & Happy Trading
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