One of the most well-known proverbs when discussing trading is "Trend is your Friend."
This proverb means that in order to choose the best course of action for a trader, he must constantly examine past price fluctuations in order to analyze the actions of buyers and sellers. Determining whether the market is trending or ranging—that is, whether it is in an upward, downward, or sideways trend—is therefore crucial.
Before we continue, let me clarify that markets are referred to as trending markets when they are trading in an upward or downward trend, and ranging markets when they are trading sideways.
What Is Trending Market?
When prices are going in a single direction, a market is said to be trending (either up or down).
A trending market may see brief retracements or corrections, but when you examine the bigger picture over a longer period of time, the market will be moving in a clear direction.
Depending on your trading style and type (i.e., scalping, intraday trading, swing trading, positional trading, short term trading, long term investment, etc.), you can utilize any time frame, such as daily, weekly, or monthly, to detect a trending market. But always remember that the higher the time frame you use, the better the trend will look.
Types of Trending Market
Upward Trend
When the price of an asset forms a sequence of Higher Highs and Higher Lows, the market is considered to be trending upward.
Downward Trend
Similar to this, when a security's price forms a sequence of Lower Lows and Lower Highs, the market is said to be moving downward.
How to Identify Trending Markets ?
Step 1 : First of all look at market structure
Structure of Higher High and Higher Low
The structure indicates that the market is on an upswing and that buyers are prepared to take advantage of any dip.
Structure of Lower High and Lower Lows
The structure indicates a downward trend and implies that people are prepared to sell at any increase.
To determine if an investment is trading in an uptrend or a downtrend, one alternative method is to create a basic trend line that connects extreme lows to highs or extreme highs to lows.
Step 2 : Next step is to look at the Moving Average to get additional confirmation.
200 Day Moving Average (DMA) -
The 200 DMA is the next thing to look at after the market structure.
A security is considered bullish, or to be in an uptrend, if it is trading above the 200 DMA. Similarly, a security is considered bearish, or to be in a downtrend, if it is trading below the 200 DMA.
Never forget that the sole long trend filtering criterion we are utilizing is 200 DMA.
How to Trade in Trending Market -
When the market is heading upward, purchase at support and sell at resistance.
Sell when the market is heading lower, and buy back when it is at support.
When a market is trending, it is usually advisable to follow the trend rather than trying to go against it, especially if you are new to the market.
Never do this -
In the event of an upward trending market, never sell at resistance and always buy back at support.
Never buy a market that is heading downward and sell it at resistance.
What is the Ranging Market?
When prices settle into a range, the market is said to be ranging. In these types of market conditions, price frequently oscillates between support and resistance levels. Consolidation, congestion phase, range bound, choppy, sideways, or flat market are some other names for it.
Support stops the price from falling further, and resistance stops the price from rising any higher. As a result, the security's price fluctuates in a range-bound phase.
The market's significance stems from the equilibrium and balance between buyers and sellers. The trending market is entirely different from the ranging market.
How to Identify the Ranging Market?
Step 1 : First of all look at the market structure
If support and resistance lines and zones are drawn, it can be observed that the price frequently oscillates between these levels.
Step 2 : Next step is to look at the volume to get additional confirmation.
Examining the volume comes after examining the market structure. When a security's price enters a consolidation period as opposed to an up or down trend, the volume stops.
When a price breaks over resistance or support in a ranging market, it opens the door for an uptrend or downtrend, accordingly.
The market is ranging around 70% of the time. This is because the market may be ranging before a trend reversal occurs, or it may be ranging in between a longer-term primary uptrend or downturn.
How to Trade in Ranging Market -
If the market is fluctuating, there are two types of trades that could occur:
Swing Trading:
You must trade during a consolidation, during which you can purchase an asset at a support level and sell it at a resistance level. and the other way around.
Breakout Trading:
When a security clearly breaks through the resistance or support level, you can buy or sell it.
Avoiding trading in ranging markets
As a trend-following trading technique, the beginner's approach performs best when the market is trending.
This is due to the fact that, if you trade in that direction, your profit targets are more likely to be met while the market is trending.
Therefore, it is advantageous to be able to tell when the market is trending and when it is ranging. By waiting for a price breakout, you may minimize the possibility of losing trades and avoid ranging market situations.
This technique of avoiding specific market conditions—in this case, range markets—to prevent losing transactions is known as filtering. Once a ranging market has been recognized, you might choose to hold off on looking for trades until the price breaks out of that range.
The Bottom Lines
A trending market typically indicates that traders are now more bearish (down trending) or bullish (up trending), which is easily discernible from the chart.
It is crucial for us to understand when the market is trending and when it is ranging as the market will be in a definite trend 30% of the time and range bound 70% of the time.
It's also crucial to remember that, in a ranging market, the range—which can be represented by two parallel lines or zones that stand for support and resistance—is not always set. Additionally, something could be growing or shrinking.