Identify Trending and Ranging Price Action
Most people, even non traders, can quite accurately distinguish trending and ranging price action after the fact by just glancing at a chart. If the market was going up or down, it was trending. If it was going sideways, it was trending.
But how do you determine when a trend is beginning and when it is coming to an end? Likewise for a ranging market? These are important questions. A reliable method will enable you to optimize your entries and exits, and by extension, your profits.
At Currency Ninjas, we use a straightforward approach that based purely on price action. But before we get ahead of ourselves, let’s define trending and ranging price action with greater precision.
- A bullish trend is a series of successive higher highs and higher lows.
- A bearish trend is a series of successive lower highs and lower lows.
- In a ranging market, price is neither making a series of higher highs and higher lows nor a series of lower highs and lower lows.
Valid highs and lows
Not every swing high and swing low on a chart is significant enough to be useful in identifying trending and ranging markets. A simple, conservative filter is to use the following five-candle definition:
- A valid high must be preceded by two lower highs (LH) and followed by two lower highs (LH).
- A valid low must be preceded by two higher lows (HL) and followed by two higher lows (HL).
In your trading, you may use discretion at times and not require two candles before and after the swing high candle. Or you may use a different method entirely to determine trend. That’s fine – as long as you have confirmed the probabilities of your approach through backtesting.
Trending Price Action
- The start of an uptrend is indicated when the market makes a higher low and then price rises above the previous swing high.
- The start of a downtrend is indicated when the market makes a lower high and then price falls below the previous swing low.
- The end of an uptrend is indicated when the market makes a lower high and then price falls below above the previous swing low.
- The end of a downtrend is indicated when the market makes a higher low and then price rises above the previous swing high.
At the end of a trend, the market either can reverse immediately and begin trending in the opposite direction, or it can shift into a period of ranging price action or consolidation. As stated earlier, a range is characterized by “price neither making a series of higher highs and higher lows nor a series of lower highs and lower lows.”
In other words, price becomes trapped between a swing high and swing low, unable, for the time being, to break out higher or lower.
As price begins trading sideways in this manner, you may suspect you have entered a ranging market phase. Confirmation of a ranging market occurs when price starts forming a series of smaller-sized swing highs and swing lows within the larger, established swing high and swing low pattern.
Believe us, learning to detect trends and ranges earlier in their development by reading the price action will do wonders for your trading. You won’t master the technique overnight. But it’s all there in the charts.
Good luck in your trading!
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