Trending markets are ones that go in one primary direction for a sustained period of time.
Here are the signals for an up trending market:
- The chart makes higher highs and higher lows.
- Price is trending above the moving average of the time frame being analyzed.
- Price is near all-time highs or 52-week highs.
- The candlesticks on the chart are bullish, primarily white or green.
- Ascending trendlines can connect unbroken higher highs and higher lows.
- Moving averages are ascending higher.
- Volume increases as the chart moves higher.
Here are the signals for a down trending market:
- The chart makes lower highs and lower lows.
- Price is trending below the moving average of the time frame being analyzed.
- Price is near all-time lows or 52-week lows.
- The candlesticks on the chart are bearish, primarily red or black.
- Descending trendlines can connect unbroken lower highs and lower lows.
- Moving averages are descending lower.
- Volume increases as the chart moves lower.
All markets go through repeating cycles of being range bound, volatile, through downtrends and through uptrends.
A trader should focus on the signals for the trend in the timeframe they are trading in. A swing trader should be very interested in the 10-day moving average while a long-term trend follower can watch the 200-day moving average.
“The answer to the question, “What’s the trend?” is the question, “What’s your timeframe?” – Richard Weissman
What markets should be backtested for trend trading signals?
- Stock indexes: S&P 500, NASDAQ 100, DJIA, Russell 2000, etc.
- Liquid stocks: Big caps, small caps, growth stocks, value stocks, etc.
- Interest Rates
- Currencies and forex
- Metals: Gold, silver, copper, etc
- Energy: Oil, Natural Gas, etc.
- Agricultural: Wheat, Corn, Soybeans, etc.
- Softs: Coffee, Sugar, Cotton, etc.
What should trend followers trade?
- Exchange traded funds (ETF)
- Futures contracts
- Option contracts
- Liquid Cryptocurrencies: BTC, ETH, ADA, DOGE, etc
- Mutual Funds
Chart courtesy of TrendSpider.com