Type of Market Trends

A mistake many traders make is thinking all trends are the same.

Nope.

Here’s why…

Some trends have a shallow pullback, some make a deep pullback, and some goes “crazy” in a parabolic manner. And if you ask me, we can classify trends into 1 of 3 categories…

- Strong trend

- Healthy trend

- Weak trend

Let me explain…

Strong Trend:

In a strong trend, the price remains above the 20 periods Moving Average (MA). The pullbacks are shallow and seldom retrace beyond the 20MA. In such a market condition, it’s difficult to enter on a pullback because it “ends” quickly and before you know it, the price has reversed higher.

Instead, an easier approach is to trade the break out of swing highs.

Next…

Healthy Trend:

In a healthy trend, the price remains above the 50MA. The pullbacks are obvious and usually retrace towards the 50MA.  In such a market condition, it’s possible to trade the pullback as there’s enough time to time your entry as the price retrace towards the 50MA. And often, the 50MA is at previous Resistance turned Support which makes a high probability reversal area.

And lastly…

Weak Trend:

In a weak trend, the price remains above the 200MA. The pullbacks are deep and seldom retrace beyond the 200MA. In such a market condition, you don’t want to “chase” breakouts because it tends to fail. Instead, wait for the price to return to the 200MA or an area of Support to time your entry.

One last thing…

Don’t “chase” the market if the price is far away from the “respected” Moving Average because there’s a good chance it’ll snap back.

A smarter approach is to sit on your hands and let the price come to you.

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Disclaimer: The contents produced here are purely for educational purpose. They should not be construed as buy/sell recommendations. I am not a SEBI registered Analyst or Investment Advisor. Readers are advised to consult their Investment advisor before taking any decisions based on the above write-up.