Trend Trading Strategy: Trend Confirmation Techniques

Intro

Trending seasons are always present in the crypto market, and learning to confirm trends should be a primary consideration for every trader aiming to succeed in the market. 

Essentially, trending markets mark the path for consequent movements in the price and the formation of the market structure, while riding and influencing the market sentiment.

Luckily, there are several strategies and techniques to identify and most important confirm possible trend momentums, continuations, or reversals. 

In this article, we will disclose those strategies and techniques.

How Does The Trend Strategy Work

The principle supporting the trend strategy affirms that markets tend to move in a particular direction, up or down, for a prolonged period, allowing traders to capitalize on the general trend and middle price movements in favor of the leading direction.

Middle price movements are essential for the chart analysis under the trend strategy viewpoint. During this period, the price could encounter phases like a range, a reversal, or, what is more convenient, a continuation. 

Integrating a trend strategy with other concepts will boost the capabilities to take advantage of various price directions. A trend strategy could make profits from the phases forming the market structure. 

Traders could address scenarios like the following:

• Momentum: When the price starts to move in the upside or the downside direction. Typically, this first move should be substantially strong to confirm a trend is about to start or continue.
• Range: After the price has established a direction and moved in that path for a prolonged time, it generally pauses for an accumulation or distribution phase, characterized by a sideways formation where the price moves in.
• Retracement: Despite how strong or weak a trend could be, it will surely have retracements in the middle. Depending on how far that retracement can go, it could end up in a reversal move, breaking the trendline, or simply in a correction to continue the main path.

Volatility and trends

As mentioned before, middle movements in a trend represent crucial points. If we take the large timeframe charts of Bitcoin as examples, we will note that the principal coin has been trending up since its release. However, the shorter the timeframe, the more notable the price retracements and volatility in the BTC market.

Crypto trends can be affected by short periods of volatility but still preserve the general trend. Assessing volatility and possible price reversals is critical to engaging with a crypto trend successfully, as the analysis of a general trend could be correct, but volatile seasons can prejudice trade positions in the middle term.

Types of Strategies For Crypto Trends

Trends are an overall market move that carries several opportunities as they try to keep going in the established direction. In this section, we will discuss various strategies to use in trends.

• Moving Average Crossovers: Simple moving averages (SMA) and exponential moving averages (EMA) are widely used to detect the trend direction and potential reversal points when crossovers between different moving averages emerge as signals.
• Breakout Trading: When the price moves out of a range through a support or resistance level with increased volume. This can indicate the start of a new trend or the continuation of an existing one, offering a strategic entry point for trend traders.
• Range Trading: Range trading is a sideways strategy, where the price moves within a consistent range, between support and resistance levels. Traders can buy at the bottom of the range and sell at the top.
• Momentum Strategy: Momentum indicates the beginning of a trend following a strong move. Using indicators like the RSI or the Moving Average Convergence Divergence (MACD), traders can gauge the strength of a trend and potential turning points, to determine if a trend is likely to continue or if it’s losing momentum.
• Trend-Following Strategy: Involves entering trades in the direction of the established trend. This strategy states that the current trend will continue and aims to capitalize on this movement.
• Trendlines: Trendlines and chart patterns are tools to visually identify and confirm trends. Drawing trend lines along the highs and lows of price charts helps determine the direction and strength of a trend.
• Chart And Candle Patterns: Formations such as ascending triangles in uptrends or descending triangles in downtrends can indicate potential continuation, and others like head and shoulders indicate a reversal in trends.
• MACD Crossover Strategy: The MACD crossover strategy involves using the MACD indicator to identify potential trend reversals and momentum. A bullish signal is generated when the MACD line crosses above the signal line and a bearish signal when it crosses below.

Techniques For Trend Confirmation

Now that we have explored the types of strategies that can be used to take advantage of trending markets, a prior step to embark on entering trades should be confirming the existing trend.

To confirm trends, traders may use technical indicators alongside price action and chart patterns in a combined approach applying the following techniques.

Volume and Price Action Analysis

The volume analysis can be split into two focuses: increasing and decreasing.

The price action in a trend followed by increasing volume will add weight to the confirmation of the movement. 

Otherwise, a decreasing volume can be a signal of a weakening move.

The price action can be a bounce from a support level, a rejection from resistance, or a candlestick pattern formation.

Technical Confluences

An advanced approach to confirming trends can be spotting confluence across multiple technical analysis concepts. This involves combining various technical tools.

For example:

1. In a downtrend, traders can use RSI to measure the strength of the trend.
2. While moving averages are crossing in favor of the trend after a retracement in the price action.
3. At the same time, volume could increase, and like an engulfing bearish pattern emerges straight from the trendline.

This scenario can be taken as a perfect signal for the continuation of the downtrend.

Uptrend in BTC while MACD crosses twice. 1H chart

Conclusion

Trending markets let traders engage in different scenarios to detect trade opportunities. 

The trend trading strategy can serve as a framework for the integration of further concepts and technical analysis tools to confirm those emerging opportunities.

In Altrady you can start trading trending markets, applying the strategies discussed here. Enroll in a free trial by signing up for live or paper trading.