Analyzing a Change of Trend
Student’s Question:I am looking at a lot of Daily charts and getting confused. How can you tell the trend on a chart when they appear to be transitioning?Instructor’s Response:Good question…I have posted two historical Daily charts of the NZDJPY below…each shows a different technique. Feel free to combine them or use them independently of one another.The first chart has a 200 period Moving Average placed on it…the green line. As a general rule, if price action is below the 200 MA the pair is considered to be in a downtrend and if price action is above the 200 MA the pair is considered to be in an uptrend.The above being said, let’s expand a bit. If the pair is trading below the 200 MABUTis moving closer and closer to 200 MA, building higher highs and higher lows in the process, the downtrend is weakening and the pair is coming closer to being in an uptrend. If price action is above the 200 MA but is building lower highs and lower lows and is closing in on the 200 MA from above, the uptrend is weakening and is moving closer and closer to being in a downtrend…it truly is a matter of degrees.The second chart quite graphically depicts a trend change by showing a downtrend turning into an uptrend. Continual lower lows and lower highs represent a downtrend while higher highs and higher lows exemplify an uptrend. As you can see, while they are transitioning one into the other, you are correct, it can be a challenging call to make. In my opinion, it is better to wait and allow more of the transition to take place thereby providing greater confirmation. I would rather be late into the trade and be right as opposed to being early into the trade and be wrong.
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