Weekly Trading Lesson: What a Trend Change Looks Like
With expectations of a USD trend change rising as we head into the summer of 2008, it might be a good time to look at what this event looks like on a chart.
The USD/CAD trend change of 2007 was a classic example of what the daily chart looks like when the market moves from a strong uptrend to a strong downtrend. First of all, we identify an uptrend as a series of higher highs and higher lows. The first part of the chart is a classic uptrend where the highs and lows look like a staircase moving up. With every pullback down to a support level, buyers were getting into long positions (buying) to ride the trend up for as long as possible. In March, we saw the change where the market moved down through the previous low for the first time and started to print lower highs and lower lows, which is a downtrend. But it is the point where the trend changes that causes confusion and this chart shows what that change looks like. When looking for a trade, the first step is to find the strongest uptrends and look for buying opportunities or to find the strongest downtrends and look for selling opportunities. With experience, you will eventually want to take advantage of these trend changes to enter into a trade with the new trend. This is how professional traders are able to get in early on a trend and ride the trend for a long period time of time, moving their protective stop with the market to protect any gains. This is a daily chart, but short-term traders will look for the same activity on hourly chart to take advantage of the shorter-term trends. The key for short-term traders is to trade in the direction of the daily trend to make sure they are trading with the momentum of the market and not against it.