Technical Analysis - Identifying Trend in Market

Thank you guys for an overwhelming response on our first post on Charting, Tools and Setup. If you haven't read the blog yet, then I would suggest to skim through it once.

Before starting with next blog on Identifying Trends let's summarize and revise what we have read in the first blog.

We discussed various charting platforms like TradingView, Investing.com, Chartink and broker charting terminal. We also looked at how to search for the stocks or indices in those terminals. Then we discussed various types of charts like Heiken Ashi, Line Chart, Candlestick, Bar Charts. Lastly, we discussed chart setup and various tools that are available on TradingView platform and in this series we will use those tools extensively.

Now topic from here on will be quite subjective and I will try my best in sharing my experience and learning. The primary purpose of these series to build technical analysis foundation among readers. I am open to any questions or constructive criticism because after all I am also a learner in this market and would like to learn and upgrade myself with the wisdom that all the readers have.

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Let's begin now with the main agenda;

We will mainly focus on candlestick charts, as it is widely used by traders. But the definition and concept will remain same for other type of charts too.

There are 3 types of trend in Technical Analysis:

• Bullish or Uptrend:

In this the price of the underlying moves up on any time frame if you look. Generally price doesn't move up in a single line; there is formation of higher highs and higher lows (HHHL) in uptrend like in the image shared below.

In uptrend, it is seen that higher low is formed and then previous high is broken. It was a theoretical explanation. Let's see live chart of Nifty when it was in uptrend.

H1, H2 till H6 are higher highs, whereas L1, L2 till L7 are higher lows.

• Bearish or Downtrend:

In this, the price of the underlying moves down on any time frame if you look. Generally price doesn't move down in a single line; there is formation of lower highs and lower lows (LHLL) in downtrend like in the image shared below.

In downtrend it is seen that lower highs are formed and then previous low is broken. It was a theoretical explanation. Let's see live chart of Nifty when it was in downtrend.

H1, H2 till H5 are lower highs, whereas L1, L2 till L4 are lower lows.

• Consolidation or Range Bound Market:

In this price of the underlying moves in a range. Upper level is called resistance, where price reverses and comes down. Lower level is called support where price reverses and goes up.

Consolidation pattern is shown in the image below.

Let's see live chart of Nifty when it was in consolidation.

Consolidation is a calm phase of the market and after these phase there can be a move on either side. Traders wait for breaking of resistance or support and then initiate their trades with proper plan.

There are few other ways to identify whether the market is consolidating or not and those are:

1. Squeezing of Bollinger Bands

2. Different duration moving average coming together

Don't worry about these indicators right now, I will explain all these indicators and strategies in later part of these series.

One tip for the readers who are active in Indian Equity Market: So its observe that downtrend move is more painful, but it doesn't last long. Downtrend ends quickly compared to the Uptrend. In short it means, "Bulls climb the Ladder and Bears jump from Window."

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How to take basic trade after identifying these trends?

If you are a beginner with limited capital, then look for buy side opportunities by looking at higher highs and higher lows formation. Always confirm your trend by looking at one time frame higher charts and see whether it is in same trend or not. If it is then it would be a double confirmation for your analysis and it will give you more conviction to initiate the trade.

For example: If you are looking for an uptrend (HHHL) formation on daily time frame chart then always look for same uptrend formation (HHHL) formation on weekly time frame. Reason for this if higher time frame chart is bullish, then lower time frame chart will show bullishness. Suppose you are long in any stock after getting confirmation of the uptrend in lower and higher time frame and if in lower time frame it is forming lower low then exit immediately. Don't wait for higher time frame to form downtrend pattern because it would be very late by then.

This I have explained for traders who will do buy side trade only, even short sellers can follow same methodology. If any reader still didn't understand any part for the buyer or seller side, then mention it in the comment section or you all can ping me directly. I would be more than happy to solve your queries regarding this.

Preference and order of time frame of charts:

Quarterly > Monthly > Weekly > Daily > Hourly > 30 mins > 15 mins > 5 mins > 1 min

If you are looking at weekly chart and get confirmation from monthly chart and for 5 mins time frame get confirmation from 15 mins. If higher time frame chart is not confirming similar formation, then avoid that trade as it is more risky and look for other opportunities in market.

Let's see on live chart and trade:

On weekly chart we got higher high formation and confirmation on 1st June. Then we will check on lower time frame what's happening.

On lower time frame i.e. daily time frame higher high started forming in April 2020 but on weekly chart we didn't get confirmation. Then we got another higher high formation in June 2020 which coincided with weekly time frame. So the pattern and trend formation would coincide on different time frame. It will help you build conviction and hold on to trades. Mostly it will help you in skipping few trades that are in fake trend on your time frame chart.

Now let's see the exit in buy position

On same daily time frame, we will look for lower low formation and then we will exit. Again in same chart we got lower low formation on 24th Sept when Nifty was at 11150. So we bought at 9980 and sold at 11150; returns of 12% in this trade.

Other way to identify trend is by using technical indicators like Moving Average, Relative Strength Index (RSI), Bollinger Band. These we will learn in subsequent blogs.

This is all about identifying trends by looking at chart, things would seem easy now but believe me it is more difficult while analyzing charts. Mostly traders are stuck in stocks that are having the opposite trend. Like they are on buy side of the stocks although trend is down or they sell their stocks even if trend is up. They don't cut their losses early and don't ride their profit to the fullest. Only practice will help you increase your observational skills and it will help you in the long run. As of now look for daily charts and above for practice as it will contain less whipsaw or volatile move.

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This would be slightly concept intensive blog and most of the readers won't understand it in one go. I took 2 years in understanding this thing after starting my trading journey in equity market so it might take time for some of our friends as well. Please read it again and ask your doubts by reaching out at: Twitter, Whatsapp and LinkedIn. Also, you can post your queries in the comment section of this blog.

If there is something that I can improve upon, then please suggest that too so that I can create true value in this Technical Analysis Series.

Thanks for using your precious time in reading this blog. Like, Share with others too if we can create value for others too who are new in Equity Market and want to learn.