If you get the direction right, you've already won half the battle in investing.
Hello everyone, I am an old hand focusing on market analysis. Today, I want to share with you a few core methods I use to judge trends. In a highly volatile market, being able to quickly identify the trend direction is equivalent to seizing the initiative. The trend is your friend; this saying never goes out of style.
In my opinion, judging the trend does not require too many fancy indicators; it's enough to use a few basic tools well and precisely. Below, I will share my three most relied-upon methods for trend judgment based on my practical experience.
1. Moving Average System: My directional compass
Moving averages are my 'entry-level tool' for observing trends, and they are essential for me to check daily on the market software. Simply put, moving averages are curves formed by connecting the average prices over a certain period. They act like the market's average cost line, helping us filter out unnecessary noise and see the true direction.
I usually look at three moving averages: the 5-day moving average (short-term direction), the 20-day moving average (medium-term direction), and the 60-day moving average (long-term direction). Their arrangement and the price position make the trend clear at a glance.
An uptrend (bullish arrangement) is characterized by: the 5-day moving average being above the 20-day moving average, the 20-day moving average above the 60-day moving average, and the price steadily above the 5-day moving average. This 'high above and low below' arrangement indicates that short-term investors are willing to buy at higher prices, and the market is firmly controlled by the bulls.
For example, when the price retraces to near the 20-day moving average and stops falling, this moving average acts as a support. This is often a sign of a healthy trend.
In a downtrend (bearish arrangement), it’s the opposite: the 5-day moving average is below the 20-day moving average, and the 20-day moving average is below the 60-day moving average, with the price being suppressed below the 5-day moving average. This arrangement indicates that the bearish forces are strong, and every rebound to the moving average may encounter resistance and fall back.
A choppy trend (moving averages entangled) is the easiest for beginners to lose money—several moving averages intertwine, with prices oscillating up and down without a clear direction. This indicates that the forces of bulls and bears are temporarily balanced, and the market is waiting for a new catalyst. In such cases, I usually choose to stand by and wait for the market to make a directional choice.
Practical insights: Don't be greedy; beginners should first become proficient with these three moving averages. The significance of moving averages varies under different cycles: for short-term trading, refer to the 4-hour or 1-hour charts, while for swing trading, observe the daily charts. The shorter the cycle, the more sensitive the signals but also more false signals; the longer the cycle, the more stable and reliable the trend.
2. Trading Volume: The 'cash register' of trends.
I often tell my friends: 'Trends have to be built with real money.' Trading volume is the 'cash register' that verifies the authenticity of trends. Even if the moving average patterns look perfect, I will remain skeptical of the trend if there is no accompanying volume.
An increase in price accompanied by an increase in volume indicates a healthy trend. When prices rise, the trading volume should also expand accordingly. This indicates that a large amount of capital is entering the market to drive prices up, reflecting the trend's authenticity. If the price rises while the trading volume shrinks, such an increase is often difficult to sustain and may just be a 'trap for the bulls.'
A decrease in price with shrinking volume may signal a turning point. In a downtrend, if trading volume gradually shrinks, it indicates that selling pressure is decreasing, and the trend may be nearing its end. However, it is important to note that if there is a surge in volume during the initial phase of the decline, it signifies panic selling, and the downtrend may accelerate.
Breakthroughs must come with volume. When the price breaks through an important resistance level or consolidation range, the trading volume must significantly increase to be credible. Such 'volume explosions' are important signals for the start of a trend; without accompanying volume for a breakthrough, I usually remain cautious.
3. Support and Resistance: The 'brake and accelerator' of trends.
Support and resistance are key reference points for judging whether a trend can continue. The support level is a potential stopping point during a decline, while the resistance level is where potential obstacles may arise during an increase.
In an uptrend, I focus on whether the support level can hold effectively. For example, when the price retraces to previous lows, important moving averages (such as the 20-day or 60-day moving average), or near gaps, if it can gain support and rebound, the uptrend may continue; once the important support is effectively broken, it may signal a trend reversal.
In a downtrend, it is necessary to observe whether the resistance level can be broken. When the price rebounds to previous highs, important moving averages, or near gaps, if it is repeatedly blocked and falls back, it indicates that the downtrend is still continuing; only when the key resistance level is effectively broken can it possibly mean that the trend is about to change.
The roles of support and resistance can interchange. Once an important resistance level is effectively broken, it often turns into a new support level; conversely, when an important support level is broken, it can also turn into a future resistance level. Understanding this transition can help us better predict the areas where prices may encounter resistance and support in the future.
For me, the most straightforward way to judge support and resistance is to look at the previous highs and lows, as well as the dense trading area formed by the accumulation of trading volume. These positions usually represent important psychological barriers in the market and are battlegrounds for both bulls and bears.
The last few words are sincere.
After determining the trend, don’t rush to deploy all your funds. My personal habit is to wait for a 'confirmation signal.' For example, when judging an upward trend, I won’t impulsively chase the price right after it breaks through, but rather patiently wait for the price to retrace near the support level before gradually entering.
There is always uncertainty in the market, and making incorrect judgments is part of trading. If you find that your judgment does not align with market movements (for instance, thinking it’s an uptrend but it breaks a key support level), decisively cutting losses is much more important than clinging to a lucky mindset.
Discipline is the lifeline of trend trading. For small funds, protecting the principal is always the first priority.
I hope these insights are helpful to everyone. The market is always changing, but some core principles remain timeless. Grasping the trend direction means you’ve already succeeded halfway on your investment journey.
How do you judge the market trend? Feel free to share your thoughts and experiences in the comments section! Follow Xiang Ge to learn more first-hand information and knowledge about the cryptocurrency circle, precise points, and become your navigation in the crypto space; learning is your greatest wealth!
