The trend is a futures traders friend, you just have to know how to read it. Charting is an invaluable tool that helps traders identify trends. Trends tell you which way the market is headed: up, down or sideways.
Uptrend. An uptrending market is one that is steadily growing. There may be down ticks, but the general trend is upward. To identify an uptrending market, look for higher highs and higher lows. As the market runs up, each high should generally be higher than the previously set high. When the market pulls back, each low should be a bit higher than the previously noted low. When this occurs, we say the market is uptrending. Trading volume usually increases in an uptrending market. Use tight stop losses to protect your profits.
Downtrend. A downtrending market is one that is steadily declining. Up ticks will be short lived as the market generally continues downward. Lower lows and lower highs are indicators of a downtrending market. Each bounce upward will be lower than the previous bounce. Each time the market pulls back, the low will be somewhat lower than the previous low point. These actions typify a downtrending market. Use tight stop losses to reduce your risk of trading against the trend.
Sideways. Also know as a flat market, a sideways market is stuck in a particular trading range. In a flat market, the market is bouncing up and down within a fairly narrow range without creating new highs or setting new lows. Whenever the market hits a previous resistance point it goes down, bouncing back up with it hits a previous support level. In a sideways market you want to hedge your bets to protect your profit. At any moment the market could break up or down. You need to be protected whichever way it goes.
Why is trend important? Knowing what trend the market is in helps you minimize your losses and maximize your profits. Of course, you can make money fighting the trend, but there is more money to be made and less risk going with the overall market trend. You can make money in both uptrends and downtrends. Basically, in an uptrend, you’ll want to go long; in a downtrend, go short. If you have a trade that goes sour, you’ll often find you were trying to fight the overall market trend and lost.
Trend reversals. In futures trading, one of the tricks is learning to pinpoint trend reversals. Watch for a reversing pattern of higher highs and lows or lower highs and lows. If a market rally stops short of the previous high, then dips below the previous low, an uptrending market may be reversing. The first time you see this pattern, a trend reversal is only a possibility. Wait for the next rally. If the same pattern emerges, it’s fairly safe to say that the market has reversed direction — at least temporarily. The more quickly you can learn to identify trend reversals, the more money you can make as a futures trader.
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