I want to show you 3 ways to know how to detect (or not) the end of a trend.
As you can see we have the 1hour EUR/USD chart below. First, we see an uptrend and later we see a similar downtrend. Let’s see how to predict what is going to happen in the 3 orange areas.
3 ways to detect the end of a trend
Area with low volume and without lowest lows
In the first area we see a triangle. The price is doing lowest highs but cannot break the lowest lows. The key to understand the market is to understand people beyond it. If you look to the volume you will notice that is a clearly decreasing volume, that means no one is trying to sell what they have bought in the last uptrend, at least, no one is doing it seriously (with high volume).
Finally, everyone see that no one is going to sell here and start an uptrend again, probably with the help of some news release. We can see that our trend have not finished yet, so we should buy more and use a tight stop loss in this area.
Final wedge with high volume
Now, in the second area we are still in the first uptrend but something is going wrong with the price! If you look the chart closer you will notice that price is creating a wedge. The volatility is decreasing in the market but price is still rising. Now, you can see the volume higher than in the first stop area, that means traders have woke up, and believe me, if they are awake, the market is ready to move faster.
A high volume in a wedge is always a bad signal for the current trend, if you see that you may close your trades and be ready for a breakout. So, we know that the trend is ready to change because traders are working on it (High relative volume).
Old support area and big hangin man
In the last area we see a very common signal of trend ending. We can see an old support area (that’s always a good signal by itself) and we can also see a big hangin man. A hanging man is a candlestick pattern where people sell very fast first and then they re-buy everything even faster! What does it means? Fear. But it means no sense fear, that’s why the price rises again without problems. As you can see the volume is also high for the hangin man.
We will go further in price action analysis, but first we need to detect trends and be confident with our predictions. Have you tried price action before? How do you detect a trend?