How to Identify Market Direction & Analyze the Strength of the Trend using Technical Analysis.

Knowing the trend/direction of the stock market is very important, this Trend of the stock/sector/market can be analyzed using technical analysis.

As the famous saying in the stock market – “Make trend your friend”, It is very important to identify the trending markets/stocks etc.

Learning to spot trends is an important skill every trader must develop.

If you are betting in the direction of the trend, the chance of making profits is very high. But if your betting against the trend the dream of making big money is short lived.

There are three steps to be followed in setting up the charts

Step 1: Price is visualized by using Heiken Ashi candles

Price is the first thing a trader must see, as the “Price is the KING”.

To visualize the trend more clearly we will use Heiken-Ashi candlesticks, Heiken-Ashi candles determine the trend very clearly and it is very easy to visualize.

The Heikin-Ashi technique is useful for making candlestick charts more readable and trends easier to analyze

Step 2: Moving Averages to analyze the direction of the trend

We will be using four moving average to find out the direction of the trend.

I prefer to use Fibonacci numbers for moving the average line.

The four Moving average (MA) lines used for analysis are,

13 day MA for current trend
34 day MA for short-term trend
89 day MA for medium-term trend
233 day MA for long-term trend

For uptrend:

All the moving averages must be pointing 45 degrees or 1 o’clock (upwards direction)

For downtrend:

All the moving averages must be pointing –45 degrees or 4 o’clock(downwards direction)

Now we have understood how to analyze the direction of the trend but knowing the strength of the trend is also important.

Using Moving Average to identify trend
Using Moving Average to identify trend

Step 3: ADX indicator for analyzing the strength of the trend

To analyze the strength we use Average directional indicator (ADX) indicator.

If the strength of the trend is strong, we can expect a strong up move or down move.

ADX is a single line with values ranging from a 0 to 100. ADX is non-directional; it only registers the strength of the trend: i.e. whether the price is trending up or down.

If ADX value is above 25 it indicates there is a trend, as the ADX value increases it indicates the increase in strength of the trend.

ADX indicator to identify the strength
ADX Value and Its Strength

Many get confused seeing the ADX line fall and assume that the trend is reversing, but it’s not so: it just indicates the trend is weakening and it may enter accumulation or distribution phase.

With the knowledge of Price, Moving Average ( MA ), and Average Directional Index ( ADX ) you are well equipped to identify the trend and make money from this trading strategy.

Let us see some examples of how to identify the trend:

Bullish trend in Adani Entertainment visualized using Heiken Ashi, Moving average and ADX

Here

  • Hiken Ashi has more number of Green Candles indicating uptrend
  • Price is above all moving average and the moving averages are in 45 degree angle
  • ADX is above 25 indicating Strong Trend

Enter when Heiken Ashi completes the retracement. i.e When red candle turns to green.

You can use Stochastic Indicator to identify the retracement.

Bearish trend in INDIAN BANK visualized using Heiken Ashi, Moving average and ADX

Here,

  • Hiken Ashi has more number of Red Candles indicating uptrend
  • Price is below all moving average and the moving averages are in 45 degree angle
  • ADX is above 25 indicating Strong Trend

Watch this video which explains how to trade this strategy.

Conclusion:

ADX, Heiken Ashi and Moving Averages can also be used in the same way for positional trading as well, and you can use ATR indicator for setting stop loss.

If this strategy was helpful to you and if you have learn’t something new – Spread the word! 🙂

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