Another less popular method of identifying the trend is through the use of the pivot point.  A pivot point is a level that is considered to be of importance and is used by many technical traders.  A pivot point is calculated as an average of the high, low, close from the previous timeframe of the market.  If price is trading above the pivot point, it is considered bullish, whereas below is considered bearish.

An example of a bullish market can be seen below.

With price above the pivot point, the market is considered bullish.  During these times a trader would be looking to buy or go long.  It should also be clear in the above image of how precise and exact the pivot point was in offering an area of support which resulted in price bouncing and continuing up.  The below example shows an example of a bearish market.

Once again, with price below the pivot point a trader should only be looking to short or sell into the market.  The above image shows price reacting in a similar way each time it approach the pivot point.  First it offered support until price broke through then it offered resistance.

The use of the pivot point for trend identification isn’t as powerful as other methods like price action.  Like any method or tools, this method of trend identification has it’s weaknesses.

The above image shows price moving up and down through the pivot point all within the same time frame.  For this reason it is strongly advised that other confirming factors be used in conjunction with the pivot point.  This may include price action or trading indicators.

The relative strength indicator (RSI) is a momentum based indicator.  However, this indicator can still be used to identify the trend of any market by using the middle 50 line.

RSI can be used to identify the trend of a market by it’s relation to the middle 50 line.  When the RSI is above the middle line the trend can be considered up.  When RSI is below the 50 line the trend can be considered down.

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The image above shows the RSI indicator plotted on the EUR/USD.  As RSI crossed over the 50 line, there is a clear up trend visible on the chart.  While the RSI remains above this 50 line, the trend can be considered up and you would ideally be looking to go long.

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The image above shows a clear down trend in the market, again for the EUR/USD.  During this time, RSI remained below the 50 line.  With RSI below 50, the trend is considered down and this down trend was confirmed with price moving sharply down.

While RSI can be used to identify the trend, it would be strongly advised to use caution and confirm the trend using a variety of other tools such as price action.

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You may notice that the position of RSI in relation to the 50 line does not always confirm a clear trend, or that price may be moving in the opposite direction.  This can be seen in the above image and is the reason why other factors should be used to help identify the trend.

To help and avoid some of the false trend signals generated by RSI, it is recommend that it be used on the 4 hour and higher timeframes only.  The trends in these timeframes are much stronger and you will be able to reduce the amount of false signals.

If trading with indicators isn’t something you like, then the other most commonly used way of identifying a trend is through price action.  The use of price action is one of the oldest and considered by many the most reliable method of identifying trends in any market.

During an uptrend, price will make higher highs and lower lows.  During a downtrend, price will make lower lows and lower highs.  An ideal up trend would look like the following.

It is clear that price is in an up trend.  Each new high is followed by a higher low.  The previous high is then broken by a new higher high.  Likewise, a higher low is made and then price continues on upwards.

Ideal down trends appear as the above image.  As the market moves down, lower lows are made.  Each lower low is followed by a lower high.  The previous low is then broken by a lower low and another lower high.  This continues as the market moves down.

The problem, however, is that markets rarely form as the above two images and up trends and down trends often may not appear smooth as the examples above.  A more realistic up trend may appear as the following:

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The above image shows a more realistic up trend on the EUR/USD.  This up trend could be in any market and this price action is very common.  While not as clear as the previous ideal up trend image, it is clear that price is moving upwards.  However, the main difference is that the higher highs and higher lows are not as obvious.  With a little time you can, however, spot that price has made higher highs, retraced, formed higher lows and then continued on upwards.  Here is a real world example of a down trend.

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Much like the real world up trend example, the down trend varies somewhat from the ideal down trend image.  It is obvious that price is in a down trend and has moved down through the market.  However, once again, the lower lows and lower highs that price made as it moved down are not as clear.  Regardless, you can still see that price has made lower lows, rallied to form a lower high before continuing down.

While using price action to identify the trend is one of the most accurate methods, there are a few problems.  Sometimes price will not move in any clear direction.  A classic example of this is as follows:

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It is clear that in the image above, price is moving more sideways over time than it is trending in any one direction.  Using price action to identify trends is more difficult than using indicators.  However, with enough screen time and patience you will find that price action is much more accurate and reliable for trend identification.

If you are just starting out using price action to identify the trend, be patient.  The more time you spend watching charts the more natural it will be for you to spot the true trend in the market.  Also, avoid using lower time frames to identify the trend.  It is recommended that you apply price action to the  4 hour and higher charts only.

Indicators are used to identify trends in all markets and are an extremely popular way, especially for beginners, to identify trends.  Two common indicators used to identify trends are:

• Moving Averages – The most common moving averages used to identify trends are the 150 day and 200 day simple moving average.
• Relative Strength Indicator – The Relative Strength Indicator is a momentum indicator and is a popular indicator used to identify trends.

Regardless of which trend indicator you use to identify the trend, trend identification is a core component of swing trading and is a crucial step that must be completed before placing any trade.

The stochastics indicator is similar to the relative strength indicator in that it measures the momentum of the market and can warn as to when a market is perceived to be overbought or oversold.  Any reading above 80 is considered overbought and below 20 is considered oversold.

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Swing traders use the stochatic indicator to buy when the indicator is showing that the market is oversold and sell when the indicator is showing that the market is overbought.  This follows the idea that price moves in waves, and a trader should wait for a pullback (entering overbought/oversold) before entering a trade.

In addition to warning of possible overbought and oversold areas, the stochastics indicator can be used to monitor the momentum of a market.  If price continues to climb higher, but the stochastic indicator fails to make higher highs, it may be a warning that the market is running out of momentum and is preparing to undergo a pullback or retracement.

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The screenshot above shows price climbing higher making new highs.  However, the stochastics indicator is making lower highs.  This is a clear sign that the market may be running out of momentum and preparing to pullback or retrace.

Stochastics, like any indicator, is not perfect.  One should never enter a trade blindly using the stochastic indicator.  Instead, any signals given by the stochastic should be confirmed with either price action or support and resistance levels.

Relative Strength Index, or RSI, is a favourite amongst many bank traders.  It is a momentum indicator that helps identify the trend and potential overbought and oversold areas in the market.  The indicator’s scale ranges from 0 to 100.  Usually, readings below 30 indicate oversold and readings above 70 indicate overbought.

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When the indicator is showing the market as overbought or oversold, a top or bottom may be forming.  It is during these times that traders typically look to enter trades, close any open trades or tighten their stop losses.

The middle 50 line of the RSI is also used to identify a potential trend.

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During times of an uptrend, it is preferred that the indicator should be above the middle 50 line.  For downtrends, it is ideal that the indicator be below the 50 line.

Much like the stochastics indicator, RSI is also a momentum indicator and may warn of potential turning points in the market when momentum begins to drop.

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In the above example, price is in a clear down trend making lower lows.  However, RSI is making higher lows and shows a clear divergence with price.  This is a common sign of a loss of momentum in the market and may warn of a potential turning point before the market pulls back.

RSI, like any indicator is not perfect.  One should never enter a trade blindly using RSI.  Instead, any signals given by RSI should be confirmed with either price action or support and resistance levels.

Simple moving averages are perhaps one of the oldest and most widely used swing trading indicators.  Many traders use simple moving averages for trend identification.  The most common for swing trading are the 150 and 200 simple moving average on the daily chart to identify the long term trend.  There are other kinds of moving averages, such as EMA, but they are rarely used by banks and large players.

Moving averages are typically used for two purposes:

• Trend identification.
• Support & Resistance areas.

The 150 and 200 day simple moving average are typically used to identify the major trend.  When price is above the 150/200SMA, the trend is up.  When price is below, the trend is down.

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It may be hard to believe, but that is how many professional traders identify the major trend in many markets.  When price is above the simple moving average, they are looking only to buy or go long.  When price is below, they are only ever looking to sell or go short.

In addition to trend identification, simple moving averages are used by many traders as possible areas of support and resistance.  Swing traders use price bouncing off of the moving averages as part of their entry criteria.

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The above chart shows price clearly bouncing off of the 150 SMA and continuing on with the trend.  Similar entry conditions would be used when the market was in a down trend and traders were looking to sell or go short.

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The above image shows how the 150 SMA can be used to show potential areas that may offer resistance.  Price rallied up to the 150 SMA, found resistance (confirmed with a Japanese candlestick formation) , and then continued on down with the trend.

Of all the moving averages, professional traders favour the simple moving average over them all.  Keep it simple.  Use the 150 day SMA or 200 day SMA on your charts primarily to identify the major trend.

The final and last kind of Japanese candlestick formation is the doji or sometimes called doji star.  Dojis fall into a group all of their own and offer the least more powerful confirmation of a potential change in trend.  They can be used at both tops and bottoms of price swings. They typically consist of the following characteristics:

• The open and close of the candle is the same or almost the same.
• The importance of doji is only significant on charts where there are few doji. The more doji there are on a chart the less significance they have.
• While they can be useful for calling both tops and bottoms, they are more useful at tops.

Doji candles show that the market is currently exhausted and has temporarily lost its sense of direction.

Perhaps the best use of doji candles is to warn that a current move may be coming to an end or be exhausted and a trader may consider tightening his stops or closing out positions.

Like bullish engulfing patterns, bearish engulfing patterns fall into what is possibly the third most powerful kind of Japanese candlestick patterns.  Again, these patterns offer less confirmation of a potential change in trend and should be used with caution.  They typically have the following characteristics:

• Their real body must engulf the previous candles real body.
• The real body should be the opposite colour of the previous candle.
• If the previous candle’s real body is very small and the bearish engulfing candle’s real body is very large, the stronger the formation.

Bearish engulfing patterns show that the sellers overcame buyers and this can be seen by the candlestick completely
engulfing the previous candlestick body.

It is recommended that you wait for confirmation before entering a trade based solely on a bearish engulfing pattern.

The third kind of Japanese candlestick formations are bullish engulfing patterns.  These patterns offer much less strength than the pin bar, hanging man and inverted hammer, but they can still offer some insight into potential future market movement.   Typically have the following characteristics:

• Their real body must engulf the previous candles real body.
• The real body should be the opposite colour of the previous candle.
• If the previous candle’s real body is very small and the bullish engulfing candle’s real body is very large, the stronger the formation.

Bullish engulfing patterns show that the buyers overcame sellers and this can be seen by the candlestick completely engulfing the previous candlestick body.

Due to them offering less reliable signals, it would be best to wait for some confirmation before using a bullish engulfing pattern to enter a trade.