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8 INDICATORS, TIPS AND TOOLS TO READ

TREND STRENGTH IN TRADING
HOME INDICATORS 8 INDICATORS, TIPS AND TOOLS TO READ TREND STRENGTH IN TRADING

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8 Indicators, Tips And Tools To Read Trend Stren

Trading
 Rolf |  Rolf |  Indicators, Price Action, Technical Analysis, Tradeciety Academy |  5

Read the article in German: Auf Deutsch

——————

Trading is all about being able to read market structure, sentiment and the balance between b
Understanding if a trend is gaining or losing momentum is important if you are trying to
about whether support and resistance levels are likely to hold or break, if a trend will continue
can be expected anytime soon.

In a di erent article, we talked about how to understand the direction of a trend; this article ex
read the trend strength from your charts. The following 6 concepts, tools and indicators can h
sense of price action and provide insights about market structure.

1) Price action analysis

Trend waves – length, steepness, and smoothness

The rst point lays the groundwork for all that follows and it describes the basics of price mov
price moves during trending waves and pullbacks can tell you a lot. The chart below shows a d
series of lower lows. At the same time, you can see that the bearish price waves are much smo
bullish pullbacks are less smooth.

Secondly, the steepness of the bearish price waves decreases and they become shallower as
continues. Steep price waves indicate trend strength whereas shallow price waves signal a lac
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The blue circled area highlights the rst period bears faced strong opposition and price wasn
further down as smooth. This price behavior is in sharp contrast to previous price action. In a
healthy downtrend, the bearish trend-waves do occur mainly uninterrupted.

Pullbacks during a trend

The next screenshot highlights the importance of putting the size of pullbacks into context:

The rst green shaded area shows the rst larger pullback during the ongoing downtr

Before that, the pullbacks were relatively small which signaled strong momentum to t
Often, strong trends only show sideways ranges instead of real pullbacks.

A large pullback can foreshadow a broken market structure and it provides rst indica
trend strength.

Finally, price failed to make lower lows altogether which had been foreshadowed by th
of pullbacks against the downtrend.
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2) The slope of trendlines

Trendlines are a great trading tool because they provide instant information about the strengt
First, you have to pay attention to the angle of a trendline because the angle shows you exac
the trend is. In an uptrend, a small angle means that the new lows are not moving up as fast. H
the angle becomes too large, it often signals a trend (Boom) which is not sustainable.
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decrease in the momentum of a trend or a complete trend reversal.

The slope of trendlines describe trend strength

An increasing slope in an uptrend shows a trend with rising momentum

A decreasing slope shows fading momentum

The break of a trendline is the nal signal of a trend reversal

3) Bulls vs. Bear and microstructures

We already touched on this topic when we talked about pullbacks earlier but there are a few m
we can use to our advantage when it comes to analyzing the dynamics between bulls and bea
trending phases. There are a few things a trader needs to be aware of when analyzing a trend
estimate the strength:

A trend where candle bodies do not overlap signals strong strength because price ke
direction without pulling back signi cantly

When candlesticks show no or only small wicks, it also signals a strong and healthy t

Candlesticks are roughly the same size and are not too large. If you see that sudden
are becoming very large, it means that volatility is increasing. This often happens when m
a top or a bottom

If you see gaps, especially in the daily timeframe, those gaps don’t close and price kee
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4) Rejected reversals
The way failed breakouts and rejected reversals occur on your charts is a big tell as well. Here
important patterns and characteristics when it comes to analyzing failed reversals during tren

Price does not overshoot trendlines or when it does, it never closes beyond a trendlin

When a trendline breaks, there is only a sideways move and no immediate reversal

Reversal spikes get immediately rejected and covered

Pullbacks into moving averages are very quick and price does not stay long at a movin
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5) ADX
The ADX measures trend strength and it is non-directional which means that it cannot tell you
price is going – it only tells you if the trend is gaining or losing momentum.

The chart below shows a downtrend and the rst down-movement shows a lot of strength in t
making a new high and absolute on the ADX. The next two bearish moves were much smaller
and the ADX con rmed it by showing lower highs. The last move on the far right showed a ver
narrow movement and the ADX went dipped at that point, the price had entered a range.
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A rising ADX shows gaining trend strength

New highs on the ADX signal a healthy trend

Lower highs on the ADX signal losing strength

A “hook” on the ADX shows a sudden shift in trend strength

A at or an ADX heading down signals a range

6) Moving averages (MA)

The relation of price to the MA and the slope

Moving averages are a great trading tool because they provide a variety of di erent informatio
the slope of a moving average is important. When the price is above the MA and the MA is m
signals a strong trend with prices rising faster than the historical averages. The further price
from a moving average, the stronger the current trend is. The longer price can stay on one
moving average without touching the moving average, the stronger the trend.
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The combination of a smaller and a larger moving average measures sentiment shifts in p
screenshot below shows a chart with a 50 and a 100 MA. When the small MA crossed above
signaled a shift in sentiment to the upside because recent prices were moving above the avera
term price structure. Conversely, when the shorter MA crossed the larger MA it signaled a sent
the downside because recent price started trading below the longer-term average.

The space between MAs – momentum information

Finally, the bigger the space between the two MAs, the stronger the trend is becoming beca
price is pulling away from the long-term average faster. The size of space between the two MA
information about momentum. The MACD or the Ichimoku indicators are both based on the d
between short term and long term average price structure.

Generally, price above a moving average signals an uptrend [read about Marty Schwar

When the short-term MA crosses above the long-term MA, it signals a bullish trend sh
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7) RSI
The RSI is another indicator that measures strength. It is similar to the ADX but the RSI is direc
healthy uptrend, the RSI makes new highs and higher lows. In a downtrend, the RSI makes new
highs. In a range environment, the RSI moves sideways between 30 and 70.

The screenshot below shows that the rst uptrend was initiated by an RSI divergence (higher l
and lower lows on price – a momentum divergence). During the following uptrend, the RSI m
highs and higher lows. After the uptrend, price moved down for a while but not with a lot of
RSI stayed mostly between 30 and 70 (dotted arrow). The next uptrend-phase also started afte
divergence and the RSI started making higher lows again until, just recently, another divergenc
end of the uptrend.

During an uptrend, the RSI makes higher highs and higher lows

A at RSI ranging between 30 and 70 indicates a lack of momentum

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8) Bollinger Bands ®
Bollinger Bands® can be combined with other momentum indicators but they are also a great
themselves. The screenshot below shows a healthy uptrend and the Bollinger Bands® showed
stayed above the middle Band; price “grinding” higher between the middle and the outer Ba
trend signal.

A trend is usually broken once price crosses the middle Band. A price spike outside the ou
immediately reverses back into the Bollinger Bands® can often signal a change in trend direct

In an uptrend, price moves higher between the middle and the outer band

A break of the middle band often signals a trend reversal or the lack of momentum
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Knowing the strength of a trend is the backbone of a

trading method
Understanding trend strength and being able to read the balance between bulls and bears is a
skill every trader has to develop. And although each of the 6 described tools and concepts can
you should pick 1-2 to avoid confusion and indicator redundancy.

The trading tools and concepts described are not a standalone system by themselves, but they
the backbone of any trading methodology.

COMMENTS ( 5 )

Antony
09 Jun 2018

Awesome read! I will incorporate this in my trading.

REPLY

Sourav Mondal
25 Jun 2018

Excellent information!! Thanks

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Jeroen
29 Jun 2018

Good article!!

REPLY

Pankaj
19 Aug 2018

Very well explained and easy to understand article. Thank you Rolf for the excel
sharing the information. Great work.

REPLY

Mehdi
26 Aug 2018

It’s really an e cacious method.

I appreciate for worthy information

REPLY

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