"The trend is your friend" is the oldest cliche in trading — and also the truest. This lesson teaches you how to identify what direction the market is heading, and why trading with the trend dramatically improves your odds.
Three Types of Trend
Uptrend: Price makes higher highs and higher lows. Each peak is higher than the last. Each dip stays above the previous dip. Like climbing stairs.
Downtrend: Price makes lower highs and lower lows. Each rally fails to reach the previous peak. Each drop goes lower than the last. Like descending stairs.
Sideways (Range): Price bounces between a support floor and a resistance ceiling without making meaningful progress in either direction. The market is undecided.
Key Concept
Trading with the trend is easier because momentum is on your side. In an uptrend, buy the dips (pullbacks to support). In a downtrend, sell the rallies (pullbacks to resistance). Fighting the trend is like swimming against the current — possible, but much harder.
Drawing Trendlines
In an uptrend, connect two or more significant lows with a straight line. This line acts as dynamic support — the price often bounces off it. In a downtrend, connect two or more significant highs. You need at least two points to draw a trendline, but three or more touches make it more reliable.
Moving Averages as Trend Filters
Moving averages smooth out price action and show you the underlying direction. The three most popular periods:
- 20-day MA — short-term trend (about one month of trading)
- 50-day MA — medium-term trend (about one quarter)
- 200-day MA — long-term trend (about one year)
Example
Golden Cross: When the 50-day MA crosses ABOVE the 200-day MA, it is a bullish signal — the short-term trend is now faster than the long-term trend. Major fund managers watch this closely.
Death Cross: When the 50-day MA crosses BELOW the 200-day MA, it is a bearish signal. The name tells you everything you need to know about how traders feel about it.
Multi-Timeframe Analysis
Smart traders look at multiple timeframes. Use the daily chart to determine the overall direction (the trend). Then drop to the 4-hour or 1-hour chart to find precise entry points. This way, you are trading with the bigger trend while timing your entries on smaller moves.
Warning
Trends do not last forever. Every uptrend eventually ends. Every downtrend eventually reverses. The skill is identifying when a trend is still healthy and when it is showing signs of exhaustion. We will cover those signs in upcoming lessons on indicators and chart patterns.
Risk Disclaimer: Trading financial markets involves significant risk of loss. The content on this page is for educational purposes only and does not constitute financial advice. Past performance is not indicative of future results. You should not trade with money you cannot afford to lose. 70-80% of retail investor accounts lose money when trading CFDs and spread bets. Consider whether you understand how these products work and whether you can afford the high risk of losing your money.