How to identify the beginning and end of a trend?
Trends are always the mainstream in the market. Identifying the beginning and end of trends is crucial for capturing profits from trends, and it is also a challenge in trend trading. Some friends have learned many techniques to identify the start and end of trends, but the results are not very good.
Here, I want to emphasize that while techniques are very important, it is essential to understand the basic characteristics of trends and the basic logic of trend trading before delving into techniques. Only then can you truly excel in trading from a technical standpoint.
At the beginning of today's article, I will share my thoughts on the basic characteristics of trends and trading logic. Then, I will continue to share two technical methods for identifying the start and end of trends. The article contains both contemplation and practical knowledge, and everyone can follow my logic to learn together with me.
1. My thoughts on the basic characteristics of trends and trading logic.
We all know that fluctuations and trends alternate, just like the four seasons of the year, which are always in rotation. However, the alternation of trends and fluctuations is not as regular as the four seasons and is much more complex.
The strength of trends, the cycles of fluctuations, and the changes in the trend, such as sharp rises followed by slow declines, or slow adjustments followed by rapid increases, all make trends unpredictable. It is precisely because of this that many people lose their direction amidst these changes and are unable to determine the start and end of trends.
At this time, people's reactions are often confused, feeling overwhelmed, and easily getting stuck in a mental cul-de-sac.
In fact, we can think about this issue from a different perspective.
The purpose of our trading is not to identify every trend with extreme precision; our purpose for trading is to make money.So we don't need to identify all trends; recognizing just one or two is enough, and that's more than sufficient to make us rich.
Let's think further.
Among these one or two trends that we are good at identifying, we don't need to be absolutely precise and correct every time; having a certain success rate is fine.
For instance, if we have a 50% success rate and our win-to-loss ratio is greater than 1:1, then our overall trading is profitable. Or if we have a 40% success rate with a win-to-loss ratio greater than 2:1, we are still making money.
At this point, our focus shifts; we are no longer obsessed with how to perfectly identify trends or how to make flawless trades, but instead concentrate on: how to slightly improve our success rate or how to slightly enhance our win-to-loss ratio.
Trading itself is a very abstract activity, but now, due to the shift in our thinking, it becomes concrete, and the technical standards we need to improve become tangible, allowing us to start researching techniques specifically.
At this time, we must understand that the earlier we start identifying trends, the more accurately we can place orders at the very beginning of the trend.
Here, pay attention to my choice of words; what we aim to achieve is not a 100% precise alignment with the absolute starting point of the trend (too difficult and impossible to hit perfectly every time), but to get as close as possible to this starting point.
Because the earlier we enter, the smaller our stop-loss space will be, the lower our trading costs will be, and the greater the win-to-loss ratio after the market moves, the better the trading results will be.
For example, a difference of 5 points between a stop-loss of 30 points and 25 points may not seem significant, but it makes a big difference when calculating the win-to-loss ratio.If the market moves 100 points to close the position, with a 30-point stop loss, the profit-to-loss ratio of this trade is 3.3:1 (with a trading system success rate of around 25%, achieving the break-even point). If the stop loss is 25 points, the profit-to-loss ratio becomes 4:1 (with a success rate of 20%, achieving the break-even point).
Friends who have established trading systems know that increasing the success rate of a trading system by 5% is a challenging task. However, if we can identify trends a little earlier, we can enter the market sooner and thus compress the space for the stop loss, which is a very effective method.
From a technical standpoint, recognizing the beginning of a trend is more important than recognizing its end.
The purpose of identifying the end of a trend is to close the position, and in practice, once our holdings reach the profit-to-loss ratio of our order, such as when profits reach 4:1, we can exit. At this point, it may not have reached the standard for the end of the trend, and that's okay. We may not have earned all the profits, but we have earned the profits that the trading system should have, and that is sufficient.
Next, I will directly dive into the practical information and discuss two technical methods for identifying the beginning and end of trends.
2. Share two technical methods for identifying the beginning and end of trends.
Before discussing technical issues, let's first consider the basic patterns of trends and range-bound movements. Since the two alternate, after a long period of range-bound movement, there is a probability that the market will enter a trend, marking the beginning of a trend. After a trend has been running for a long time, there is a probability that it will enter a range-bound period, marking the end of a trend.
Therefore, identifying the beginning of a trend = identifying the end of range-bound movement.
In practice, if we find that the market has been in a range-bound state for a long period, the probability of the market moving into a trend increases significantly.
Everyone knows that among all market movements, range-bound movements are more common and have more distinct characteristics. First, the price maintains operation within a range. Second, sometimes the market will break through the range, forming a false breakout that is then retracted. Third, within this range, indicators can become quite dull, such as moving averages frequently crossing over, divergence indicators becoming dull, and Bollinger Bands narrowing and flattening out, etc.The first method of identifying trends is a breakout from a consolidation pattern.
The technique of consolidation is the technique of candlestick pattern combinations. For example, consolidation patterns that signal a reversal at tops and bottoms, consolidation patterns that continue a trend, and the stage of consolidation is when the market is in a fluctuation. After the fluctuation is over and a pattern breakout is formed, it usually leads to a trend.
The chart shows the 1-hour candlestick chart of spot gold.
There are three patterns of consolidation breakdown in the chart. The first one on the left is an expanding triangle consolidation, the one in the middle is a flag consolidation, and the one on the right is a triangle consolidation. After the consolidation, the market moves in the direction of the trend.
However, these three patterns are quite different and are worth delving into.
The first one on the left, the expanding triangle consolidation, has a high entry price before the breakdown, and after a slight increase, the market begins to fall back. Moreover, the stop loss is set at a low point, and the space for the stop loss is quite large, making the difficulty of trading this pattern quite high.
The two patterns on the right, in a bullish trend, are both downward consolidations, and the entry points are below the previous wave highs. After entering, the stop loss space is also small, and the subsequent market launch offers a larger profit space.
By comparing, you can find that some consolidation patterns are easy to trade, while others are not, which is something we should pay attention to in practice.
The general principle of selecting consolidation patterns is: in a bullish trend, downward consolidation patterns, and in a bearish trend, upward consolidation patterns, are both more suitable for trading.
The method of identifying the end of a trend through consolidation breakout.Consolidation patterns are a type of trend-based technical theory. Once all consolidation breaks confirm the trend, trend reversals can be identified using the standards of trend theory. After an order is entered and the market moves to drive, a 1-2-3 structure that forms a counter-trend can be used to judge the end of the trend.
The chart is a 1-hour candlestick chart of gold.
The price break of the flag consolidation pattern on the left is 1977, with a counter-trend 1-2-3 break point formed above, and the price to identify the end of the trend is 1996. The profit for this trade is 19 USD.
On the right, the triangle consolidation pattern breaks at 1997, with a counter-trend 1-2-3 break point formed above, and the price to identify the end of the trend is 2036. The profit for this trade is 39 USD.
Both patterns use the same standard to identify the end of the trend, but due to the changes in the market movement, the profit space changes.
Regarding consolidation patterns, two key points are shared:
(1) Let the bullet fly for a while, wait until the consolidation pattern has dozens of candlesticks and the pattern is more apparent, then look for the break point of the line drawing. Don't rush.
If a painting only reveals 10% for you to guess its content, and another reveals 80%, it's clear that the latter provides more information and is more accurate. Recognizing consolidation patterns is the same; with more candlesticks, you can read more information, more easily identify the pattern, and find a more accurate entry point.
(2) Stick to the simple patterns.Engage in patterns that are easily recognizable, have good trading opportunities, small stop losses, and large profits. It's like taking an exam, where you first tackle the easy questions that you know how to answer. This way, even if you encounter some difficult problems, you can simply give up on them, but you can still pass the exam.
The second way to identify trends is when a trend runs unilaterally for a long time and then reverses direction after exhausting its momentum at the top or bottom.
There is no market that only rises without falling, nor one that only falls without rising. When the market moves in one direction for too long, it will eventually reverse or undergo a deep correction. Identifying these turning points can also help you recognize the beginning of a trend.
The chart below is a 1-hour candlestick chart of spot gold.
The gold bulls have been running continuously, with the daily level moving up from 2277, breaking through the previous high of 2431. After the breakout, a reversal candlestick pattern appeared at the high level, indicating signs of a fake breakout and exhaustion of momentum.
Subsequently, the market fell back, forming a triangular consolidation pattern at the top. After breaking through this consolidation, the market continued to decline.
I will summarize the key points of this pattern for reference in actual combat:
(1) The daily previous high resistance at 2431.
(2) The market continues to rise, with the bullish force being released.
(3) The top market consolidates for 3 days, forming a triangular consolidation pattern.In actual trading, you can use these three criteria to identify the beginning of a trend. Both top and bottom reversals are viable, and pattern breakdowns are signals that a trend has started.
Methods for identifying the end of a trend with top and bottom reversals.
Using dual moving averages to identify the end of a trend.
The crossover of dual moving averages is a commonly used standard to judge the end of a trend. Dual moving averages can effectively track trends, but they also have a significant drawback: their signals appear relatively slowly. When a reverse crossover occurs, there can be a substantial profit drawdown.
In practice, you can use moving averages with the same parameters on a smaller time frame and adopt a strategy of closing positions in batches when a reverse crossover occurs to overcome the issue of excessive drawdown.
The chart shows the candlestick chart of spot gold, with the left side being the 1-hour candlestick and the right side being the 15-minute candlestick.
On the 1-hour chart, the trend starts, and after entering a short position at 2406, the market continues to fall. To prevent a significant profit drawdown when the dual moving averages on the 1-hour chart reverse, close half of the position when the dual moving averages on the 15-minute chart form a reverse crossover. The closing price is 2334, and the remaining orders continue to be held, waiting for the dual moving averages on the 1-hour chart to signal the end of the trend before closing.
The dual moving average parameters in the chart are EMA15 and EMA30. You can refer to these parameters, or you can choose parameters that suit you.
The method has been explained. In fact, there are many technical methods to identify the start and end of a trend, but the most important thing is not the method itself, but the thinking we started with.
Finally, a few more words:(1) Have confidence and patience in your approach.
I previously emphasized the importance of identifying simple and recognizable patterns, including the three criteria for top and bottom reversals I mentioned, which are not complicated. Learning them is not difficult; the challenge lies in whether one has the patience to wait for such opportunities.
Market trends are in a constant cycle of repetition. As long as you can be patient and wait, you will surely wait for your own opportunities.
(2) Choose commodities with strong trends.
Commodities with strong trends tend to move quickly and cover a large range after the signal of a trend's beginning. Compared to those commodities with more oscillations, trading them is more relaxed. In trend trading, gold is generally considered better than the US dollar against the Swiss franc, which is a widely accepted view.
(3) The issue of trends must be combined with the cycle.
Identifying the beginning and end of any trend must be combined with a fixed candlestick cycle; this is the foundation for confirming trends.