3 Powerful Techniques to Determine Trend Strength

3 ways to determine trend strength

Every trader wants to know how to identify trends and determine their relative strength. It’s what allows us to trade with momentum rather than against it, which in turn increases the odds of a favorable outcome.

Unfortunately, gauging the strength of a trend isn’t as straightforward a task as some would hope.

Let me rephrase that, the plethora of indicators and techniques that have flooded the financial world over the years have unnecessarily convoluted a relatively simple task.

But I digress…

Yes, it is a simple task. Is it easy? Well, that depends on the techniques and tools you decide to use.

There are three very simple techniques that I will show you today that, with enough practice, will make determining trend strength a much more manageable task.

By the time you finish reading this lesson, you will have a firm understanding of trend characteristics as well as when to know whether to look for a continuation of the current trend or an imminent breakdown.

Let’s get started!

Characteristics of a Trending Market

First and foremost, we need to know how to identify a trending market. Traders have complicated the topic for years, but it’s very simple, I promise.

A trending market is one that is making higher highs followed by higher lows or lower lows followed by lower highs.

That’s it.

If we transform that statement into its visual equivalent, we get the following illustration.

Uptrend and downtrend illustration

Pretty basic stuff, right?

Thought so!

But before you leave thinking you know about the concept of higher highs, higher lows, etc., there are some concepts later in the lesson that may not be familiar to you. In fact, I would bet that 90% of Forex traders don’t know to look for what I’m about to show you.

In other words, you may want to stick around.

Now comes the fun part – taking this very basic concept of highs and lows and turning it into actionable information.

For that, we turn to the most basic principle of technical analysis.

1. The Highs and Lows Tell the (Whole) Story

Let’s start things off by just visualizing where the highs and lows on a chart have formed over a period. In short, the relationship among highs and lows as they form over time.

All we are doing with this technique is observing where the extended swing highs and lows are within a given trend.

The GBPUSD daily chart below is a perfect example of how something as simple as watching how the highs and lows of a market interact with each other can signal a change in trend.

GBPUSD highs and lows on the daily time frame

Notice how over the course of several months, GBPUSD carved out somewhat of a rounding top, which is a valid technical pattern. However, for purposes of this lesson, we’re only interested in using the swing highs and lows to identify a possible change in trend.

In the chart above, the first lower high was the first sign that the uptrend was beginning to fatigue. But it wasn’t until the first lower low that we had a telling indication that the current trend had reversed.

Keep in mind that trend changes won’t always be this obvious. But the signs are always there; you may just have to look a bit harder to find them in some instances.

At this point you may be thinking, this is great and all, but how/where do we enter short?

For that, we need the highs and lows to interact with a key level in a way that offers a favorable setup. In other words, we need to turn the price action you see in the chart above into actionable information.

2. Distance Between Subsequent Retests: A Killer Way to Determine Trend Strength

Now that we have discussed how to use swing highs and lows to gauge the strength of a trend, let’s add a key level into the mix.

There is a common (and costly) misconception among traders in all markets where technical analysis is a traditional method of trading.

Someone at some point in time came up with the notion that support and resistance levels become stronger with each additional retest.

I hate to be the bearer of bad news, but that’s a complete and utter fallacy.

Multiple retests of the same level make that level more visible, they do not make it stronger.

And visible and strong are by no means synonymous.

Think about it, if this were true – that a level became stronger with each additional retest – it would theoretically never break. Because if it didn’t break on the third retest, why would it break on the sixth when it’s supposedly twice as strong?

It doesn’t add up.

So if we can agree that multiple retests of a given level do not make it stronger, we can naturally conclude that it makes the level weaker, right?

Well, not quite. While a market that continually revisits the same area can eventually break through, we don’t have enough data to conclude that it is likely.

For that, we turn to (you guessed it), highs and lows. More specifically, the relationship the highs and lows have with our key level.

The illustration below shows a trending market that is respecting a trend line, however, the distance between each retest has become shorter over time.

Illustration showing shorter distance between retests over time

Note how the market tested this level as support on four separate occasions since its inception. What many traders tend to dismiss, however, is the shorter time span between each retest as the trend extended higher.

The likely outcome for this type of price action is as follows:

Shorter distance between retests breakdown

Why does this happen?

In short, it’s the market telling you that demand is drying up. When it comes to supply and demand, as prices move higher, demand naturally begins to run thin as traders a less willing to buy at higher prices.

At the same time, supply increases as market participants unwind their positions to book profits.

In the case of the illustrations above, that demand is drying up more quickly with each subsequent rally from trend line support. Thus, we get a market that begins spending more time trying to keep its head above water than making higher highs.

Of course, this concept also applies to a bearish trend where demand increases and supply decreases as prices drop.

The EURUSD daily chart below is a perfect real-world example of a currency pair that began testing support more rapidly over the course of 256 days.

EURUSD more frequent retests on the daily chart

Notice how each rally spent less time away from support as the trend became extended.

We all know what happened next. The breakdown you see in the chart above was the starting point of the massive 3,300-pip drop that transpired over the next 44 weeks.

If we want to get fancy, we can combine the two techniques we just discussed to further the conviction that a breakdown was imminent.

EURUSD rising wedge on the daily chart

I will be the first to admit that the pair was not making lower highs before the technical break. However, the fact that a rising wedge formed indicates that each subsequent rally had less bullish conviction than the last.

3. Clustering Price Action: An Early Warning Sign

Last but not least is when price action clusters near a key level. In some ways, this is a combination of the two techniques we just discussed.

I often call this “heavy” price action. The idea of heavy price action is something my members have become very familiar with over the years.

As the term implies, this is when a market begins to put constant pressure on a key level over a short period.

I suppose I should come up with a better word for it since the word heavy only applies to a pair that is putting pressure on a support level. That would make the opposite “light” price action, which doesn’t have the same ring to it.

(I’ll save that for a later discussion with my members.)

At any rate, the idea here is to watch how the market responds to support or resistance within a given period. A typical period would be a few days or maybe a full week if trading from the daily time frame.

If the market begins to cluster or group for an extended period at a key level, chances are the trend is about to break down and reverse.

The illustration below shows what this looks like for a market that is in an uptrend.

Clustering price action at trend line support

Notice how, toward the latter half of the trend above, the market began to cluster just above support. This type of price action leads to a breakdown more times than not.

The AUDJPY weekly chart below is a perfect example.

AUDJPY clustering price action on the weekly chart

I can’t tell you how many times I’ve seen this happen at significant support levels. Unfortunately, those who haven’t done their homework find themselves entering in the direction of the trend just before it breaks down.

But don’t be fooled into thinking this technique is only useful on the weekly chart. It can, in fact, be extremely powerful on just about any time frame, even the 1-hour chart.

AUDUSD heavy price action on the 1-hour chart

The annotated chart above is the same one I posted inside the member’s area on November 19, 2014.

Once again, notice how the price action became heavy toward the latter half of this ascending channel, a clear indication that the bullish momentum was not only tiring but that a break was imminent.

The AUDUSD 4-hour chart below paints a fairly bleak picture of what happened next. The result of the breakdown in the chart above was a 680 loss over the next 30 trading days.

AUDUSD clustering price action on the 4-hour chart

While it’s still necessary to wait for a close above or below a key level before considering an entry, understanding how clustering price action can lead to a break will help you avoid being on the wrong side of a trending market.

Final Words

Determining the strength of a trend doesn’t need to be a complex operation. Something as simple as the three techniques discussed above are all you need to gauge whether a trend is likely to continue or break down.

Keep in mind that all three techniques above are as useful in bearish markets as they are in bullish markets. The charts and patterns above were only used to maintain a consistent theme throughout the lesson, but the techniques discussed above can be utilized in any market and on any time frame.

The best thing any trader can do for themselves whether they are attempting to decipher trend strength or identify key levels is to get back to basics. Every market has its story to tell, and every story can be translated using swing highs and lows.

As I often say, your job as a trader is not to know what will happen next. Rather, your job is to gather the clues the market leaves behind and assemble them in a way that stacks the odds in your favor; and every possible clue is born from the natural ebb and flow of the market.

Your Turn

How do you currently determine the strength of a trending market? Will you be adding any of the three techniques above to your trading arsenal?

Share your opinion, leave some feedback or ask a question below and I’ll be sure to get back to you.

Leave a Comment:

16 comments
Farzin Sb says

Hi, Thanks for this lesson . the problem in detecting market direction is not as simple as drawing some channels and seeing the bounces. for example on gbpusd in recent days. there was a decending channel. but it broke out of channel for 2 days. then it came back inside the channel. ( maybe a false breakout ) but again before reaching the bottom of that channel it turned direction. so on the very last candle that u want to enter a trade u won’t know what will happen. seeing higher highs and lower lows on passed candles does not act perfectly on the upcoming candles. for example I place a sell on gbpusd it goes higher. I close that and place a buy , and it drops ! some how the market or broker apps are designed intelligently to hit our stops then rotate!

Reply
    Justin Bennett says

    Farzin, you’re welcome. And you’re right; there is no perfect way of identifying trend strength. Then again, “perfect” doesn’t exist in the world of trading. The best we can do is use the price action on our charts to determine the most likely outcome.

    As for GBPUSD, the pair has been range-bound since January. The techniques described in this lesson are to be used to ascertain the strength of a trending market; they won’t be of much help if a market is stuck in a range.

    Reply
Terry Bill says

Lately, the intra-day trading is more into vogue because it doesn’t add swaps to your positions and particularly keeps away the overnight risks. The major benefit of Intra-day Forex trading is- a trader can make the potential trades in the news hours, keeping up with the liquidity in his account and can have extra competent check on trades. Therefore, more of the expert traders are inclined towards intra-day trading. The technical analyst’s studies on-line Forex charts and uses the past market action to achieve their foremost goal- forecast a price or trend movement. To predict the drift and the movement of the currencies most of the traders make analysis on the Forex chart.

I am Trader since 2014 and I believe Trend Following Chart Patterns like Triangles, Pennants, Flags, Rectangle. Also Trend Reversal Patterns Like Doji, Hammer, Shooting Star, Head & Shoulders…

Reply
    Justin Bennett says

    Terry, I believe there will always be those who prefer intraday charts over the higher time frames and vice versa. It’s a hugely personal decision and one that usually takes years to form.

    Thanks for sharing.

    Reply
Sam says

Been on here for almost 3 hours, reading price action techniques and even links in between each post. Really insightful Justin, thanks.

Reply
Lakeside says

Nice one and very explanatory, I used the clustering P.A to catch a big move on (USDCHF, M30) and it was good. I hope i could share a pic on here

Reply
Norm says

Hi J,

Thanks for the lesson.

On The GBPUSD chart above circle #7 forms the first lower low but it seems it was overlooked and instead circle #9 was apparently cherry picked as the first lower low. Likewise there were a series of lower highs forming a cluster between circles #7 and #8, yet #8 was labelled as the first lower high.

I am not familiar with this method of selecting highs and lows. Can you expound further?

Norm

Reply
    Justin Bennett says

    Norm, I’m not sure what you’re referring to. I chose the most obvious swing highs and lows in the charts above. Like everything else, there’s some interpretation involved, but I certainly didn’t cherry pick anything for purposes of this lesson. Cheers.

    Reply
Bernard says

very informative, thanks but i,m a bit struggling on to identify the levels in a correct manner.

Reply
suresh says

Dear Master,
Couldn’t resist myself to stop posting this comment. It’s simply great.\
I’m 3 months old with trading … would say I just started, hoping to see you soon.

Thanks,
Suresh

Reply
David Ocean says

I am most great-full for these secretes revealed. I have been struggling with my trades in the past years and months with no understanding of the market. but, after reading through your lessons, its like a vile is taken off my eyes. i can now read the charts and understand its direction. God bless you abundantly.

Reply
Roy Peters says

Excellent article. I now see something forming possibly like this on Gbpusd. I’m going to save this page and keep reading it. Thank you.

Reply
Add Your Reply

67 Shares