Reacting to Change Part 2: Evolution of Trends
Adapting to subtle changes within a trend is a key element of successful trading. It's not enough to recognise that a trend exists; to stay ahead, you need to understand how trends evolve.
From the initial surge to the steady grind, each phase of a trend carries its own characteristics—and knowing how to react to these transitions is what separates a prepared trader from one caught off guard.
The Anatomy of a Trend
In this section, we’ll explore the different types, phases, and characteristics of trends:
1. Initial Momentum Drive
The first leg of a new trend often follows a prolonged period of sideways consolidation, and this momentum-driven move is typically sparked by a fundamental catalyst. Characterised by a strong surge either higher or lower, this phase usually comes with significant volume and can even include price gaps. The energy in this phase is palpable; it's where the trend announces itself.
Apple (AAPL) Daily Candle Chart
Past performance is not a reliable indicator of future results
2. Standard Pullback, Trend, Pullback Trend
In the heart of a trend, the market often moves in a wave-like fashion: trend legs followed by pullbacks. These pullbacks are typically less volatile and weaker in momentum than the dominant trend legs, making them perfect opportunities for traders to enter in the direction of the trend. Whether you're looking at a bullish or bearish market, these pullback-and-trend cycles are the bread and butter of swing trading strategies.
Apple (AAPL) Daily Candle Chart
Past performance is not a reliable indicator of future results
3. Steady Slide Higher
A rarer but powerful trend type, the steady slide higher (or lower) features minimal pullbacks and a consistent, almost relentless direction. When a trend is in this phase, it signals sustained pressure from buyers or sellers, and it often grinds slowly but surely in one direction. This trend type is highly attractive to trend-followers, but it requires patience and conviction to hold through what may appear to be an over-stretched market.
Tesla (TSLA) Daily Candle Chart
Past performance is not a reliable indicator of future results
4. Exponential Blow-Off
This phase represents the trend on steroids. Expanding ranges, steepening price action, and rising volume all signal that the market has entered an aggressive, almost frantic, final phase. The exponential blow-off can be exhilarating to watch and trade but carries a warning: when this phase comes during an established trend, it's often a sign that the end is near. Traders should be cautious, as a reversal or prolonged consolidation may follow shortly after this euphoric push.
Tesla (TSLA) Daily Candle Chart
Past performance is not a reliable indicator of future results
Simple Tools to Identify Trend Phases
Reacting to these phases means recognising them as they unfold. Luckily, there are several simple tools traders can use to identify which part of the trend they're dealing with.
1. Trendline Fans
Trendlines are perhaps the cleanest and most effective tool for gauging trend strength with no lag. By mapping the swings with multiple trendlines, or trendline "fans," you can visually track momentum. A rising trendline fan—where each new trendline is steeper than the last—indicates increasing momentum, while a falling trendline fan suggests that momentum is starting to ebb. Trendline fans are particularly useful for identifying whether a trend is accelerating into an exponential blow-off phase or slowing down into a pullback phase.
2. Keltner Channels
Keltner Channels are another versatile tool for identifying different trend phases. These bands are plotted around a central moving average, with the distance between the bands determined by the volatility of the market. A price movement outside the Keltner Channels usually signals strong underlying momentum, often associated with the initial trend phase. A steady grind along the bands is characteristic of the "steady slide higher" trend type, while prolonged periods outside of the bands are usually indicative of the exponential blow-off phase. The midline of the Keltner Channels can also be used to gauge pullbacks and time entries during a trend.
3. Long-Term Moving Averages
Long-term moving averages like the 50-day and 200-day simple moving averages (SMA) are essential for gaining perspective on the overall health and strength of a trend. These moving averages act as a dynamic support or resistance level during trends, and their positioning relative to the price can offer clues about the trend's longevity.
4. Anchored Volume Weighted Average Price (VWAP)
The Anchored VWAP is a more sophisticated tool for assessing trend strength. VWAP represents the average price at which a market has traded, adjusted for volume, and anchoring the VWAP to the inception of a trend allows traders to see whether those who initiated the trend are still in control. If the price remains above the anchored VWAP in an uptrend, it suggests that buyers are still in control, whereas falling below could signal that sellers are beginning to take over.
Example: Brent Crude Daily Candle Chart
Let’s take a closer look at how these tools can be applied to understand an evolving trend in the oil market. Recently, oil experienced a strong rally, breaking through the first trendline and surpassing the 50-day moving average. While this initial momentum signals strength, the bigger picture still points to a bearish trend. We see that prices remain below the 200-day moving average, under a long-term descending trendline, and crucially, below the VWAP anchored to the April highs.
This combination of tools highlights the importance of maintaining a wider perspective. Even though there is short-term upward momentum, the prevailing longer-term trend suggests that sellers may still have the upper hand.
Past performance is not a reliable indicator of future results
Conclusion: Adapting to Trend Phases
Understanding and reacting to the different phases of a trend is crucial for any trader. From the initial surge of momentum to the steady grind or explosive blow-off, each phase requires a unique strategy and a deep understanding of market dynamics.
By using tools like trendline fans, Keltner Channels, moving averages, and Anchored VWAP, traders can stay on top of these phases and maximise their potential for success.
Stay flexible, stay alert, and always be prepared to evolve with the trend.
Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 82.67% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
From the initial surge to the steady grind, each phase of a trend carries its own characteristics—and knowing how to react to these transitions is what separates a prepared trader from one caught off guard.
The Anatomy of a Trend
In this section, we’ll explore the different types, phases, and characteristics of trends:
1. Initial Momentum Drive
The first leg of a new trend often follows a prolonged period of sideways consolidation, and this momentum-driven move is typically sparked by a fundamental catalyst. Characterised by a strong surge either higher or lower, this phase usually comes with significant volume and can even include price gaps. The energy in this phase is palpable; it's where the trend announces itself.
Apple (AAPL) Daily Candle Chart
Past performance is not a reliable indicator of future results
2. Standard Pullback, Trend, Pullback Trend
In the heart of a trend, the market often moves in a wave-like fashion: trend legs followed by pullbacks. These pullbacks are typically less volatile and weaker in momentum than the dominant trend legs, making them perfect opportunities for traders to enter in the direction of the trend. Whether you're looking at a bullish or bearish market, these pullback-and-trend cycles are the bread and butter of swing trading strategies.
Apple (AAPL) Daily Candle Chart
Past performance is not a reliable indicator of future results
3. Steady Slide Higher
A rarer but powerful trend type, the steady slide higher (or lower) features minimal pullbacks and a consistent, almost relentless direction. When a trend is in this phase, it signals sustained pressure from buyers or sellers, and it often grinds slowly but surely in one direction. This trend type is highly attractive to trend-followers, but it requires patience and conviction to hold through what may appear to be an over-stretched market.
Tesla (TSLA) Daily Candle Chart
Past performance is not a reliable indicator of future results
4. Exponential Blow-Off
This phase represents the trend on steroids. Expanding ranges, steepening price action, and rising volume all signal that the market has entered an aggressive, almost frantic, final phase. The exponential blow-off can be exhilarating to watch and trade but carries a warning: when this phase comes during an established trend, it's often a sign that the end is near. Traders should be cautious, as a reversal or prolonged consolidation may follow shortly after this euphoric push.
Tesla (TSLA) Daily Candle Chart
Past performance is not a reliable indicator of future results
Simple Tools to Identify Trend Phases
Reacting to these phases means recognising them as they unfold. Luckily, there are several simple tools traders can use to identify which part of the trend they're dealing with.
1. Trendline Fans
Trendlines are perhaps the cleanest and most effective tool for gauging trend strength with no lag. By mapping the swings with multiple trendlines, or trendline "fans," you can visually track momentum. A rising trendline fan—where each new trendline is steeper than the last—indicates increasing momentum, while a falling trendline fan suggests that momentum is starting to ebb. Trendline fans are particularly useful for identifying whether a trend is accelerating into an exponential blow-off phase or slowing down into a pullback phase.
2. Keltner Channels
Keltner Channels are another versatile tool for identifying different trend phases. These bands are plotted around a central moving average, with the distance between the bands determined by the volatility of the market. A price movement outside the Keltner Channels usually signals strong underlying momentum, often associated with the initial trend phase. A steady grind along the bands is characteristic of the "steady slide higher" trend type, while prolonged periods outside of the bands are usually indicative of the exponential blow-off phase. The midline of the Keltner Channels can also be used to gauge pullbacks and time entries during a trend.
3. Long-Term Moving Averages
Long-term moving averages like the 50-day and 200-day simple moving averages (SMA) are essential for gaining perspective on the overall health and strength of a trend. These moving averages act as a dynamic support or resistance level during trends, and their positioning relative to the price can offer clues about the trend's longevity.
4. Anchored Volume Weighted Average Price (VWAP)
The Anchored VWAP is a more sophisticated tool for assessing trend strength. VWAP represents the average price at which a market has traded, adjusted for volume, and anchoring the VWAP to the inception of a trend allows traders to see whether those who initiated the trend are still in control. If the price remains above the anchored VWAP in an uptrend, it suggests that buyers are still in control, whereas falling below could signal that sellers are beginning to take over.
Example: Brent Crude Daily Candle Chart
Let’s take a closer look at how these tools can be applied to understand an evolving trend in the oil market. Recently, oil experienced a strong rally, breaking through the first trendline and surpassing the 50-day moving average. While this initial momentum signals strength, the bigger picture still points to a bearish trend. We see that prices remain below the 200-day moving average, under a long-term descending trendline, and crucially, below the VWAP anchored to the April highs.
This combination of tools highlights the importance of maintaining a wider perspective. Even though there is short-term upward momentum, the prevailing longer-term trend suggests that sellers may still have the upper hand.
Past performance is not a reliable indicator of future results
Conclusion: Adapting to Trend Phases
Understanding and reacting to the different phases of a trend is crucial for any trader. From the initial surge of momentum to the steady grind or explosive blow-off, each phase requires a unique strategy and a deep understanding of market dynamics.
By using tools like trendline fans, Keltner Channels, moving averages, and Anchored VWAP, traders can stay on top of these phases and maximise their potential for success.
Stay flexible, stay alert, and always be prepared to evolve with the trend.
Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 82.67% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
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