A trending market is a market that is trending in a specific direction. Markets can have bullish, bearish or sideways trends.
A trending market can provide multiple trading opportunities for technical analysts. Technical analysts will chart the price pattern of a security or market index to identify trending directions for placing investment trades. Investors may also follow the trending direction of an index that serves as a benchmark for a specific security. These trending market lines can serve as an overlay to a security price chart which can help to form an additional indicator for market trends.
Trending markets are of primary interest in technical analysis. Technical analysts believe that trending markets occur with some degree of regularity and predictability. The ability to correctly discern these trends can have a substantial impact on investment returns.
Traders use various patterns and trendlines to identify trending market directions and trading signals for a single security. A trending market can be classified as such for either the short, mid or long term. Several trading channels can be drawn to follow a security’s trend. Some of the most common trading channels include the following:
Ascending: In an ascending channel a security is showing a bullish trend. This is represented by two positive sloping trendlines drawn above a security’s peaks and troughs.
Descending: In a descending channel a security is showing a bearish trend. This is represented by two negative sloping lines drawn above and below the candlestick pattern.
Sideways: A security or market index can also be showing a sideways channel. This trend will be flat. In a sideways channel, two zero sloping trendlines will be drawn from a security’s peaks and troughs.
Assuming that a price of a security is expected to remain within its trended pattern, traders can use resistance and support lines to indicate buy and sell signals. Thus, when a price reaches a resistance line, traders can be expected to initiate sell orders to benefit from a reversal to a bearish trend. Adversely, when a price reaches support lines, buy orders would typically be initiated to profit from a reversal to a bullish trend.
One caveat for standard trading channels is that they do not fully encompass price movement through reversals and changing trends over time. This can lead to the use of wedge channels which are ascending or descending channels with non-parallel trendlines pointing to a specific point at which a potential trend reversal can occur.
Envelope channels can also be used to broaden the range of price levels and provide for a single channel used over a long period of time. Envelope channels use non-linear trendlines drawn at resistance and support levels to create a moving channel over an extended period of time that can encompass both bullish and bearish trends.