I will explain a few strategies using the fibonacci tool and candlestick patterns to determine the trend strength. After reading this article, you’ll be able to identify trend strength. You will also be able to determine the weakness of the trend before the major trend reversal.
Because most of the technical indicators are lagging indicators, they are not able to forecast the market correctly. You need price action tools to forecast the market.
What is trend strength in trading?
In trading, two forces drive the forex market: buyers and sellers.
The simple rule of thumb is that if buyers are strong, the price will increase; if sellers are stronger than buyers, the price will decrease.
If the momentum is high, then the strength of the trend is strong. If the momentum of buyers/sellers is weak, then the trend strength will also be weak.
How to determine the trend strength?
In price action trading, there are two simple ways to determine the weakness in a trend or upcoming trend reversal in the market.
- Using Fibonacci tool
- By analysing the candlesticks
Both methods are suitable. Once you practice these methods, a time will come when you don’t need to use these tools because you will identify the weakness in trend just by looking at the chart and without the help of tools.
So let me explain these two methods.
Use of the Fibonacci tool in determining the weakness of the trend
Fibonacci is a tool that uses natural numbers to determine the high probability price levels. This method will use four Fibonacci levels 38%, 50%, 61.8% and 78%.
Another thing that you should understand is that the market chart is made up of two waves: impulsive and retracement. After an impulsive wave, a retracement wave will form; after a retracement wave, the impulsive wave will form.
The impulsive wave represents the strong momentum of buyers/sellers. At the same time, the retracement wave shows the weakness of buyers and sellers.
So the retracement wave decides the weakness of the trend. And this wave ford after impulsive wave. If the impulsive wave is bullish, then the trend is also bullish, while in the case of a bearish impulsive wave, the trend will be bearish.
There are three scenarios to determine the strength of the trend.
78% Fibonacci retracement = Weak Trend
If the price retraces to the 78% Fibonacci level, then the trend strength is weak. Price may not be able to continue the previous trend.
50 – 61.8% Fibonacci retracement = Moderate Trend
If the price retraces to the 50 or 61.8% Fibonacci level, this indicates a strong trend. It shows that buyers/sellers can continue the previous trend.
38% Fibonacci retracement = strong trend
If the price retraces to just 38% Fibonacci level, then this is a strong indication that trend strength is powerful and the price will continue the previous trend.
The retracement shows the strength of the opposite force in the market. For example, if the impulsive wave is bullish, buyers are stronger. Then in the retracement wave, sellers will try to dominate the buyers.
So the deeper the retracement, the sellers will be stronger than the buyers and bullish trend strength will be weak.
The Fibonacci retracement is a direct indication of trend strength or trend weakness.
Note: Please remember that this method will work for the trending market only. If there’s no trend in the market and the price forms a ranging structure, then this method will not work.
Now let’s talk about the second method.
Analyse candlesticks to find the trend strength
In this method, we’ll analyse the body and wicks of candlesticks to identify the trend strength.
A candlestick consists of a body and a wick. The body shows the momentum of buyers/sellers, while the wick shows the activity and balance between buyers/sellers.
If most candlesticks have big bodies and small wicks in a specific range, then the trend is strong. The colour of the candlesticks or closing price determines the direction of the trend. If the bearish or red candlesticks are more significant than the green candlesticks, then the sellers’ trend strength is more muscular than the buyers.
The trend is weak if small-body candlesticks with large wicks form in a specific range. The weak trend mostly indicates the retracement wave on the price chart.
In the above definitions, the term range of candlesticks means the last 10 to 20 candlesticks.
The bottom line
Identifying the trend strength is the most important parameter of technical analysis. After screen time, you can check trend strength by looking at the chart. However, if you are a beginner, you need to spend some time finding the patterns I explained above to train yourself to become a better trader.