Determine the trend using the moving averages

The classical method - the application of price crossover with the moving average
  • When the price cuts the MA line from bottom to top, we see that the market is in an uptrend.
  • When the price cuts the MA line from above, we see that the market is in a downtrend.

It is always easier to look at past charts to determine the trend as shown above when you are real trading, but Traders cannot deny the importance of moving averages when determining the trend. This determination has the biggest problem at the point of intersection between the price and the moving average.

The price rarely goes easy (like at position 4 on the chart) but often creates many "noise" areas (position 3). Some traders see this area as the time when the market is sideways. But whether determining the sideways or the trend market just by crossing the classic style as above is still a problem for Traders. Can we not know when the price will cut the MA line completely and form a real trend to enter an order?

Luckily there are many other reliable ways to test this.

Method 1: Apply the slope of the moving average

The method focuses on determining the slope of the moving average line.
  • The steeper the moving average - the uptrend.
  • The steeper the moving average - the downtrend is.

The advantage of this approach lies in its simplicity and applicability. However, if you only rely on the slope of the MA to determine the trend, you can forget about reading price action on the chart.

Tip: When the price falls below the SMA, but the slope of the MA is still up, watch out for a buy. Conversely, when the price rises above the SMA but the slope is still down, look for an opportunity to enter a sell order.

Method 2: Confirm that the swing highs or swing lows match the moving average

Unlike the first approach, this one forces you to pay attention to the price action. This method helps you to reduce the risk of relying too much on the indicator.

Example of a bullish market chart in an M30 frame USDJPY chart (6J Futures)
How to confirm an uptrend when combining swing points with the moving average:
  • The swing lows formed above the moving average.
  • The price pushed up creating a new uptrend without ever touching the MA again.

Example of a bearish market on EURUSD M30 (6E Futures)
How to confirm a downtrend With swing points:
  • The swing high is formed below the moving average.
  • The price falls below the MA and forms a downtrend without returning to the MA again.

But in this chart, there is a small difference that price has once recovered and formed another breakout trap of MA line before forming a downward trend.

Method 3: Determine the number of upper / lower candles equivalent to the number of cycles of the MA

This is often used in identifying strong trends. If you consider entering an order when the price has just formed a new trend, this is not appropriate because it often gives late signals.

In the above chart example, you will identify a downtrend only when there are 20 candles completely below the 20-period SMA.

The same logic applies to moving averages with period 50 or 100. For example, 50 candles need to form above the 50 period SMA to be considered an uptrend.

You might think: why do we need to understand these trend identification methods so specifically? I think these methods are necessary because it is not really a trading method or system, it does not just give you entry points. On the contrary, the MA is like a means to help you understand the market. You will need to add price action to make the final trading decision.