Forex 102Lesson 6

Trend Sustainability

What I’m going to discuss in this article isn’t actually a trading strategy, although it can be used as part of one, especially when carrying out your

analysis. Trend sustainability is basically the concept of whether or not a trend

will continue for a reasonable amount of time.

The easiest way to determine whether a trend is probably going to continue or not is by using trendlines. Drawing a trendline over the lows or highs of a trending

market will give you an idea of the sentiment (long or short bias) of the market.

This is important because the majority of market participants are usually wrong. So when a market is overly bullish, it will probably crash. And when a

market is overly bearish, it will probably rally. This sounds counter-intuitive, but it’s not. The smart money (and the big money) will see what’s probably about

to happen, and pull their money out, causing a reversal.

Bullish Trend ExampleWhen a market is overly bullish it will tend to make higher lows at an increasing rate. This type of bull trend is

commonly referred to as a parabolic trend.

The easiest way to determine if a bull trend is going parabolic is by drawing a trendline from the first low to the second

low, and another from the second low to the third low, and so on.

The image below shows what I mean. Notice how the slope of the trendlines are getting steeper and steeper. This pattern

slightly resembles a parabolic curve, hence the name. It is not really important whether you draw the trendlines on the

lows or the closes of the candles, as long as you’re consistent.

Almost immediately after the upward move the market topped out and reversed. Sometimes you will see a period of consolidation

before another upward move, but the important thing to note is

that a parabolic trend is not sustainable. The market will almost

always at least pause and consolidate, if not reverse.

Bearish Trend Example

When a market is overly bearish it will tend to ‘roll

over’ and crash very quickly. This type of move is

commonly referred to as a panic.

As far as I’m aware there’s no specific way to determine

when this is about to happen, as it tends to happen very

quickly. Markets tend to sell-off a lot quicker than

they’re bought-up.

The image below shows what I mean. It’s very unlikely that you’ll be able to

get in at the start of the move, unless there’s some sort of price action setup

you’re familiar with at the beginning. The important thing to note here is that

when you

see this move at completion, getting short is probably not the best idea. It’s

very unlikely the market will trade lower in the immediate future.

After this quick sell-off the market did in fact trade a little

lower, before beginning to reverse. However the sentiment is

clearly different due to short-covering / buying.