One of the most important lessons we learn as a trader is to always “trade with the trend.” This is sage advice as long as the trend remains strong. So how can you tell when a trend is strong, and when it is about to end? While it is highly profitable to trade in the direction of the major trend, if that same trend shows signs of weakening, then the probability of logging a winning trade drops drastically.
How to Determine the Strength of a Trend
A simple visual technique to determine the strength of a trend on any time-frame chart is to watch out for the intensity of price pullbacks. In case of a strong trend, a pullback would typically be smaller than the dominant trending wave that preceded it. During an uptrend, if a strong up move is followed by price retracement which is shorter in length than the prior up wave, then the trend is healthy and likely to continue for a while. In the chart below, after a protracted rise, price retraces, but only for a short distance, indicating that the upside momentum is still intact. As long as you see price action similar to the one below, keep trading the “long” signals because the odds are still in your favour.
For a trend t...