I have found this interesting question on a forex forum. Actually the questions were two not just one:
“(1) How do you know when the trend is over?
(2) How do you know when the has started?”
(Of course we all know there is always a trend within the trend, so it’s up to you of where you see the scope)”
Note: what is here meant with “a trend within a trend” can be related to the “fractal” nature of the market. If we look at the trend in the 4-hour that could be higher. However when we look much closer at a smaller timeframe, e.g. 15min, that trend may be lower, bringing price into the next measured move higher on the larger timeframe.
This is what I would answer:
They say “The trend is your friend, until it bends”. The fact is that it is very easy to see a trend when it has already developed, i.e. the first measured move after the previous relative low or high has already been printed and visibile. Typically when the average trader is capable of seeing that, price is well on its way to hitting the closer high probability target. Here, I make no reference to any specific timeframe, because a trend can develop in any timeframe.
If you followed my work for some time you know that I attempt to get an edge in the markets by modeling the effects of Program Trading on price. Such effects materializes in sequences of measured moves that “frame” price, i.e. offering a way to see next targets and next low risk, high probability trades and – most importantly – helping determine a clear trading plan for the trades, in different timeframes.
The interactions of the different sequences of measured moves in the different timeframes (15min, 4hour, daily and weekly), along with planned and unplanned news, generate price variations we all see on our charts.
@new_reader: hey! Are you suggesting that there is order in the market and you can forecast prices?
@fibstalker: Yes, in a certain measure there is an order in the markets. But it not based on cycles and waves, bur rathed rooted into cause and effects brought about by classes of algorithmic trading.
@fibstalker: In a certain measure price can be foreseen, but only in markets with very high volume, when they are subjected to the force of traders group psychology, in absence of news and governments or central banks interventions.
If you read the content of my Blog, research papers and my eBook this will become more evident to you, and maybe the quick answers I provide hereunder will also be more clear.
1) a trend ends when the sequence of measured moves on the target timeframe is interrupted, i.e. the next setup in the sequence fails (stop is hit before target). This works even better when the failure happens just above or below and against a strong level of support or resistance in the higher timeframe.
2) when a trend in one direction ends, a trend in the opposite direction always starts. It may or may not be short lived, we do not know what the market will do next. What we know however is that a new trend is born. Moreover, if the new born trend fails right away, you are in a wedge or market lateral conditions.
There is much more to learn about how Program Trading affects prices and how we can spot its effects and use the information to successfully trade the markets.
Have a great day.