How to Tell a Trend Is Near Its End

Good traders have a knack for identifying the start of a trend or the end of one. There are a few patterns that are common at the end of a move. The first indication that a trend is over includes a series of three to four sessions where both the high and low of the day are made after the first 60 minutes of trading. This sign of impartiality is often accompanied by decreasing volume. Markets were created to facilitate trade. If volume is drying up as a market moves in a direction, it will typically turn and go the other way.

There are a couple of common candlestick patterns that show up when a trend is dying. A small body candle (a.k.a. doji) signifies balance. These candles have similar opens and closes over a series of three days to a week. Markets move higher to attract sellers and lower to entice buyers. Another candle, called a hammer, shows up frequently at the end of trends. A bull hammer typically has a long wick at the bottom of the range with a short candle body near the high. A bear hammer has a long candle wick starting from the top of the range and a small candle body near the low. Hammers appear at the end of trends and are frequent at the onset of a new trend.

Another hint that a trend has played out is range length. Most charting services have an option called ATR, or average true range. Use a short-term measurement between 10 and 15 days as your guide. When range length dips below average for a few consecutive sessions, reversals often follow.

Sometimes subtle changes make a big difference. A combination of consecutive sessions with severe price overlap, decreasing volume, small candle bodies and below average ranges are an indication of trend exhaustion. When these factors occur, it is a sign to either take profits or hedge your bet to endure a consolidation phase.   

John Seguin, Market Taker Mentoring

Trader Education