[Extra] Market And Trend Direction – Improve Your Trades With Directional Trading


In this lesson, we talk about the differences between uptrends and downtrends and how it impacts trading systems and trading performance.


The differences between trends

The first graphic below shows the average daily return of the S&P 500 separated by uptrends and downtrends (an uptrend is defined by the price being above the 100 moving average. A downtrend exists if the price is below the 100 moving average). During an uptrend, the daily return is significantly less (0.05% vs. -0.077%) which means that during downtrends, price moves faster in the direction of the trend and momentum is higher. This makes sense since downtrends are often accompanied by more panic selling and uncertainty.


The average daily return is greater during downtrends.



Volatility during trends and how to increase your performance with it

But momentum is not the only thing that is different. We also analyzed volatility as well and the results were very clear and obvious.

The graphic below shows the average intraday price change (the difference between high and low of the day), the 50-day average volatility and the 100-day average volatility, separated by uptrend and downtrend phases. It is very obvious that during downtrends all the analyzed figures are much higher. We can summarize the findings as follows:

  • During downtrends, the candles or price bars are larger
  • The daily range is significantly greater in downtrends
  • The volatility during downtrends is much greater as well
  • Overall price swings are much larger during downtrends




The implications of those findings can be huge for your personal trading and, thus, it pays to differentiate between trades taken during uptrends and downtrends. The differences between uptrends and downtrends can translate to the following observations and outcomes during your trades:

  • Using the same stop loss and take profit approach during uptrends and downtrends may not be a good idea. Swings are greater during downtrends and stops may get triggered more easily
  • If you are using a trailing stop, using a greater trailing value during downtrends could prevent premature trade exits during larger price swings
  • A trader may use a wider take profit order during downtrends because price usually moves wider during such phases


How to recognize a trend and setting up Edgewonk

Using moving averages is a common way of differentiating between uptrends and downtrends. Whenever price is above a certain moving average, it signals an uptrend and when the price is below a moving average, the price is in a downtrend. We suggest using longer-term moving averages when it comes to determining the market direction.

For example, you could choose a 50 period or a 100-period moving average and apply it to the Weekly, the Daily or the 4H chart to differentiate between the two different scenarios. In your Edgewonk journal, you can create a Custom Statistic with the following values:

  • Below 100 MA
  • Above 100 MA
  • Below 50 MA
  • Above 50 MA

Of course, you can choose other settings for your moving averages and define your Custom Statistics in a more personalized way – those examples are just meant to give you some ideas on how to use it.


Tips for your Edgewonk and how to track your data in a new way

(1) The Updraw and Drawdown analysis will provide interesting insights into the differences between uptrends and downtrends and how to adjust your stop loss and take profit placement.

(2) With the Trade Management Analytics, you can analyze your trading behavior and find out whether or not you trade differently during uptrends and downtrends.

(3) Do you prefer going with the trend and buy during uptrends or sell during uptrends? Or are your performance statistics better for counter-trend trades and do you prefer buying in downtrends and selling in uptrends? Edgewonk will show you exactly that and so help you find the best trading style for you.

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