Academy News How to correctly identify a side trend

How to correctly identify a side trend

Published: 13.02.2024

Accurately identifying a sideways trend from start to finish will help you better time your entries and exits from the market or more accurately place stop loss and take profit levels. When you add to that the right indicator from Purple Trading, it can do real wonders for your results.

Price in the financial markets is constantly fluctuating in price channels, driven by the forces of supply and demand. When these forces balance out, the price stabilizes and moves sideways in a "chop" phase. Conversely, trend phases, where the market either rises to new highs or falls to new lows, indicate the dominance of buyers or sellers.

Recognizing these phases is an absolutely crucial skill for traders. It gives them an advantage in predicting future market developments. Experienced traders eyes master this skill almost automatically after years of practice, but if you are new to trading, it pays to have some sort of indicator aid. One of the best indicators in this regard is our Purple Magnets indicator.

How Purple Magnets Indicator works

The Purple Magnets indicator can use the analysis of the market movement over the last 1 to 5 days to very clearly discern the entire market structure. It then displays it in a way that even novice traders can understand. Based on its analysis, it then predicts the price levels in which the market is most likely to move in a chop.

Thus, the Purple Magnets indicator predicts price levels at which strong clashes between buyers and sellers may occur based on historical data.

_{Purple Magnets indicator on the sideways trend}

As you can see in Chart 1, the indicator analyzes several days back (shown by the solid line) and then predicts the market behavior at different price levels (shown by the dashed line and percentages). The most desirable price level for both groups, i.e. buyers and sellers, is indicated here as 100%. The other price levels are then calculated automatically, with a direct proportionality to the price level of 100 %.

The smaller the percentage, the lower the barrier to price movement away from this price zone and the less chance of a market stop in this price zone.

If the price level is marked as 50%, we can only expect a half-hearted fight between buyers and sellers. For clarity, price levels with a high chance of stopping the market are shown more in red.

As can be seen in the example above, the market movement confirmed the indicator's assumption and moved within the red price levels. However, once it leaves this zone (in either direction), a trend and a longer move in direction can be expected. Since there is no obstacle along the way in the form of cumulative price levels (red zones) that will be of interest to both parties involved here.

This gives us as traders a pretty clear signal that once the market eventually moves in a direction, it will likely hold that direction for some time. To which we can devise a nice trading strategy.

More examples of how the Purple Magnets indicator works

_{Demonstration of Purple Magnets indicator on a candlestick chart}

Chart 2 again illustrates a beautiful example of the indicator's functioning. The market price first went out of the tested zone, then quickly came back and continued quite unopposed to around the 100% level, where the market stalled and will probably go into a chop here. All of the lower, low levels were (as the indicator correctly predicted) broken very easily.

_{High values on the Purple Magnets indicator}

On the third chart, the indicator again indicates the high values are working. The market first logically held around the high value of 81% for a while before making a sharp move down, followed by a sharp move up. And it went all the way up to a high of around 80% to 100%. Again, even at this point, we as traders could have anticipated that if the market bounced back from the lows back into the test zone, it would most likely easily pass the low of 23.3% and stall out around the highs.

How to set the Purple Magnets indicator

The Purple Magnets indicator is designed to be as easy to use as possible. Therefore, it contains only one single setting "Days". This setting can be set from 1 to 5 and represents the number of days calculated (tested) backward.

Depending on your trading style, set Purple Magnets to:

Days: 1 (scalping)
Days: 2-3 (intraday)
Days: 4 (swing trades lasting 1 to 3 days)
Days: 5 (position trader)

Each setting will simply show you different long-term important price levels for different length trades.

Why use Purple Magnets Indicator

This indicator is one of the professional market structure indicators and if you understand its meaning, it can be used for your own trading. The indicator does not directly indicate the future direction of the market, but it perfectly predicts the price behavior at given price levels. Therefore, we can use it mainly to detect where the price is likely to stop in the market or, on the contrary, where it will continue in the trend without any obstacles. This can fundamentally help us both in predicting entries into the market and in predicting exits from the market. That is, where to ideally set the SL and TP.