The trend is your friend!
In this article, we will present some basic information about the bedrock of technical analysis – the trend.
Technical research is founded on one main assumption: market prices move in trends as they are freely traded. Traders and investors hope to buy a security at a low price at the outset of an upward trend, ride the trend, and then sell the security at a better price when the trend stops. While this technique is straightforward, putting it into effect is incredibly difficult.
Trends come in all shapes and sizes, from long-term patterns that last decades to short-term patterns that emerge minute by minute. All trends tend to have the same characteristics. Investors must choose which trend is most important for them based on their investment objectives, personal preference, and the time they are ready to spend watching market prices.
Trends are obvious in hindsight, but ideally, we would like to spot a new trend right at its beginning, buy, spot its end and sell. However this ideal almost never happens, except by luck.
What exactly is a trend?
1. An uptrend or upward trend occurs when prices reach higher highs and higher lows.
2. A downtrend or downward trend is the opposite: when prices reach lower lows and lower highs.
3. A sideways or flat trend occurs when prices trade in a range without significant upward or downward movement.
From the investor/trader’s perspective, a trend is a directional movement of prices that remains in effect long enough to be identified and still be profitable.
The most popular method amongst traders to identify a trend is looking at a graph of prices for extreme points, tops & bottoms and to draw lines between these extreme points. These lines are called trend lines. By drawing lines between tops and bottoms we get a „feeling” of the direction of price movement, rate of change of movement, and also its limits. When those limits are broken, they can warn us that the trend might be changing.
Another method for the study of trends are the moving averages which smooth out and reduce the effect of smaller trends within longer trends.
The number of trend lengths is unlimited. The ability for trends to act similarly over different periods is called fractal nature. When we say that the trends are fractal in nature we mean that in any period we look at we see trends with similar characteristics and patterns as each other. The trend length of interest is determined solely by the trader’s period of interest. This doesn’t mean that different trend lengths should be ignored. Because shorter trends make up longer trends, any analysis of a period must include analysis of longer and shorter trends around it.
Trends are determined by supply and demand.
As in all markets, whether apples, oil or used car components the economic principle of interaction between supply and demand determines prices in trading markets. Each buyer bids for a certain quantity at a certain price and each seller asks for a certain quantity at a certain price. When the buyer and seller agree and transact, they establish a price for that instant in time, whatever the reasons might be for the buyer wanting to buy and the seller wanting to sell.
The technical analyst, therefore, watches the price movement and the rate of change of prices and doesn’t concern himself/herself with the reasons of the transactions because most times they are indeterminable. The number of players and the number of different reasons for their participation in supply and demand is close to infinite. Thus, for the technical analyst, it is futile to analyze the components of supply and demand except through the prices it creates.
Furthermore, when someone invests or trades the price is what determines profit or loss, not corporate earnings or Federal Reserve policy. The bottom line is that the price is what determines success and fortunately, for whatever reason, prices tend to trend..
Trade with care.
If you like our content, please feel free to support our page with a like, comment & subscribe for future educational ideas and trading setups.
Technical research is founded on one main assumption: market prices move in trends as they are freely traded. Traders and investors hope to buy a security at a low price at the outset of an upward trend, ride the trend, and then sell the security at a better price when the trend stops. While this technique is straightforward, putting it into effect is incredibly difficult.
Trends come in all shapes and sizes, from long-term patterns that last decades to short-term patterns that emerge minute by minute. All trends tend to have the same characteristics. Investors must choose which trend is most important for them based on their investment objectives, personal preference, and the time they are ready to spend watching market prices.
Trends are obvious in hindsight, but ideally, we would like to spot a new trend right at its beginning, buy, spot its end and sell. However this ideal almost never happens, except by luck.
What exactly is a trend?
1. An uptrend or upward trend occurs when prices reach higher highs and higher lows.
2. A downtrend or downward trend is the opposite: when prices reach lower lows and lower highs.
3. A sideways or flat trend occurs when prices trade in a range without significant upward or downward movement.
From the investor/trader’s perspective, a trend is a directional movement of prices that remains in effect long enough to be identified and still be profitable.
The most popular method amongst traders to identify a trend is looking at a graph of prices for extreme points, tops & bottoms and to draw lines between these extreme points. These lines are called trend lines. By drawing lines between tops and bottoms we get a „feeling” of the direction of price movement, rate of change of movement, and also its limits. When those limits are broken, they can warn us that the trend might be changing.
Another method for the study of trends are the moving averages which smooth out and reduce the effect of smaller trends within longer trends.
The number of trend lengths is unlimited. The ability for trends to act similarly over different periods is called fractal nature. When we say that the trends are fractal in nature we mean that in any period we look at we see trends with similar characteristics and patterns as each other. The trend length of interest is determined solely by the trader’s period of interest. This doesn’t mean that different trend lengths should be ignored. Because shorter trends make up longer trends, any analysis of a period must include analysis of longer and shorter trends around it.
Trends are determined by supply and demand.
As in all markets, whether apples, oil or used car components the economic principle of interaction between supply and demand determines prices in trading markets. Each buyer bids for a certain quantity at a certain price and each seller asks for a certain quantity at a certain price. When the buyer and seller agree and transact, they establish a price for that instant in time, whatever the reasons might be for the buyer wanting to buy and the seller wanting to sell.
The technical analyst, therefore, watches the price movement and the rate of change of prices and doesn’t concern himself/herself with the reasons of the transactions because most times they are indeterminable. The number of players and the number of different reasons for their participation in supply and demand is close to infinite. Thus, for the technical analyst, it is futile to analyze the components of supply and demand except through the prices it creates.
Furthermore, when someone invests or trades the price is what determines profit or loss, not corporate earnings or Federal Reserve policy. The bottom line is that the price is what determines success and fortunately, for whatever reason, prices tend to trend..
Trade with care.
If you like our content, please feel free to support our page with a like, comment & subscribe for future educational ideas and trading setups.
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