Trend Analysis

What is a trend?

It is the general direction which a financial market develops.

There are three types of trend within the market: primary, secondary and minor. The primary trend is the major trend lasting at least six months.

The Dow Theory describes the secondary trend as a market movement lasting from three weeks to three months.

Minor trends have a short life span stretching from minutes to several hours.

In financial markets, price tends to move in a series of zigzags forming waves. These waves constitute a market trend.

Trending markets are easy to identify, do not try to complicate things. You do not need indicators to determine if the market is bullish or bearish in nature. Remember to always trade with the trend. 

If the market is bullish, then look for buying opportunities and if the market is bearish then look for selling opportunities.

"Buy things that are going up. Sell things that are going down. And when they stop, get out!" – Rob Smith

The market trend is determined by the price moving downward, upwards or sideways.

• Uptrend

The market makes successive higher highs and higher lows.  As you can see the market has two different moves, the first move is impulsive and the second one is a retracement move, correcting the impulse move. For an up trending market, the best place to make a buy decision is at the beginning of an impulsive move

• Sideways trend

Such a market is called a trendless or ranging market because price is fluctuating at a horizontal movement. The fluctuations of price up and down indicate the period where there is a balance of supply and demand.

When the market is in a sideways trend with no clear trend direction, such a market is often called a choppy market and it is best to stay away from the market at such periods.

• Downtrend

It is characterized by a repeating pattern of lower highs and lower lows. 

What is a trend line?

A trend line is a line drawn between at least two turning points on a chart to show the prevailing direction of price.

How to draw trend lines

Draw the trendline from the line graph as the trendlines will be closer to the price. 

Example(Trendlines drawn from candlestick chart vs line graph)

To change the chart type, right click on your chart window and select line graph. 

Trendlines are drawn from the closing price. For a downtrend connect the major peaks.

After drawing the trendline from the line chart, you can change it back to the Candlestick chart. The above chart will look like this:

For an uptrend, connect the major troughs. You only need two turning points to draw a trend line, the third turning point is for confirmation of the trend. The more the turning points, the better as this confirms the strength of the trend.

As with support and resistance, trend lines can either be major or minor.

Major trend lines are plotted from higher time frame charts, for example, daily chart and they represent support or resistance levels.

Support and resistance levels

Support represents a low level that price reaches over time and resistance represents the high level that price reaches over time. In essence, support and resistance levels are the major turning points in the market.

As you can see from the chart above, the market respects the major turning points (i.e resistance and support level). Hence, we can predict when the next impulsive move will take place. Once a resistance level is broken, then the resistance level becomes a support level. The same applies when the support level is broken.

A support or resistance area becomes more important when price fluctuates around that level for a long period.

Trend Channels

A channel line reflects potential support and resistance areas.

A trend channel occurs when price is moving between two parallel trend lines. 

How to draw a Channel

Drawing a trend channel is relatively easy. Plot a major upward trendline, then plot a line parallel to your trend line moving from the first significant peak. The trend should fit well between the parallel lines. 

Example of a trend channel

If price fluctuations failed to touch the upper channel line, this is a sign of an upcoming trend reversal. The same concept applies in a downtrend.

How to use trend channels in technical analysis

Example of a Primary trend starting from January to July

Generally, the top of the channel is considered as a sell zone and the bottom of the channel as a buy zone. A channel can be used to determine the strength of a trend.

The channel boundaries should slop at the same angle.

If price fluctuations fail to touch one of its channel lines then this can be viewed as a sign that the trend is about to reverse.

Summary

A trend is the general direction which the market moves. There are three types of trends in a market: primary, secondary and the minor trend. The primary trend is the one that is used to determine the long term direction of the trend. The trend can move in an uptrend, downtrend or sideways. When plotting a trend line, identify two turning points. A trend line is drawn in a line graph based on the closing price. 

When a line is drawn parallel to the trend line, a trend channel is formed. This channel can be used to determine when to make a buy or a sell decision.

"I hear and I forget, I see and I remember, I do and I understand." ~ Confucius