Trends

In the last lesson we discussed the timeframe of a chart and its importance in the current lesson we are about to discuss the Trend.

The trend is the direction of the market. Given that market moves are being characterised by a series of zigzags a certain number of consecutive peaks and troughs are being formed. It’s the direction of exactly those peaks and troughs that betrays the general direction of the market.

Overall the concept  of a trend is very important as it allows traders to identify the direction of their trades, whether to buy or to sell a certain trading instrument, as traders rely on the existence of a trend for a certain period of time in order to predict the direction of price movements.

It’s characteristic that in the market there are sayings  like, “Always trade in the direction of the Trend”, “The trend is your friend” and “do not go against the Trend”.

At this time we must note that a certain amount of traders trade against the trend in order to profit from an unpredicted market trend reversal, yet that is considered from our side as a very risky strategy and we are to neglect it.

So the trend is where the market is heading to and it can have three directions.

• a) It may be moving upwards
• b) It may be moving downwards
• c) And it could be going from side to side

Trend lines are used to identify the directional movement of prices, to mark a trend. The slope of the trend can be used in order to grasp the rate of price changes. Their usefulness is based on the principle that once a trend is established, it usually persists for some time.

Also note that Trend lines can be used to manage trades, identify entry and exit points by focusing on:

• Trend line breaks and
• Trend line bounces

Let’s have a look

The first trend we are to examine is the uptrend

An uptrend is a series of consecutive higher peaks and consecutive higher troughs.

An uptrend line is constructed by connecting two or more higher lows. The line is extended into the future in order to act as a support during the development of the trend. It signals bullish sentiment, i.e. that prices are likely to increase. Traders usually look to buy the pullbacks near the trend line, while may also allow for the trade to remain open in the buying position as long as the trendline supports the price-action. An uptrend line is drawn by resting on the consecutively higher troughs and that’s being done for a reason. The reason is that should the uptrend lose steam and the price action no longer marks higher peaks and higher troughs, it would have to move below the upward trendline, to break it, thus signalling that the uptrend is no longer valid and a trend reversal is taking place.

The second is the down trend.

A downtrend is a series of consecutive lower peaks and consecutive lower troughs. A downtrend line is constructed by connecting two or more lower highs.  The line is extended into the future in order to act as a resistance during the development of the trend. It signals bearish sentiment, i.e. that prices are likely to decrease. Traders look to sell the corrective rebounds near the trend line. The downtrend line is drawn by resting on the consecutively lower peaks for a similar reason the uptrend rest on the troughs. Should the down trend no longer be valid, it would have to break the downtrend line, as the price action turns higher signalling a trend reversal.

Finally there is the sideways movement

A sideways trend is identified by drawing two parallel trend lines, with the one acting as a support and the other as a resistance, hence forming a trading range rectangle. The market is trading in a horizontal range with neither the bears nor the bulls taking control of prices and the price action being confined between the prementioned upside and downside boundaries. Traders usually buy near the lower end of the range and sell near the upper bound, like within a horizontal channel.

In the current lesson we discussed the three trends that characterise the markets, in the coming lesson we are to discuss channels as well as resistance and support lines.