Trends: 3 Types of Trends and their significance in Technical Analysis
Technical Analysis

What Are Trends?

"The trend is your friend" is an important trading guideline. Because trends last for a long time, a position taken with the trend is more likely to succeed than one taken at random or against the trend.

Trendline is most used and misunderstood concept in the trading world. I want to make one thing crystal clear - your understanding of trendlines must be solid if you want to trade like a pro. Before you dive into the "Trendline", it is important to have an clear understanding on "Trends". Hence, we are going to discuss "Trends" and the psychology behind it.

A trend is the price movement of a market or an asset in its overall direction. In technical analysis, trends are identified by trendlines or price action.

  1. Uptrend
  2. Downtrend
  3. Sideways / flat trend
  1. Uptrend
  2. Upward Trends occur when the price of a stock moves higher or in an upward trajectory. In an uptrend, the price makes higher swing highs and higher swing lows.
  3. Downtrend
  4. When the price of a stock falls, this is referred to as a downward trend. In a downtrend, the price makes lower swing lows and lower swing highs.
  5. Sideways
  6. A sideways trend indicates little price movement or change. There is an indecision between the buyers and the sellers hence the price of an asset neither rise nor fall. In a sideways, the price moves in a channel or within a parallel line.
Swing High & Swing Low
Swing High & Swing Low
Higher High & Higher Low
Higher High & Higher Low

Market moves following some patterns. There are only three possible direction of the market movement i.e either up (upward market), down (downward market) or sideways (flat or non trending market).

three types of trends
Uptrend, Downtrend and sideways

Always try to avoid flat markets because there is a indecision between the buyers & the sellers and trading signals may generate false signals because of the market sentiment

The longer the flat market the greater the outbreak will be because when the market decides the next direction (indecision vanised) then a new trend evolves and many traders follow this trend.

Some chartists draw trendlines through lows and high, other may prefer drawing lines through closes in hopes of detecting a change in trend more quickly. But wait, Do you know how to draw these trendlines correctly?
Before we go through the ploting of trendlines on the charts it is important to discuss some mandatory rules of drawing trendlines.

Know the rules

Follow these rules to see whether your trendline is significant—

  1. At least two peaks are connected. More connecting peaks, the more valid it is.
  2. The angle of 45° is significant to trendlines. Most significant trendline occur around the angle of 45°, indicating that trend is strong.
  3. Lower level (angle) trendlines indicate that trend is close to reversal.
  4. Longer timeframe trendline is better. Day charts trendlines are more significant than 1 hours charts.
  5. Never mind about peak penetrations (as long as 1%).
  6. When you draw a trendline by connecting two peaks or troughs and there is an intermediate shawdow over the trendline, this is not considered a break as long as the closing price is below the trendline.
  7. Last but not least, Don't force trendlines on the charts. Draw it only when it is obivous meaning anyone can spot it clearly.

The longer the time period the most accurate your analysis will be. Always look the longer time charts and then transfer your analysis to shorter time period

Psychology of price movement

As you know, there are two participants in the market one is buyer and other is seller. The buyers belives price will go up and the seller feels price will decline.
Once the buyers and sellers make their trade, you can see their influence in the market. Thus, there are two aspects to every trade:

  1. Each trade must ultimately have an opposite reaction on the market.
  2. The trade will influence other traders.
Price movement in the market can be generalized into the three basic group of traders who always present in the market.
  1. Traders who have long position
  2. Those who hold short position, and
  3. Those who have not take any position but soon will.
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