The trend in trading - what is it and how to build trend lines
In this article we will talk in detail about such a concept as a "trend" in the financial markets. What does this give traders and how to earn money. We will also talk about how to correctly build trend lines according to theory.
1. What is a trend in the market in simple words
Local extremes are understood as points on the graph that have a clearly degenerate peak character. Most often, the market moves in waves (impulsive movements), after which there comes a period of lull and correction.
Trends are the basis of technical analysis. Many analysts base their forecasts only on the basis of trend lines, which cannot be reliable information.
The concept of a trend exists in almost any area of life: mathematics, fashion, politics.
Most often, trend movements occur in the stock market for stocks, as they are prone to growth. This is due to rising profits and inflation. Less commonly, trends occur on Forex. That is why this market has the largest number of speculators and day traders (they trade intraday).4 phases of a trend
- Formation (market is determined with direction)
- Accumulation (accumulation of position)
- Saturation (trend attenuation)
- Completion (U-turn)
2. Trend lines - what is it and how to build it right
Trend line is a straight line drawn through local extremes (two or more points). Most often it is built through 2 points. Rarely, when a line withstands touch more than 4 times.
To build trend lines, you need to open a chart on a large timeframe (daily or four-hour charts). You can open smaller timeframes, but there will be much more market noise, false breakouts (shadows) on them. Therefore, the construction of the line can cause difficulties. Plus, there isn’t much sense in this, since the trend is not too stable in small market areas.
We find local extremes and draw a trend line:<
These lines are strong levels of support and resistance. The longer they hold prices, the stronger the level.
Very often build price channels. This is done by constructing a second trend line based on local peaks or simply relative to a parallel line:<
Very often, trends break. This is the moment when the price goes out of line. In this case, it is necessary to rebuild it according to the newly formed extrema (if possible).
In general, going beyond the price channel is a great opportunity to take profit or gain a position (if we are talking about the stock market).
3. Types of trends - what they are
There are two types of trend in the direction:
- Uptrend (bullish, up-trend)
- Downtrend (bearish, down-trend)
The market is trending only 1/3 of all time. The remaining time, it fluctuates in a narrow range without establishing a clear pattern of extrema. Such a period of time is called a flat. It is also called a sideways trend, sideways, consolidation.<
The following types of trends are divided by duration.
- Long-term (from 2 years and more)
- Medium-term (from six months to 2 years)
- Short-term (up to six months)
4. How to trade with the trend
There are famous phrases:
Trend is your friend
They can be called the most important fundamentals of trend trading. Even someone who is far from the rules and nuances of trading can make money if he simply enters the beginning or middle of the trend.
What should a trader know when trading on a trend:
- It can't last forever
- The direction of price movement does not change instantly. It takes some time before the market finally reverses. Exceptions are V-turns. They work best when changing a downtrend to an uptrend and are accompanied by large volumes.
- The simplest strategy on the exchange is to sit in a trend and not twitch. Investors call it buy and hold.
- Opening positions against the trend (looking for pivot points) is like trying to stop a moving train. Larry Williams also compared a similar game to catching knives flying down.
- Trends regularly appear on the market
- The moving average with a period of 55 on the daily charts is an analog of the trend line
However, despite all the clever words and tips for difficulties when trading with the trend, there are plenty of:
- Being in the black, many traders are stubbornly looking for pivot points, because they want to do something. A long position in the black causes some pain that I do not want to lose profits.
- Most nascent trends never flow into something big, so false entrances are often
- Trends can change their tilt angle, breaking the previous low. As a result, most investors exit the market, and the trend continues.
- How to determine a trend reversal
- Divergence and convergence in trading
- The stock market is growing with volumes - what does it mean