Trading course: The use of trends in technical analysis
Trends are one of the most important aspects of technical analysis; here we look at the key elements of using trends to trade the markets.
Unfortunately, when it comes to trading the markets, it's a little more complicated than merely looking for a straight line on our charts.
As you can see from the chart below, there are lots of ups and downs but no clear indication of a trend to the uninitiated.
As trends are not that easy to spot, defining one goes beyond the obvious. Prices never move in a straight line but in a series of highs and lows. For the trader learning technical analysis, it is this movement of the highs and lows that constitutes a trend.
Uptrends describe the price movement of a security that is on its way up. An uptrend is constituted when each successive high and low is higher than the ones found earlier in the trend.
Downtrends are the same as uptrends but in reverse; so each successive low and high is lower than those previously found in the trend.
Essentially what this indicates is that there is no trend as the peaks and troughs are too close to together to work out what's happening.
In trading terms, when reading about it in the news, a long-term trend generally refers to one that is over the course of at least a year. Intermediate trends are measured over the course of between one and three months. Short-term trends are under one month.
Of course, for intra-day trading, this timescale is drastically shortened – long, intermediate and short are all relative to the type of trade.
What matters is that a long-term trend consists of several intermediate trends, some of which may very well move against the overall long-term trend. Short-term trends are considered to be components of both long-term and intermediate trends.
A trendline joins the dots on the chart. The trendline represents the overall, or long-term, trend being looked at.
As you can see from this chart, the downward trendline is drawn at the lows of the downward trend. What this line does is represent support the security has. Support is a term you will hear a lot when trading the markets using technical analysis. An upward trendline would join the highs of the upward trend. What this trendline does is represent the resistance level that the security faces each time that the security moves from a low to a high.
If you add two parallel trendlines, you create a channel. This shows where the security's support and resistance are.
Channels can slope in any direction, even sideways, but the interpretation will stay the same – we can expect the stock or currency or commodity to continue trading within these two lines until it breaks out of this channel in either direction.
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