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“riding Trends Down Under: How To Capture Long-term Forex Profit In Australia” – Simply put, short-term, medium-term, and long-term trends are the three types of trends we see every day in our technical analysis study. “The trend is your friend,” is just one of the sayings that emerged from the study of both primary and secular trends.
Some people try to identify trends by looking at averages. By understanding that market psychology actually moves the markets, we can recognize that psychology develops and terminates the trends we will look at today.
“riding Trends Down Under: How To Capture Long-term Forex Profit In Australia”
Learning to identify a trend should be the first task of any student of technical analysis. Once invested in an uptrend, most investors will stay there looking for any weakness in the uptrend, the indicator needed to jump out and take profits.
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Bull and bear markets are also known as primary markets; history has shown us that these markets generally last between one and three years.
A secular trend, which can last from one to three decades, has many primary trends in its parameters and is largely easy to recognize because of the time frame. A price-action chart over a period of about 25 years would appear to be nothing more than a series of straight lines that gradually move up or down.
Take a moment to look at the S&P 500 chart below. The chart shows the development of the markets from the 1980s to the mid-2000s, showing the rise of the market until the turn of the century.
In all primary trends, there are transitory trends that keep business journalists and market analysts constantly searching for answers as to why an issue or market will suddenly turn around and go in the opposite direction from yesterday or last week. Sudden rallies and reversals are transitory trends and are usually the result of some sort of economic or political action and its subsequent reaction.
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History tells us that the rally in bull markets is strong and that the reactions are somewhat weak. The flip side of the coin shows us that bear market reactions are strong and rallies are short. Hindsight also shows us that every bull and bear market will have at least three transitional cycles. Each transitional cycle can last as little as two weeks or as long as six to eight weeks.
To determine the long-term trends that appear on the charts of their favorite stocks, experienced analysts will use the stochastic indicator. But my favorite is a momentum indicator called the Rate of Change (ROC) (which you can read about in the Rate of Change section):
A common time frame for measuring ROC is 10 days. The ratio to create the ROC indicator is as follows:
“Y” represents the last closing price and Yx represents the closing price a specific number of days ago. So, if the share price closes higher today than 10 days ago, the ROC value point will be above the break-even point, which means to chartists that prices in that issue are rising.
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Conversely, if the price closes lower in today’s session than it did 10 trading days ago, the value point will be below equilibrium, indicating that prices are falling. It is safe to say that if the ROC is rising, it gives a short-term bullish signal and a bearish sign would make the ROC fall.
Chartists pay a lot of attention to the time frame when calculating the ROC. Long term views of the market or a particular sector or stock will use perhaps a 26 to 52 week time frame for Yx and a shorter view would use 10 days to six months or so.
You can see that by changing the number of days or weeks as the time frame, the chartist can better determine the direction and duration of the trend.
Markets are made up of several different types of trends, and recognizing these trends will largely determine the success or failure of your long-term and short-term investing. Trend trading is a trading style that attempts to make profits by analyzing the momentum of an asset in a certain direction. When price moves in one general direction, such as up or down, it is called a trend.
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Trend traders enter a long position when a security moves higher. An uptrend is characterized by higher swing lows and higher swing highs. Similarly, trend traders may choose to enter a short position when the asset is declining. A downtrend is characterized by lower swing lows and lower swing highs.
A trend trading strategy assumes that the security will continue to move in the same direction as it is currently trending. Such strategies often include a take-profit or stop-loss provision in order to secure a profit or avoid heavy losses if a trend reversal occurs. Trend trading is used by short-term, medium-term and long-term traders.
Traders use price action and other technical tools to determine the direction of a trend and when it might move.
Price action traders look at price movements on a chart. In the case of an uptrend, they want to see the price move above the recent highs, and when the price goes down, it should stay above the previous swing lows. This shows that even though the price oscillates up and down, the overall trajectory is up.
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The same concept is applied to downtrends, with traders looking to see if price is making overall lower lows and lower highs. When this no longer happens, the downtrend is challenged or ended and the trend trader will no longer be interested in holding a short position.
There are many different trend trading strategies, each using different indicators and price action methods. For all strategies, a stop loss should be used to manage risk. In the case of an uptrend, the stop loss is placed below the swing low that occurred before entry, or below another support level. In a downtrend and a short position, the stop loss is often placed just above the previous swing high or another resistance level.
Traders often use a combination of these strategies when looking for trending trading opportunities. A trader may look for a break of a resistance level to indicate that a move higher may begin, but will only enter a trade if the price trades above a particular moving average.
These strategies include entering a long position when the short-term moving average crosses the long-term moving average, or entering a short position when the short-term moving average crosses below the longer-term moving average. Alternatively, some traders may watch for when the price crosses the moving average to signal a long position, or when the price crosses below the average to signal a short position.
Identifying Market Trends
Usually, moving average strategies are combined with some other form of technical analysis to filter out signals. This may involve watching price action to determine a trend, as moving averages provide very weak signals when no trend is present; the price just swings back and forth through the moving average.
Moving averages are also used for analysis. When the price is above the moving average, it helps to indicate that an uptrend may be present. When the price is below the moving average, it helps to indicate that a downtrend may be present.
There are many momentum indicators and strategies. When it comes to trend trading, an example would be looking for an uptrend and then using the Relative Strength Index (RSI) to signal entries and exits.
For example, a trader can wait for the RSI to drop below 30 and then move above that value. This could signal a long position, assuming the overall uptrend remains intact. The indicator shows that the price has pulled back but is now starting to rise again in line with the overall uptrend.
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A trader can potentially exit when the RSI rises above 70 or 80 and then drops back below the chosen level.
A trend line is a line drawn along swing lows in an uptrend or along swing highs in a downtrend. It shows a possible area where the price may retreat in the future.
Some traders also choose to buy during an uptrend when the price pulls back and then bounces higher from the rising trendline, which is a dip buying strategy. Similarly, some traders choose to go short during a downtrend when the price rises to the downtrend line and then declines away from it.
Trend traders will also watch for chart patterns such as flags or triangles that indicate a potential trend continuation. For example, if price is aggressively rising and then forms a flag or triangle, a trend trader will watch for price to break out of the pattern to signal a continuation of the uptrend.
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The following Alibaba Group chart shows some examples of how trends can be analyzed, as well as some examples of potential trades using chart patterns and the trend.
The price starts in a downtrend and then rises through
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