Trend Analysis
By Marcus Fei

One of the key tenets in the study of Technical Analysis is that prices move in trends. More specifically, a trend can be spotted when prices move in a zigzag fashion while maintaining a consistent direction over a specific period. Price trend analysis therefore is very often the very first step to take in the study of Technical Analysis and plays a critical role is determining the proper trading strategy.

The study of trend begins with two considerations, the timeframe and the direction. Timeframe is an important consideration because different traders will have different trading preferences. A long term trader might be more interested in a 3-year trend while a day trader may be interested in a 3-day trend. Generally trends are classified into primary (or major), secondary (or intermediate) and near-term (or minor). A very long-term investor/trader might consider a 30-year trend as the major trend with a 10-year trend as the intermediate trend and a 3-year trend as a minor trend. A typical trader might consider a major trend as a trend lasting longer than a year with intermediate trends lasting one to six months and minor trends lasting less than a month. A day trader might consider a 3-day trend as a major trend with intermediate trends lasting in the hours and minor trends lasting only in the minutes. It is therefore important to choose the timeframes that are relevant to one’s analysis.

Once a timeframe has been selected for analysis, determining the direction of the trend will require a careful study of the price actions. When prices move in a zigzag fashion, a series of peaks and troughs can be identified and it is through the study of these peaks and troughs we can determine the trend of the price. A series of rising peaks and troughs (higher highs and higher lows) will constitute an uptrend where a series of declining peaks and troughs (lower highs and lower lows) are used to determine a downtrend. A series of horizontal peaks and troughs is then used to constitute a sideways trend.

Sideways trend

The determination of the trend is a critical factor because as traders, we are constantly faced with three important decisions, which are to buy (go long), sell (go short) or do nothing (stay cash). It is always preferable and wisest to go long in an uptrend, short in a downtrend, and do nothing when a market is trading sideways. Generally, most trend-following traders will focus on the intermediate trend while using the minor trend to initiate positions. In an intermediate uptrend, minor trend setbacks would be used to initiate long positions while vice versa in an intermediate downtrend, minor trend rallies would be used to initiate short positions.

"The trend is your friend," "always trade in the direction of the trend," "never buck the trend" are just some of the sayings that can be repeatedly heard from market participants. The next time when you trade, pick a market, determine the trend and remember to go with the trend.

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