Trends
In technical analysis, every technique – candlestick analysis, price pattern analysis, technical indicators, and so on – are designed to help inform our view of trends. Traders then take this insight with varying degrees of confidence and use it to place trades and take positions.
What is a trend?
In trading, we are talking about an asset’s price and there are three types of trend: up, down, and sideways.
A formal uptrend is when each successive high and low is higher than the ones found earlier in the trend, this is called a bullish trend. While a formal downtrend is when each successive high and low is lower than the ones found earlier in the trend, this is called a bearish trend.
Sideways trends occur when the price is not trending up or down and the market is in equilibrium.
Trends in multiple timeframes
A market can have different trends when viewed across different timeframes. In the trading approach we teach it is important to understand what these are.
When looking at long term trends there are three broad groups:
Secular | trends last 5 years + |
Primary | trends last a few months to 5 years |
Secondary | trends last less than a few months |
You will be able to identify shorter trends but a trader should understand these three overarching long term trends in any market they are trading.
What makes a price trend
We often, via charts, see trends but what is actually going on to make this happen?
A market is made up of its participants, this is everyone – banks, companies, individuals, governments, etc – that transact in that financial market, across all products and timeframes.
Bulls think the price will go up in the future and are therefore happy paying an ever-increasing price. Bears think the price will fall in the future and are happy selling at an ever-decreasing price. When participants have no firm view they become undecided. The collective sum of these views, expressed via the positions taken, across all products and timeframes, is represented in one single number…price.
For a price to trend up there needs to be enough bulls in a market happy to pay an ever-increasing price – the collective view is future prices will rise. It doesn’t mean every participant is bullish, it only has to marginally swing toward one opinion or the other.
Trends don’t last forever, the collective view of the participants’ shifts when enough bulls become undecided or bearish or undecided participants turn bearish – at this point the price stops trending up and goes into equilibrium. When the balance tilts towards the bears the price starts trending down.
Remember, as technical traders, we aren’t concerned with why views change – that is what fundamental analysis tells us – just the fact that they do.
Using technical analysis techniques we try to work out where this balance of power changed in the past, and use that to predict where it has the potential to move to in the future.
- Traders conduct technical analysis to assess the trend. Traders are working out how much confidence they have in the trend.
- Trends go up, down, or sideways for a particular timeframe.
- There are three long term trends in a market: secular, primary, and secondary.
- There are three categories of market participant: bulls, bears, and undecided.
- Where the collective balance of power sits between these three categories will determine the trend.
- Technical traders seek to analyze this dynamic with a view to predicting how it might play out in the future.