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17 August, 2021
What is Technical Analysis?
17 August, 2021

What are Trends?

Movimiento del mercado

One of the most important concepts in technical analysis is the trend. A trend indicates in which direction the price of an instrument is moving in a given time frame.

In this first image, it is quite easy to identify the price trend of the instrument.

However, price charts will not always display that way. In some cases, like in this second image, it will be more difficult to determine the trend.

So how are Trends identified?

As we have seen, trends are not always easy to identify. Defining a trend on the chart goes beyond an ‘obvious view’.

The price on a chart does not usually move uninterrupted in one direction, on the contrary, the price usually moves with highs and lows. These up and down movements are what is known as a trend in technical analysis.

For example, an uptrend is a series of higher highs and higher lows while a downtrend is the set of a series of lower lows and lower highs.

In the following image you can see an example of an uptrend.

Point 2 on the chart is the first high that is determined as high since after that level there is a fall in price to point 3, which is the first low on this chart. You can see that the price reaches a new high at point 4 (a higher high than the previous one) and then falls back to point 5 (a higher low than the previous one).

 

Types of Trends

There are 3 types of trends:

Duration of Trends

There are three types of duration of a trend: short, medium and long term.

The style of trading and the time frames in which you usually trade define what the short, medium and long term is. For example, for a Swing Trader, the short term can be a few days, while the long term can be months or years. On the other hand, for a Scalper, the short term can be seconds, while the long term can be a few days or weeks.

A long-term trend is made up of multiple medium-term trends and in turn a greater number of short-term trends. For example, in a long-term uptrend we could consider corrections as medium-term or short-term trends. Here we will see an example:

Trend Lines

A trend line is a chartical tool that allows you to add a line to your chart to identify a trend in the market.

Drawing trend lines is quite simple, you just have to draw a straight line that follows the price movement. In the example image, you can see that the trend line is drawn above the lows (or corrections) that occurred throughout the uptrend.

Channels

The channels are made up of trend lines, which are plotted in parallel and, as the name implies, they establish a channel around the price.

The lower trend line will always pick up the lows of the trend while the upper trend line will always pick up the highs of the trend (it doesn’t matter if the trend is bullish or bearish).

Channels are useful because they function as price support and resistance levels; likewise, they allow a trend to be clearly identified.

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