Trend is the most important concept in technical analysis. A trend is the direction in which the market or a security is headed. The movement of high and low price movements constitutes the trend. For example, uptrend means series of higher lows and higher highs. On the other hand, downtrend means series of lower highs and lower lows.
Trends are basically of three types:
Uptrend: When each successive trough and peak goes higher, it is known as uptrend.
Downtrend: When the troughs and peaks get lower, it is called downtrend.
Horizontal / Sideways trends: When the troughs and peaks do not show much movement, it is known as horizontal or sideways trend.
Apart from the direction of trends, trend can be further classified into long term, intermediate and short term trends. Long term trend is one which lasts for longer time that is more than a year. An intermediate trend lasts for a time period between three months and one year. Short term trend is that which lasts for anytime less than one month. Long term trends consist of a number of intermediate trends which move opposite to the direction of long term trend. Similarly, short term trends make up both intermediate as well as major trends.
Trendlines are charting techniques which add lines to a chart in order to represent a trend of a particular stock or that of a market. Trendlines can be drawn simply by sketching a straight line following a general trend. These lines not only show the trend, but also help in the identification of trend reversals.
Channels or channel lines is the name given to the addition of a pair of parallel trendlines which act as strong pillars of resistance and support. Upper trendline connects the high series whereas lower trendline is used to connect all low series. Channels can either slope downwards, upwards or sideways. However, despite of the direction, its elucidation and interpretations continues to be the same. Traders expect the given securities to trade amongst the two support levels until it is successful in breaking beyond one of these levels. In that level, the traders expect sharp movements in the course of the break. Channels are also used to explain the most important areas of resistance and support.
The Significance of Trend
Understanding and identifying the trend is extremely important as it enables one to trade with the trend and not go against it. The two most important sayings which guide technical analysis are “don’t oppose the trend” and “trend is our friend”. These two saying about technical analysis indicate the importance of trend analysis for all the technical traders.