An Old Market Saying is “The Trend is My Friend”
- Image via Wikipedia
The familiar quote, “The trend is my friend”, has echoed for years in every market hall where traders have had to make money. Trading is difficult enough when predicting future price movements can appear more like luck than a technical skill, but trends are the only directional signposts that markets freely give to hint at what is to come. A wise trader learns to respect and diligently search for signs that a trend is beginning to take shape or reversing its course, the basic concept of what technical analysis is all about.
Trends are categorized as upward, downward or sideways, as noted by their general direction on a currency chart, for example. The first two types are also referred to as a “trending” market, whereas the latter can be called a “ranging” or “flat” market, or simply “trendless”. Markets never move in straight lines. Chart patterns always consist of zigzags that appear like choppy waves. A market trend is then the general direction of these peaks and valleys.
In the chart above, an upward trend has formed over a few months. Trends can also be classified according to their respective timeframes, such as major or long-term trends, secondary or medium-term trends, and near-term or short-term trends. There is no accurate demarcation between these classes, but generally, a year or more is a major trend, while a matter of months constitutes medium, and short-term relates to weeks or even days or hours in currency trading.
Traders are always looking for alternate approaches to confirm that a trend is definitely forming before executing an appropriate strategy. One common way to achieve this is to vary the timeframe of the respective chart. A trader looking to profit during a day may take a snapshot of his current chart and compare on an hourly and then daily chart to verify that his current observation is in line with what other timeframes are suggesting.
Another concept with trends is that support and resistance levels tend to form when buying or selling pressure takes the upper hand. The upward sloping line in the chart reveals the direction of the trend, and the points of contact with the line represent “support” or instances where buying exceeded selling pressure. Conversely, the peaks denote “resistance or where selling exceeded buying pressure.
Successful traders carefully observe the form of trends to detect recognizable patterns that may signal a change, either upward or downward, is imminent. In the case above, we have an “ascending triangle” as noted by the two black solid lines on the chart. The importance of support and resistance levels, outside of their original purpose, is demonstrated here also. Whenever these levels are convincingly penetrated, as on the right side of this graph, the nature of the level tends to reverse itself and become the opposite type. A watchful trader would look for this penetration and anticipate a run up equivalent to the size of the base of the triangle. These are not hard and fast rules. Chart signals are not infallible, but recurring patterns happen on a consistent enough basis that betting on them provides an edge in favor of the trader.
There are a number of these familiar patterns that attentive traders immediately recognize. Five of the favorites are as follows:
- Symmetrical Triangle
- Ascending or Descending Triangle
- Head and Shoulders – Regular and Inverted
- Double Bottom or Double Top
- Triple Bottom or Triple Top
Financial markets move in trends, and therefore, traders expect currency trends, for example, to maintain their direction and velocity. Based on studies of early pioneers in the art of technical analysis, significant trendlines tend to hover around a 45 degree angle. If their slope is much greater, they are unsustainable, and if less, then probabilities suggest a reversal is about to occur. Early analysts also developed wave theories to mimic the wave actions of trends and predict percentage retracements. Various names have been attached to these levels based on their creator. Charles Dow focused on 33, 50 and 66%. Elliott Wave theorists popularized Fibonacci ratios, and W. D. Gann added another flavor to this type of analysis.
These studies formed the underpinnings for modern day technical analysis. Software trading platforms assimilate mountains of previous pricing information that assist a trader’s search for trends, patterns, and appropriate entry and exit points for trades. Technical indicators have proliferated in the market, each requiring experience and skill for interpretation of their signals.
Active trading regimens entail high risk, and for a trader to be successful, knowledge and hours of practice on free demo systems are required, along with a disciplined approach to the market, free from emotional involvement. At the end of the day, a trader is always looking for an edge, and a friendly trend is always welcome.