AN INTRODUCTION TO TRENDS

Technical analysis is based on three broad assumptions:

• The market discounts everything: The first and foremost assumption of technical analysis is that a stock's price reflects every element that has or could influence the company, including both the micro and macro factors, such as its fundamentals, company news, the state of the economy, geopolitical tension, the current and future state of the industry and market psychology. This leaves only the analysis of price movement, which technical theory sees as a result of the supply and demand for a specific stock in the market.
• Price trade in trends: This is the basic logic behind the technical analysis. Trading with trends involves determining the market's direction and taking positions that move in that direction. Every technical analyst's primary goal is to identify the trend as soon as possible, trade with it, and make a profit.
• History tends to repeat itself: Market psychology is thought to be responsible for the repetitive nature of price movements, which means that over time, market participants tend to react consistently and are influenced by similar psychological factors, such as fear, greed, and optimism to the same types of market stimuli. 

In summary, technical analysis uses historical price and volume data to identify patterns and trends that have happened in the past and uses this information to make predictions about future price movements.

If you are a human reading this and not an AI, I believe you understand the concepts of greed and fear. You must also understand how "history repeats itself" in many ways. Thus, the only concept left to clarify is what we mean by "TRENDS"?

There are several requirements needed to convert pure technical analysis into money. The first and most important is determining when a trend begins or ends. The key to making money is to "jump" on the trend as soon as possible. Although it seems easy in theory, consistently making money requires more work, skill and experience. 

But what exactly is this "trend" the investor wants to ride to make money?

• The definition of a trend in finance isn't all that different from the term's general usage; a trend is merely the general direction.
• A trend gives information about the underlying supply and demand factors influencing an asset's price by representing a consistent change in prices (i.e., a change in investors' expectations).

There are three types of trends in technical analysis:

Uptrend: An uptrend occurs when the price of an asset is consistently moving higher over a period of time. This can be identified by a series of higher highs/peaks and higher lows/troughs.

Downtrend: A downtrend occurs when the price of an asset is consistently moving lower over a period of time. This can be identified by a series of lower highs/peaks and lower lows/troughs.

Sideways trend: A sideways trend occurs when the price of an asset is moving within a relatively narrow range without a clear direction. This can be identified by a series of similar highs/peaks and lows/troughs.

Psychology of a trend

All markets worldwide, whether it is real estate, industrial products, your normal sabzi mandi, or stock markets, are run by a simple economic principle of supply and demand which ultimately determines the actual trading prices of the market. Each buyer (demand) bids for a certain quantity at a certain price and each seller (supply) offers or "asks" for a certain quantity at a certain price. When the buyer and seller agree, they establish a price for that instant. Therefore, price is the result of the supply and demand at that instant in time. When prices change, the change is due to a change in demand and/or supply. The technical analyst, therefore, watches price and price change and is fine with the reasons, primarily because they are indeterminable.

A trend is a direction, not a line

Of course, the trend is never a straight line. Then it would be too easy to tell that it had reversed. Instead, the trend is a direction rather than a line.

In other words, as it moves along the larger trend, the security price oscillates back and forth in smaller trends. This makes it challenging to predict when the larger trend is changing because any reversal indications may only apply to specific smaller trends within the larger trend. In addition, securities occasionally "rest" during trends and move sideways as all the players "digest" the earlier rise or fall. 

Technical analysts have divided trends into several broad, arbitrary categories for identification purposes. These are the primary trend (measured in months or years), the secondary or intermediate trend (measured in weeks or months), the short-term trend (measured in days), and the intraday trend (measured in minutes or hours).

The primary trend refers to the long-term direction of a security or market, which can last for several months or years or more. It is the most important trend and determines the market's overall direction.

The secondary trend is a shorter-term trend that occurs within the primary trend. It can last from a few weeks to a few months and is often referred to as a correction or a pullback. Secondary trends can be upward or downward, but they are considered to be temporary fluctuations that occur within the context of the primary trend.

Identifying and understanding both the primary and secondary trends is important, as it can help make better decisions about when to enter or exit a position. For instance, if the primary trend is bullish (upward), but there is a brief pullback (downward correction) in the form of a secondary trend, a trader may take advantage of this as an opportunity to purchase the asset at a lower price in the anticipation that the primary trend will continue its upward movement in the long run. On the other hand, if the primary trend is bearish (downward), but there is a brief upward correction in the form of a secondary trend, a trader may take advantage of this as an opportunity to sell the asset at a higher price in the anticipation that the primary trend will continue its long-term downward movement.

How to use trends for analysis

The oldest and easiest method of determining the trend of prices is with a "trend line." A trendline is a simple charting technique that adds a line to a chart to represent the trend in the market or a stock. Remember, the purpose of the trend line is to provide a signal of a change in trend.

When the price is rising(uptrend), trend lines are drawn by connecting the lows/troughs, and when the price is falling(downtrend), trend lines are drawn by connecting the tops/peaks. The lines connecting the lows and highs are extended into the future to allow the analyst to determine when the trend line is broken.

For example, in the below chart, price movement appeared to be in the upward direction. Therefore, a trend line that connected the major troughs in 2017, 2018, and 2019 and continued to the right was drawn. 

Several standard rules have been developed about trend lines. One is that the longer and the more times that prices touch the drawn trendline, the more significant it is when the line is finally broken. Another is that the steeper the trend line, the sooner it will be broken.

Some analysts, for example, draw trend lines between peak and trough closing prices rather than intraday highs and lows. I use the same strategy to draw trend lines: connecting the closing prices rather than highs and lows, as this reduces the number of false breakouts.

The angle of a trend

The power of the buyer or seller group increases with the trend's steepness. It means that one group is overwhelming the other at a faster pace. When prices are declining, sellers will accept ever-lower offers before temporarily running out of options at a trough. On the other hand, in an uptrend, buyers are increasingly anxious and willing to pay higher prices until the prices make a new high/peak.

However, the steeper the angle of ascent or descent, the less sustainable it becomes. An uptrend is a manifestation of buyer anxiety versus seller anxiety. The price trend continues until it reaches a point of exhaustion because all the stock that buyers and sellers want to sell is not transacted at once and at one price level but rather over time as news spreads and positive feedback influences other players. At the point of exhaustion, the price trend flattens out in a consolidation area or changes course to become a declining trend.

Conclusion

The majority of profits come from correctly anticipating and acting upon a trend, and for this reason, almost all technical study is devoted to early anticipation of a trend.

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