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31/7/2017 Technical Analysis: The Use Of Trend

Technical Analysis: The Use Of Trend


By Justin Kuepper

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4. Technical Analysis: The Use Of Trend

5. Technical Analysis: Support And Resistance

6. Technical Analysis: The Importance Of Volume

7. Technical Analysis: What Is A Chart?

8. Technical Analysis: Chart Types

9. Technical Analysis: Chart Patterns

The idea of a trend is perhaps the most important concept in technical analysis. The meaning in
finance isnt all that di erent from the general definition of the term a trend is really nothing more
than the general direction in which a security or market is headed.

Take a look at the following chart:

Figure 1 5-Year S&P 500 SPDR (SPY) Chart Source:


StockCharts.com

It isnt di icult to see the trend higher in Figure 1.


1.
However, its not always that easy, as demonstrated
in Figure 2 below.

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31/7/2017 Technical Analysis: The Use Of Trend

Figure 2 2-Month S&P 500 (SPY) Chart Source: StockCharts.com

There are a lot of ups and downs in this chart, but there isnt a clear definition of which direction the
stock is headed.

A Formal Definition
Trends arent always easy to spot because prices almost never move in straight lines. Rather, prices
tend to move in a series of highs and lows over time. In technical analysis, it is the overall direction of
these highs and lows that constitute a trend. An uptrend is classified as a series of higher highs and
higher lows, while a downtrend consists of lower lows and lower highs.

Figure 3 Trend Diagram Source: Investopedia.com


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Figure 3 is an example of an uptrend. Each of the high points of the trend 2, 4, and 6 are higher
than the previous high, while each of the low points of the trend 3 and 5 are higher than the I'm having trouble getting my former employer to
previous low. For the uptrend to continue, the next low point must be above 5 and the next high distribute my 401(k) plan balance to a rollover. Can yo
point must be above 6, else the trend will be deemed a reversal
reversal.. tell me the reasons why an employer might delay
distributions and if thereis a government agency I cou
contact to encourage the distribution?

Types of Trends If My Mortgage Lender Goes Bankrupt, Do I Still Have t


Pay My Mortgage?
There are three types of trends:
How do I know if I should refinance my mortgage?
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1. Uptrend
2. Downtrend
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3. Sideways / Horizontal Trends

Sideways or horizontal trends occur when there is little movement up or down in the peaks and
troughs of a trend. If you want to get technical, you might even say that a sideways trend is actually
the absence of any well-defined trend in either direction. (For more insight, see Peak-And-Trough
Analysis).
Analysis).

Trend Lengths
In addition to their direction, trends can be classified in terms of their length. Most traders consider
trends short-term, intermediate-term, or long-term. Long-term trends occur over a timeframe of
longer than one year; intermediate-term trends occur over one to three months; and, short-term
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trends occur over less than one month.

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31/7/2017 Technical Analysis: The Use Of Trend

Trends are also embedded within one another. For example, Figure 1 above is an example of a long-
term five-year trend and Figure 2 is a two-month subset of that trend. In other words, long-term
trends consist of a series of intermediate-term trends which consist of a series of short-term trends.
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Long-term uptrends may have several short- and intermediate-term downtrends along the way.
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Heres an example of how these trend lengths look in practice:

Figure 4 Trend Comparisons Source:


StockCharts.com

When analyzing a trend, its important that the chart


is constructed to best reflect the type of trend being
analyzed. Daily or weekly charts are best for
identifying long-term trends, while minute or hourly
charts are best for short-term trends. It is also
important to remember that long-term trends carry
greater weight than short-term trends. For instance, a
one-month trend isnt as significant as a five-year
trend.

Trendlines
A trendline is a simple charting technique whereby a line is added to a chart to represent the trend in
a market or stock. Drawing a trendline is as simple as drawing a straight line that connects lower
lows or higher highs to show the general trend direction. These lines are used to cut through the
noise and show where the price is headed, as well as identify areas of support and resistance
resistance..
Support levels are where the price rebounds higher multiple times, whereas resistance levels are
where prices rebound lower multiple times. The strength of support and resistance levels are
determined by the number of rebounds from the trendline. (To read more, see Support & Resistance
Basics and Support And Resistance Zones Part 1 and Part 2).2).

Figure 5 Trendline Examples Source: StockCharts.com

Figure 5 shows an example of a downtrend trendline where the stock price experiences resistance, as
Figure
well as an uptrend trendline where the stock price experiences support.

Channels
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31/7/2017 Technical Analysis: The Use Of Trend

A channel consists of two trendlines that act as strong areas of support and resistance with the price
bouncing around between them. The upper trendline consists of a series of highs, while the lower
trendline consists of a series of lows. A channel can slope upward
upward,, downward
downward,, or sideways
sideways,, but
regardless of the direction, the interpretation is always the same. Traders expect the price to trade
between the support and resistance trendlines until it breaks out beyond one of the two levels, in
which case traders can expect a sharp move in the direction of the breakout. Along with clearly
displaying the trend, channels are used to illustrate important areas of support and resistance for
the stock price.

Figure 6 Price Channel Source: StockCharts.com

Figure 6 illustrates a sideways channel where the upper trendline connects a series of highs and the
lower trendline connects a series of lows. When the price breaks out from the upper trendline, the
upper trendline becomes a new support level as the stock moves higher.

The Importance of Trend


It is important to identify and understand trends so that you can trade with rather than against
them. Two important sayings in technical analysis are the trend is your friend and dont buck the
trend, illustrating how important trend analysis is for technical traders.

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