Basic Concepts of Trend

The concept of trend is absolutely essential to the technical approach to market analysis. All of the tools used by the chartist-support and resistance levels, price patterns, moving averages, trendlines, etc. -have the sole purpose of helping to measure the trend of the market for the purpose of participating in that trend.

Markets don’t generally move in a straight line in any direction. Market moves are characterized by a series of zigzags. It is the direction of those peaks and troughs that constitutes market trend.

An uptrend would be defined as a series of successively higher peaks and troughs; a downtrend is just the opposite, a series of declining peaks and troughs; horizontal peaks and troughs would identify a sideways price trend. Most technical tools and systems are trend-following in nature. They usually work very poorly, or not at all, when markets enter these lateral or ‘trendless’ phases. It is during these periods of sideways market movement that technical traders experience their greatest frustration.

There are three decisions confronting the trader: whether to buy a stock, sell a stock, or do nothing. When a stock price is rising, the buying strategy is preferable. When it is falling, the second approach wuld be correct. However, when the stock price is moving sideways, the third choice -to stay out of the stock – is usually the wisest.

In addition to having three directions, trend is usually broken down into the three categories: the major, intermediate, and near term trends. Dow theory classifies the major trend as being in effect for longer than a year, the intermediate trend as three weeks to as many months, and the near term trend as anything less than two of three weeks. Each trend becomes a portion of its next larger trend. The intermeidate trend would be a correction in the major trend. That secondary correction would itself consist of shorter waves that would be identified as near term dips and rallies. Most trend-following approaches focus on the intermediate trend. The near term trend is used primarily for timing purposes. In an intermediate uptrend, short term setbacks would be used to initiate long positions.