Friday, 13 February 2015

Trend

TREND

A trend defines a direction in price movement.  A rising trend (uptrend) is formed when prices reach higher peaks and higher troughs.  A decreasing trend (downtrend) is formed when prices reach lower peaks and lower troughs.  A sideways trend (flat trend) occurs when prices tend to trade in a specific range.  A flat trend is also called a consolidation or congestion area.

A trend should be identified as early as possible and it remains valid as long as it could be identified and still be playable.

Prices tend to switch from trending to ranging behavior.  Rarely they remain to act in only one of those two ways for an extended period of time. 

Trend Strength

There are three  main indicators of the strength of a trend:
  1. Movement in the direction of the underlying trend.
  2. Correction or consolidation before the primary trend resumes.
  3. Role of Support and Resistance.

Trend Movement
The magnitude of the move above the previous base indicates buyers' enthusiasm. The more bullish buyers are, the further they will be willing to venture above the safety net of the previous correction or consolidation.




















Correction or Consolidation
Short corrections and narrow consolidations also reflect trend strength. A short correction indicates that buyers have overwhelmed sellers or simply that sellers are disinterested. In either case this is a positive sign for the underlying trend.














Role of Support and Resistance
When price breaks above its preceding high, resistance at the earlier high becomes support for the new breakout, with buyers likely to accumulate should price retrace near the breakout level. The new support level will be relatively weak compared to support at the previous low; so when the new level holds it indicates a strong up-trend.

If initial support does not hold at the first attempt, buyers and sellers may be more evenly matched and the up-trend is likely to be slower and more uncertain. If price later respects the initial support level, that is a sign that trend strength may be increasing.

















Extension and Dips
Sometimes measuring the extension and dips and comparing them with the earlier ones can be helpful to gauge the trend strength.

Extension is a distance between one swing high and the previous swing high in an uptrend and vice versa.  Compare it with previous extension.  If it is more, then trend is accelerating.

Measure the dips (pullback), how deep they are.  Compare them.  Deeper pullbacks denote less strength.





















6 comments:

  1. Daveji,

    Another beautiful post. One of the problems of new traders taking up DP trading is that they get obsessed with BOF and end up taking too many CT trades on trend days too. I had done this mistake many times.By analysing strength of the move, corrections and Supports and Resistances, as you had explained, we can guard against the tendency to take CT trades.

    Request you to write about another key area, when time permits, where I have failed terriibly

    When price tries to reverse after moving in one direction reasonably, I find it very difficult to take up trades at the right time in the right direction. When there is a strong vertical fall, price retraces and forms a RH after some consolidation. Here, if the price settles above RH, bias will turn bullish. But picking up trades at this Range extreme has always been difficult. One could see Complex Pull back and all kinds of choppiness before price moves in a direction. A few lines from you on how you decide your entries at this location will be helpful to me.

    Thanks,
    S.Karthikeyan

    ReplyDelete
    Replies
    1. SK

      Thanks. As I said prices will be either trending in one direction or consolidating in a range. Prices will continue doing this and many attempts of reversal will fail when the trend is strong. One should be cautious because after the first move against the trend, the market actually continues to trend and attempts to test the old extreme level in the trend.

      I feel one should try to trade with-trend only in initial phase of the trading career and completely avoid taking CT trades. The trades you took on Friday were with-trend trades. Concentrate on such setups and try to trade them only till you gain confidence and start earning some money.

      My next post will be on Range. I hope it would help you some way.

      URD

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    2. Daveji,

      Thanks a lot for the detailed reply.

      S.Karthikeyan

      Delete
  2. Hi URD,
    Good to see you back.
    I have a query regarding a comment you made on ST's blog on 21 Nov '14 (http://niftynirvana.blogspot.in/2014/11/21112014.html). You referred to 20 Nov '14 as reversal day. Why did you term it a reversal day? What criteria did you use?
    Thx,
    DM

    ReplyDelete
    Replies
    1. DM

      There was a good pin bar (reversal) on 20th on daily chart. Also it reversed from the 5 day low in a very good uptrend. Whenever price reverses from the higher time frame S/R and if it is supported by other factors like overall trend, its strength, we can presume the type 1 trend day the very next day after the reversal day.

      URD

      Delete
    2. Thx URD. Will post your reply on ST's blog of that day so that it is useful to other readers as well. DM.

      Delete