“Trend is your friend” is a way of saying often used on financial markets, which is the result of a long-term trend study. It is the market to move and consequently, to give birth and death to the trends that characterize the movement of prices. Let’s find out what is the trend and its various facets.
Before starting trading the Forex market, or any other market, it is important to understand some basics. One of these is surely knowing what is a Trend and how to recognize it.
Using trends is important if you want to implement a successful forex trading strategy.
Traders distinguish three different types of trends and define them based on the information they give on the stock market:
- Uptrend, bullish trend with a series of increasing ups and downs;
- Downtrend, bearish trend with a series of decreasing ups and downs;
- Sideway Trend, later-stage trend.
When there is little movement on the market and downward and upward peaks follow each other in an unprecedented situation, then the market is at a later stage. This happens when there is no trend.
Usually, this type of situation is described in technical analysis by the rectangle figure, showing how price changes fall into the lines of strength and support.
In addition to direction, there are three other parameters for classifying a trend, for example the duration. The classification is:
- Long-term trend;
- Medium-term trend;
- Short-term trend.
A long-term trend is characterized by a time span that may last even one year. A medium trend can last about one to three months; a short-term trend lasts for less than a month.
Within a long-term trend we will find several intermediate trends that may also move in the opposite direction to the long-term trend. If the general trend moves upwards but is interrupted by a downward correction followed by a new upward movement, then we will have an intermediate correction trend.
Trend can be divided also into three phases (Dow theory): the primary, secondary and minor.
The Primary Trend is the largest one you can notice on a daily or weekly chart and generally lasts several months or several years. Technically we can say it is a Primary Trend if it lasts at least 1-3 years.
A Secular trend can last for ten or thirty years, within it we can certainly find several primary trends and it is very easy to spot because of the very extensive timeframe.
The Secondary Trend instead represents a “retraction” (correction) of the Primary Trend. It generally lasts from 3-4 weeks to 3-4 months and represents 1/3 or 2/3 of the previous trend movement.
The Minor Trend therefore represents the shorter day-to-day movements, it usually lasts 1-3 weeks.
To summarize everything, according also to Dow’s theory, a trend has three characteristics:
- it must have increasing (if uptrend) or decreasing (if downtrend) maximum and minimum;
- the relative minimum of each upward does not fall below the previous maximum, or is higher (if uptrend) or lower (if downtrend) than the previous minimum;
- it must have a certain inclination.
Technical analysis is critical if you need to find a trend and every trend corresponds to a predetermined trading strategy. We will never stop repeating that basics study is the basis of everything.