The Trend in Trading

Technical Analysis in favor of the trend

In my years of experience they tell me that the holy grail does not exist, there are no methods that are always right. You can have a system where you can win 70% of the time and make money trading, but 100% success is impossible. In decision making you can start with an analysis of the different assets, and execute it when you think we are at the best time, that is where technical analysis comes in.

The basis of technical analysis is to try to have a reference on the future behavior of an asset, based mainly on the behavior of the price and the trading volume, as well as the analysis of the different graphic figures that are formed.

A fundamental point of technical analysis is the psychology of the masses and how people’s feelings influence the prices of different assets.

The trend is your friend

We must look for these trends by analyzing the evolution of the different technical indicators. To begin with, the ideal is to use annual and logarithmic or percentage graphs (so as not to analyze absolute price variations), going later to the monthly and weekly analysis. The more coincidences in the different time periods, the more reliability.

The highs and lows should be rising, and we will buy at support (low points) and sell at resistance (high points). If the price is above the moving average of the last 200 sessions, we confirm this trend. The timing strategy with the moving average allows us to avoid certain bearish points or secondary trends, capturing the moments with clearer upward impulses.

There are three types of trend: Bullish, Bearish and Sideways.

Bullish trend: Bullish trends are those in which the lows are increasing, as we see in the following image, the low (c) is higher than (b), and as (b), in turn, is higher than (a ).

The same should happen with the highs, each of them should be higher than the previous one. We see how (3) is greater than (2) and this is greater than (1).

Downtrend: Downtrends are those in which each high, represented by letters, is less than the immediately previous high, lower highs. In the image we can see how the maximum (c) is less than (b), and how (b), in turn, is less than (a).

The same should happen with the minimums, each one of them should be lower than the previous one. We see how (3) is less than (2) and this is less than (1).

Sideways Trend: Sideways trends are those in which highs and lows fall between two price levels. The upper price level is called resistance and the lower price level is called support. We see how all the highs (1, 2 and 3) fail to overcome the resistance just as the lows (a, b and c) fail to pierce the support.

More things about trends

The market has three types of trends: The primary trend is long-term (more than a year). The secondary trend, with the shortest duration, is the one that corrects the primary trend. According to Dow, the correction made by the secondary trend is between 33% and 66% of the movement made by the primary trend. Finally, we have the minor trends, which are within the secondary trends. The latter are less important in the medium and long term.

Primary trends consist of three phases: The accumulation phase is the beginning of the trend, where the most informed begin to take positions in a security. The trend phase is when a majority of investors join the trend started in the previous phase. Finally, the distribution phase marks the end of the trend and many of the investors who entered in previous phases have already exited the asset.

We can detect trends and changes in trends using Moving Average strategies, which are based on the price crossing over the average and the average crossing. It should be noted that moving averages can be optimized to calculate what number of sessions is best for higher returns.

Sounds interesting to you, right? Keep learning trading with DTP with upcoming articles on our Blog.

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