“Technical analysis is simply to enter a position at its earliest time and close it when the trend is ending.”
But do you really think that technical analysis is as simple as this line says? As a technical analyst, our main objective is making money and this requires proper methods of analyzing a chart, a basic understanding of different trading strategies with all skills and practice of different tools and indicators.
Technical analysis is a combination of Art and Science of identifying trend changes at an early stage and it is based on one major assumption that is Trend.
Trend concept is very simple to understand but its application is difficult in practice.
Determination of trend and trend reversal is very important part of Technical Analysis and it depends on one’s skills, experience in the stock market and the ability to control the two main emotions that are greed and fear.
The trend means direction. When we refer to a trend it means a directional movement. The trend is a period in which price moves in a particular direction and a trend is that, in which a trader and investor want to make money by riding it from the beginning to the end. When prices move in a direction, called trending and there is an imbalance between demand and supply.
A rising trend is called an uptrend when price makes higher peaks and higher troughs. Here buyers are always more than sellers.
A declining trend is called a downtrend when prices make lower troughs and lower peaks. Here sellers are more than the buyers.
In every transaction there are equal number of buyers and sellers but if the buyers have enough money, they are more aggressive, they have specific information about the market/stock and the emotion of greed is propelling their actions, then prices will tend to go up and trend remain headed to upward direction but if the sellers have enough stocks, more anxious, they have negative news about the market/stock and emotion of fear propelling their actions to sell the stock then prices will move in downward direction.
A sideways trend is called a flat trend when prices trade in a range.
In the figure, the Trends are looking very clean but a trend in real-world security market is not so simple. Prices do not follow a continuous path. Small irregular counter trend movements can exist within a trend that makes it difficult to identify. If a trend is not recognizable until too late, we cannot make money in the stock market. In order to make profits, a trend must be recognized at the beginning.
There are different methods to identify a trend. Moving averages and trend lines are used to identify the trend. If a moving average and a trend line are sloping up, then it is an uptrend if they are sloping down, the trend is down trend. In a sideways trend, you will get horizontal trend lines and a moving average moves in a zigzag manner. all the trend following technique work poorly in the sideways/ trading market. So it is preferred to use price oscillators when making use of this range.
In addition to these three basic Trends, there are many different classifications of trends based on time span and these are the Primary trend, Intermediate Trend and Short-term Trend.
Primary / Major Trend:
The first and most important is the primary trend. The primary trend is the longest of three main types and generally lasts for months and years. The primary trend is a reflection of the sentiments of investors. The primary upward trend is known as Bull Trend and a primary downward trend is known as a Bear trend. The correct determination of primary trend is the most important factor for investors. It can be analyzed on weekly and monthly charts and represents the overall long-term movement of prices.
Prices do not move in a straight line, instead they move in a direction rather than a line. A primary trend is interrupted by several counter cyclical trends and that are known as intermediate Trend. In a bull trend, a decline will be an intermediate downtrend and in a primary bear trend, an advance will be an intermediate uptrend. These Trends usually lasting from 3 weeks to as many months. These can be easily recognizable at the daily chart. Many participants accompany this trend, they can be arbitrages who bet against the trend or they can be the traders who make the profit in counter-trend directions. So the prices oscillate back and forth in smaller swings along traveling in a larger trend.
Short-Term / Minor Trend:
Short-term trend generally lasts for 3 to 6 weeks. They are the interruption between intermediate trend just as intermediate trend interrupts the primary trend. They are difficult to identify than intermediate and primary trends. An hourly or 15-minute chart can be used to identify these trends. Short-term traders are concerned with smaller movements in price but they must know and trade in the direction of intermediate Trend.
A trade-in counter-trend direction may develop to losses so a knowledge of all the three trends is important for all market participants.