Trends

A trader’s job is similar to those in the fashion industry – they both need to keep up with "trends." Also, traders don’t only need to keep up with technological trends to improve their trading - these trends are merely secondary to their main focus, which is on the trends that are made up by price action of the markets they trade. The trader’s ability to recognize these trends, and changes in these trends, early on, is often the difference between profitability and high performance returns – or the lack thereof. Trading on the correct side of the correct trend and the correct change in trend, is one of the main highways to a trader’s profits.

Time and Time Frame

At any given moment, it is possible to say that the market is both on an UP and a DOWN trend. That’s because of the different time frames involved. Some of us trade for the next 15 minutes, others will trade for the next 15 months or more, and in between that, there are a multitude of other tradable time frames. It is very important, in the analytical process, to identify a trader’s objective for his trade, before attempting to determine or match the direction of the trend – because there could be many. For example, a trader who is involved in a day trade has little use for looking at a stock’s trend over a 5-year period. Perhaps the stock’s trend for the last few hours or days would be more appropriate. Trading on the side of the trend whose time frame matches the objective of the trade is always critical in its potential for success or failure.

Up and Down Trends

An uptrend is defined as a series of higher Lows in conjunction with higher Highs in price over a given period of time.

A downtrend is defined as a series of lower Highs in conjunction with lower Lows in price over a given period of time.

Drawing Trendlines

Drawing Trendlines is as simple as connecting the series of higher lows in an uptrend and conversely, connecting the series of lower highs in a downtrend. The drawing of Trendlines can be quite subjective and a trader can use the Trendlines as a guide for whether the direction of the trend is intact or threatened. As a rule of thumb, the steeper the Trendline is, the more likely it is to be broken.

The use of Trendlines is so prevalent in the market that they often act as areas of support or resistance, attracting order flows as traders respond to hits and breaks of these lines. These tend to happen more often on symmetrical price and time (somewhat like 45 degree) lines.

Uptrend – Trend Line Connects Higher Lows
Downtrend – Trend Line Connects Lower Highs

Channels

Channels are areas in price that are defined by a consistent area of Support and Resistance. These can occur in a flat trend, where the highs all fall within the same price areas, and the lows also fall within their own defined area as well. Traders will use this information in their attempts to measure overbought or oversold conditions as price hits the upper or lower end of the trading Channel.

Consolidation Channels

Channels also occur within up or down trending markets. In uptrends, connecting the highs to each other with a Trendline, and then doing the same for the lows, defines the channels. When the upper Trendline (connecting the highs) is symmetrical to the lower Trendline (connecting the lows), a "Channel" of trading is defined in the uptrend, and serves as a guide to traders to help identify "overbought" conditions (as price hits the upper Trendline) or "oversold" conditions (as it attempts to find support at the lower Trendline). The opposite will apply to down trending Channels.

Uptrend Channel

Consolidation and Congestion

Consolidation is a trading range that can be defined by two horizontal trendlines (support/resistance) at the top and bottom of the range. This is where buying and selling is balanced - neither buyers nor sellers are winning. This pattern may signify a continuation of the trend, or a reversal. The length of the pattern can help determine its significance. The longer the pattern, the higher the probability the trend will continue for some time. The distance between the top and bottom of the consolidation is its range. The range of the pattern can help determine its significance; the tighter the range, the stronger the pattern is.

Downtrend Break and Consolidation

For confirmation that an uptrend/downtrend will continue, the top/bottom trendline needs to be broken. Until that time there is no confirmation that the trend will continue. Consolidation in an uptrend is considered a basing pattern and is an area of accumulation by institutional investors. Price is creating a base of support before continuing up.

Consolidation patterns are tradable, depending on the volatility of the pattern. The common method of trading this pattern is by going long at the bottom of the range (with a tight stop below the bottom of the range), or shorting at the top of the range, with a stop just above the top trendline.

XYZ has 2 trading ranges

Congestion areas are much more difficult and complicated to trade relative to normal consolidation patterns. It is not recommended for trading due to increased volatility and difficult pattern of price behavior.

Congestion allows for too many variables to be traded safely
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