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Figure 1 shows a series of prices. Point 2 is the first high, which is determined after the price falls from this point. Point 3 is the low that is established as the price falls from the high. For this to remain an uptrend each successive low cannot fall below the previous lowest point or the trend is deemed a reversal.

As the names imply, when each successive peak and trough is higher, it is referred to as an upward trend. If the peaks and troughs are getting lower, it is a downtrend. When there is little movement up or down in the peaks and troughs, it is called a sideways or horizontal trend.

If you want to get really technical, you might even say that a sideways trend is actually not a trend on its own, but a lack of a well-defined trend in either direction. Therefore, the market can trend in three ways: up, down or nowhere.

Short, Medium or Long Term Trends

There are three trend classifications. A trend of any direction can be classified as a long term trend, medium term trend or a short-term trend. Different traders and investors have different time horizons for their outlook. For example the “long term” for a forex trader might be around six months, while that of an equity investor might be one to two years or perhaps even longer. For the sake of trading forex, a short term trend could be considered to last for a few days up to a couple of weeks; while a medium term trend might be a few weeks to a few months.

The longer term trend is composed of several medium term trends, which can often move against the direction of the major trend. If the primary trend is upward and there is a downward correction in price movement followed by a continuation of the uptrend, the correction is considered to be a medium term trend. The short-term trends are components of both primary and medium term trends.

What are trendlines?

One of the most important concepts in technical analysis is that of trends. A trendline is a simple charting technique where a line is drawn to represent the trend in the price. These lines are used to show the trend as well as the identification of trend reversals.

Unfortunately, identifying trends is not always easy, and a common accusation is that trendlines are often subjective. In any given chart, it is noticeable that prices don’t tend to move in a straight line in any direction, but instead in a series of highs and lows. When a series of higher highs and higher lows is in place, if you can link them, this is an uptrend. Alternatively, where there is a series of lower lows and lower highs that can be linked, this will constitute a downtrend.

1. Trade with Trendlines

Figure 1: The process of building an uptrend

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1. Trade with Trendlines

Trading Trendlines

Trendlines are another form of support and resistance. Therefore in an uptrend, a correction back towards the support of the uptrend can be a chance to buy; whilst in a downtrend, a rally towards the trendline can be an opportunity to sell. The more often a trend line is used as the basis of support, the stronger the conviction of the trade.

In the example of GBP/USD above, towards the end of July 2012 an uptrend is beginning to form and the correction in early August could be used as a chance to buy. With the uptrend extending, the medium term downtrend is merely a 10 week correction within the uptrend, and the support formed in mid-November turns out to be another chance to buy. When the primary uptrend is breached in mid-January, this is a signal to sell or a signal to take profits on long positions.

The chart above also shows that once the trendline is broken, there can often be a sharp move as traders see an important level having been removed. In a similar way old broken supports become resistance, and old broken uptrends will become resistance to a recovery.

Remember: The Trend is your Friend

It is important to be able to understand and identify trends so that you can trade with them, rather than against them. There are two important sayings in technical analysis, “the trend is your friend” and “don’t buck the trend”. These illustrate how important trend analysis is for technical traders.

Figure 2: Short, medium and long term trends in GBP/USD

Remember! Trend is your friend

Figure 4: Range trading using the Bollinger Bands on Silver

Risk Warning for Educational Material

This document is issued by Hantec Markets limited, who is authorised and regulated by the Financial Conduct Authority (FCA) in the UK, No. 502635. The document is prepared and distributed for information and education purposes only. Trading in Foreign Exchange (FX), Bullion and Contracts for Differences (CFDs) is not suitable for all investors due to the high risk nature of these products. Forex, Bullion and CFDs are leveraged products that can result in losses greater than your initial deposit. The value of an FX, Bullion or CFD position may be affected by a variety of factors, including but not limited to, price volatility, market volume, foreign exchange rates and liquidity. you may lose your entire initial stake and you may be required to make additional payments. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions. Before deciding to enter into FX, Bullion and/or CFD trading, you should carefully consider your investment objectives, level of experience, and risk appetite. you should only invest in FX, Bullion and/or CFD trading with funds you are prepared to lose entirely. Therefore, only your excess funds should be placed at risk and anyone who does not have such excess funds should completely refrain from engaging in FX and/or CFD trading. Do not rely on past performance figures. If you are in any doubt, please seek further independent advice. This document does not constitute personal investment advice, nor does it take into account the individual financial circumstances or objectives of the clients who receive it. All information and research produced by Hantec Markets is intended to be general in nature; it does not constitute a recommendation or offer for the purchase or sale of any financial instrument, nor should it be construed as such. All of the views or suggestions within this document are those solely and exclusively of the author, and accurately reflect his personal views about any and all of the subject instruments and are presented to the best of the author’s knowledge. Any person relying on this document to undertake trading does so entirely at his/her own risk and Hantec Markets does not accept any liability.

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