The topic I'd like to talk about today that every trader must take into serious consideration and simultaneously have respect for is the trend of the market. It doesn't matter if you trade stocks, options, and foreign currencies, commodities like gold, copper or even tasty O.J (yum). If you invest or trade without acknowledging the current trend you are most likely handing your money over to the market. As most of you already know, trends basically come in three different flavors: up trends, down trends and ranges. They tend to last for different lengths of time as well. They are distinguished as primary, secondary and secular trends. Of course traders and investors alike require tools to determine a trend at any given time, where that trend is headed and for how long. There is a plethora of technical tools out there, but I personally believe some of the most reliable indicators consist of price, volume, support and resistance lines and MACD. But before delving into that, let's take a closer look at the different types of trends.
There are generally three trends recognized in the market: down trends, up trends and ranges. They are pretty self- explanatory, except for ranges. In an uptrend, the market overall is increasing in value (I say this without taking inflation into account of course, but I'll keep it simple as long as you don't call me stupid ;-)). Everyone is making a killing, your broker looks like a wise and divine mystic and we're all holding hands singing camp songs. Down trends howeverâ€¦you guessed it, are just the opposite. People are outside walking around with their "THE END IS NEAR" signs and your neighbor is no longer bragging about his 401 (k)'s 15% yearly gains (most of which have probably moved on to money heaven, rest in peace). Of the three trends, ranges tend to be spoken of the least which puzzles me, because ranges are hands down the dominant market trend. It seems that most people fail to realize that anywhere from 60 to 75 percent of the time the market isn't trending anywhere. I like to refer to ranges as the bipolar trend because one minute the market wants to rise, but the next moment it wants to fall or stay stagnant. Despite how different these three trends may appear to be on the surface, they all share one common thread. Successful traders find ways to profit, regardless the mood of the market.
Once you have an idea where a market is headed it is important to have an idea of how long a trend will last. After all you want to know when to maximize those incredible gains (or to retreat so you can lick your wounds), but that of course is easier said than done. Trends are secondary, primary or secular. Secondary trends are the shortest of the three and generally last less than a year. Primary trends last longer than a year and can span multiple years, but a secular trend can span a quarter of a century! Obviously if you miscalculate when a trend changes its course (or not i.e. ranges) it can be detrimental to the health of your portfolio!
I've talked enough about types of trends and their various time frames, but the fun part (for some of us at least) is the technical analysis. What better way to spend your weekend than on your PC for hours on end eyes glued to and endless assortment of charts, oscillators', indicators, moving averages and those oh so revealing candlesticks? Ok maybe not that fun, but many people agree that technical analysis is the "how" when it comes to determining trends and their life expectancies. Despite all those fancy doo dads and fancy technical tools around, this writer/trader considers the simplest tools to be some of the most reliable. I won't go too into detail in this article (hint, hint), because the focus is trends and entire books have been written on technical analysis. Enough books to fill respectable sized book shelves. I would like to stress to everyone (new and inexperienced especially) the importance of using price, volume and support and resistance lines in your technical analysis. I'm not discrediting other indicators and such, but I personally find them to be the most trustworthy technical tools around for reading trends. MACD is also an indicator that I can vouch for, and in my next article I will break each of these tools down into greater depth.
Today we covered market trends. Up trends are by far the most popular, down trends are feared and ranges are the oft reliable but little recognized middle child of the group. To surf these trends successfully one must not only recognize what the trend is, but also where it is headed and for how long. In order to do this you need tools, technical tools, that are reliable. After taking in all of the information above, you may be wondering if the trend really is your friend. Well my friend, that is entirely up to you. Till next timeâ€¦