Trends are essentially patterns in the movement of something. For example, if we look at the rise and fall of stock prices, we can see that the stock prices rise and fall in a predictable pattern called a trend. We can further define trends as a general agreement among economic theories that something is likely to happen. It might be the general opinion that interest rates will continue to rise for another two months, the average oil stock price will rise another five cents, and the price of gold will increase one percent over the next six months.
The best way to trade on the rise in the price action of a security is to find support at the trendline. Technical Indicators are used to confirm the trend. When you find support at the trendline, you know the price action is going to be the same as the price action near the resistance or support.
Trend lines are drawn by technical analysis, or price action in relation to the overall direction of the market. A trendline is a line connecting the high and low points of a trend, and also the distance between them. A trend might break up along these trendlines, or it may simply break at a single point. Traders look to see if the trend continues in the same direction (up) as it broke out. When it is breaking out, traders look to make big profits by selling short the long side of the trendline.
There are different ways to identify trend lines and their intersections. Most trend lines connect two slumps, or price curves, in the same way that a curve connects two points on a graph. For instance, if the price has crossed the resistance line, a trend line connecting the high with the low and the bottom of the trendline connects the point where the price broke out of the lower low. A straight line connecting two trendlines is called a support line.
Another important tool for trend analysis and prediction is the use of the MACD, Moving Average Convergence/Divergence. MACD uses moving averages, which are typically lagging indicators, to help traders determine the overall direction of the market. These moving averages are intended to help traders determine where the market will go next. However, they can also provide valuable support or resistance levels for an indicator. The MACD can also help predict the total direction of the market based on the size of the lagging indicator. For instance, if the MACD shows a small period of consolidation between two trendlines, this is a good sign that the market is about to reverse.
The use of technical analysis and chart patterns to help predict the direction of the market is known as technical trading. Successful traders use a combination of technical analysis techniques as well as other kinds of trading techniques such as fundamental analysis and hedging to determine the best course of action in the face of changing market conditions. Although trend analysis can be used in any trading situation, it is especially important in challenging markets where traders must act quickly to maintain or establish a position in the trading market.
