Understanding Trend Lines in Technical Analysis
Trend is a term describing any sudden change in popular behavior. A trend can appear on various scales including time-frame and direction of change. A trend can be a spontaneous break out of a new cultural norm, for example, or it can be the normal response of a public to a particular event or idea. A trend is normally short-lived in terms of its duration and in some cases it can last decades before fading away into oblivion. The main reason for the appearance of a trend is that the cultural norm that gives the trend its name changes over a period of time.
Trend can also be defined by other means such as by deviations from statistical normal distribution. Abnormal distributions are Ones with mean and standard deviation as values around the mean value. Abnormal distributions can occur when large numbers of market participants observe a trend of increasing variance and value. Trends can also be affected by international transactions, since trading can affect international transactions by influencing the location of prices between markets.
There are several types of trends including symmetric, trend-based and random trends. A trend can appear on any one of these time frames, which are longer than the duration of the trend itself. Symmetric trends tend to be a long-term tendency, while trend based tendencies can appear in shorter time frames.
Trend can also be defined by another concept known as a downtrend. A downtrend is a continuation of a trend that goes from its opening to its closing. Trend lines are used to identify downtrends since the distance between the two lines tends to be constant over time.
Trends are important in technical analysis since they provide information on the directions of future price movements. By watching the price of a security over a period of time, you will be able to determine the direction of the price. The direction of the price movement can then be used to forecast the future price movements. These predictions become very accurate when the information contained in the trend lines are combined with other price dynamics. This combination produces the best estimates of future market direction.
While many technical indicators are used to identify trends, there are some technical indicators that are considered the most reliable. These include the Stochastic, Relative Strength Index (RSI), moving average convergence or divergence (MACD), and exponential moving average convergence divergence (EMACD). Traders who use technical analysis to trade often combine several trendlines in their charts to get better signal and place more money in their pockets.