The trend is the direction in which the price goes in a given period of time
When we open a chart, the most important thing should be to determine the market trend. This is very important because, often the wrong definition of market sentiment, causes that we play against the trend, and this very often involves a rapid loss of your account balance, i.e. account cleaning. Due to the duration of the trend, we distinguish: • a long-term trend (main trend) that lasts at least six months • a medium-term trend (secondary trend) that lasts from three weeks to three months • short-term trend that lasts up to 3 weeks
Why is investing "with the trend" so important? The answer is very simple because:
1) The probability of the trend continuing is much higher than its reversal 2) Playing against the trend is like swimming on a river against the tide. It is much easier and safer to go with the flow, this must also be our attitude on the market. 3) "Trend is your friend" - this is one of the most famous maxims found on financial markets, which has been used for decades
What types of trends do we have? We have 3 types of trends: upward, downward and sideways. Each of them will be discussed in detail, so that we do not have problems with their interpretation on the chart. We must also remember that it is best to determine the trend at higher time intervals, then it is much "stronger" and the chances that it will change quickly or that we will make mistakes - are decreasing.
- Upward trend We recognize it after the price on the chart breaks higher and lower peaks. The points (i.e. holes) marked in the picture below are green arrows. To determine the trend line, we connect it with a line and so we see what the trend is, i.e. what moods prevail on the market. While the price honors the upward trend, we can say that the market is booming, which consists of stages such as: accumulation of prices, then growth, speculation and euphoria. Examples are:
We must remember that to set a trend line, you must connect a line with at least two holes together. The more contact points we have with the line, the stronger the trend. Below is an example of an upward trend, where after a certain period the price negated the trend by breaking the line. In this case, we got a clear signal that market sentiment has changed. It is worth noting how the price tried to return to the upward trend, but each time these attempts ended in failure. The price bounced off the trend line several times.
Increased supply is visible, which is a clear signal to us that there are more investors selling a given instrument than buyers.
- Downward trend It is characterized by the fact that subsequent peaks and holes are located lower and lower. The opposite situation than in the upward trend. When we see that the price honors the downward trend line, then we say that the market is bearish. Subsequently, its stages are: distribution, price decline and the panic phase that accompanies it.
Here is another example, we see how lower and lower peaks are drawing, and the price is systematically falling. It is also worth paying attention to candle wicks, which are another proof for us that the market is dominated by supply.
In the graphic below we can see a downward trend that has been negated, i.e. the price has broken through this trend line and which is extremely important stayed above it. It was a clear signal about changing market sentiment, i.e. increased demand for this instrument.
What to look for when determining whether a trend change has occurred? First of all, the price must remain above (if we are moving from downward to upward) and below (from upward to downward). There are often different types of traps on the market, where the price breaks the trend but then comes back to it. Therefore, it is best to assess situations and moods on the market only after the next candles are closed, then we are more likely to see whether we are witnessing a change in the trend or a simple trap. Here is an example where the price, despite breaking the trend line, returned back to it:
- Side trend (horizontal) We can characterize it by the fact that the price on the chart breaks holes and peaks at a similar level. There are no major differences, we cannot determine either an upward or a downward trend. The lateral trend is also called consolidation because it often occurs when the downward trend transforms into an upward trend (or vice versa) and as a break in the upward / downward trend followed by its continuation. Here is an example:
Here, we see exactly how the price consolidated (i.e. was in a lateral trend), and then we saw a further decline - that is, the period from October 15 to November 14, was a transitional period, after which the downward trend continued. The cycles we see on the market, i.e. trends - have their transition stages, which we will explain in detail in the next part. If we learn to capture them well, then we will have a chance to be in the group that earns on the market. "Accumulation" is an important moment on the market. This is a period when no investor is interested in buying a given instrument or there is very little investing and a lot of bad information. Then, after some time, the rate begins to go up slowly, and fresh people on the market do not see that the upward trend is emerging. This moment is the period when experienced investors start buying a given instrument. This can be compared to the start of Formula 1, where the lights come on, which are a signal to the driver that the race will start soon, the engines are working louder, the accumulation of emotions lasts, and finally very energetically moving forward. This is also how the price behaves when it is in such "runs". Accumulation ends with a strong upward impulse. Here is an example:
Let's pay attention to the volume under the chart (these are vertical bars. The volume is the volume of turnover achieved by a given asset, it shows the degree of investor involvement). Green is buying, red is buying. We can see exactly how the price "was gathering" in these "runaways" to later shoot up.
The next important stage is distribution, that is, during this period there is a lot of positive information in the media, the Internet, television, there is enthusiasm among many people who wind up each other, "getting on a train" that has long gone, while the price does not rise. This is the time when experienced investors resell the instrument to beginners who build their beliefs that the price will be even higher. Distribution is much harder to recognize than accumulation, because while the accumulation of prices is so low that it is quite easy to state that it would be harder to go even lower, distribution can be confused with ordinary consolidation, which is just a stop in the trend. Distribution occurs after a prolonged increase, when we see that supply is increasing and market demand is falling. Such a sign may be ever higher wicks on candles and an increase in sales volume. Below is an example of distribution:
We see the price after a prolonged increase, begins to stop, the volume of sales increases and this is a signal that we can undergo distribution. Here is another example: