In technical analysis, market trend plays very important role. Virtually all of the tools used by analysts are used to determine the trend, which is used to make right investment decisions. According to practitioners, every novice investor must bear in mind three basic principles:
“I never fight the trend”
“Trend is your friend”
“Always making transactions in line with the trend.”
The most general definition of trend says that this is the direction in which for some period moves market (price). For the purposes of this study, it is worth to reach for a more extensive definition. J.J. Murphy notes that price regardless of its main directions never moves in straight lines. The movements are a series of zigzags that look like waves with clear tops and points of reflection. Direction of subsequent peaks and lows will decide on the main trend system. Based on the above definition, there are three basic types of trends:
- growing (bullish) trend – a series of successive higher peaks (HH – Higher Highs) and higher lows (HL – Higher Lows)
- downward (bearish)trend – a series of consecutive lower peaks (LH – Lower Highs) and lower lows (LL – Lower Lows)
- lateral trend (horizontal) – price moves in range of lows and highs located in the same or similar levels (in this case often is also mentioned the absence of a trend or consolidation).
Figure shows an example of the bullish trend on the graph line. Price in subsequent periods rises and falls, but holds the previously discussed factors influencing the occurrence of an uptrend. Each successive low is ranked higher than the previous (HL), as well as each of the consecutive high (HH).
Figure below shows the system in a potential downward trend. In analogy to the just discussed sample, each of the subsequent peaks is placed lower (HL) as well as consecutive lows (LL). The market in which there is a growth trend is often referred to as a “bull market” (or demand market) . When market is experiencing a downward trend we call it a “bear market” (or supply-side market) .
Last of the distinguished types of trends that can be observed in the graphs is a lateral trend (also referred to as sideway, horizontal trend or consolidation). In this case price moves sideways – you can not see downward or growth trends. Price does not go beyond the highest top or lowest low. In reality, however, may be more or less visible violations of the range of consolidation. Practitioners describe market consolidation as a lack of trend and frequently recommend in such cases to postpone trade decision until price breakes top or bottom of consolidation.
It is worth noting that most of the available tools of technical analysis are designed to study trend and make investment decisions accordingly. The situation in which we see no clear declines or rallies, but only consolidation (no trend) leads investors to major losses. This is due to matching theory used to test trend in situation in which there is no trend. That’s why when the market is in a kind of horizontal trend impasse, one of the safest and most sensible decision is to remain outside the market.