For technical analysis, the trend analysis is essential. A requirement for effective charting is understanding the definition and underlying drivers. Charles Dow was the originator of the theory of modern trends and developed the approach discussed in this post.
Why markets trend?
Markets are traded and moved with emotions by human beings. When fear and greed take root over time, the psychology of market investors as a group continues to swing (fluctuate) prices around long-term trends. The following graphical presentation discusses different emotions driving markets through the various stages of a pattern, resulting in broad lateral movements and patterns.
Definition of a trend
There are three kinds of patterns, including an uptrend, downtrend and sideways movement. An uptrend is also known as a bull trend (in price), while a downtrend is considered a bear trend. It is possible to describe an uptrend as a sequence of higher highs and greater lows. Consequently, a downtrend is a sequence of lower highs and lower lows. A sideways movement is within a horizontal spectrum of peaks and lows.
Degrees of a trend
Trends can occur over any period, and different words are used to describe them. A long-term trend is usually referred to as a primary trend, with secondary and minor trends being shorter movements.
Phases of a trend
The three phases of a trend include the accumulation period, in which astute investors make informed purchases before the market starts to trend. When prices begin to advance rapidly, the engagement process follows, and the public becomes interested. The final distribution process occurs when euphoria pushes engagement to extremes. Before anyone begins to sell, astute investors understand the prolonged market conditions and start to sell.
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