Trends · PDF fileretracement levels for signs of a reversal. Fibonacci Levels (38.2%, 50%, 61.8%) are common levels. ... Gann Fans W.D. Gann found from his hand charting

Trends● Define the term “Trend”● Explain why Trend is important● Identify Primary, Secondary, and

Short-Term trends

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● Prices rise and fall in Trends

● Trend is defined as:○ Up (Rising)

Higher Peaks and Higher Troughs○ Down (Falling)

Lower Peaks and Lower Troughs○ Sideways (Trading Range)

Peaks and Troughs are at roughly similar prices

What is a Trend?

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Sideways Trend

Uptrend Downtrend

Higher Troughs

Higher Peaks

Lower Troughs

Lower Peaks

Horizontal Peaks

Horizontal Troughs

What is a Trend?

● Linear Regression (line of best fit) is a good

way to identify trends.

● Trend is dependent on time:

○ Green is Yearly UpTrend

○ Blue is Monthly Sideways Trend

○ Red is Monthly DownTrend

● Trend must be defined in the context of the

time horizon.

● Each Analyst must make their own

determination on which time horizon to use.3

What is a Trend?

Trend is a direction, not a straight line.

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Trend Classification

● Technical Analysts have divided trends into

three categories:○ Primary

Measured in Months or Years○ Secondary (or intermediate)

Measured in Weeks or Months○ Short-Term

Measured in Days○ Intraday

Measured in Minutes or Hours

● Charles Dow first defined this model.

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Trend Classification

● If we stop our chart at July 2016, we can see

this better:○ The green Primary trend is up○ The blue Secondary trend is slightly down

(almost sideways)○ The red Short-Term trend is sharply down

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Fuzzy Logic

● Q:Does the slope of the trend matter?

● A:It depends! If we saw slopes that are

wildly different from the norm, then yes.

● This is the “art” part of Technical Analysis.

● All Analysts occasionally make statements

that seem like facts, but they are often

subjective observations.

● There will be many concepts that are built

on years of observation.

● Many of these were developed before there

were any quantitative techniques.

● In time, as evidence is presented, these will

be proven or dismissed.

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Trends - The Key to Profits

● Every TA Signal and theory is centred on

capturing the trend.

Keys to Profit

1. Determine, with minimum risk of error,

when a trend has begun at it’s earliest time

and price.

2. Select and enter a position in the trend that

is appropriate to the existing trend,

regardless of direction.

3. Close those positions when the trend is

ending.

4. The more objective and rules-based we can

be, the better.

● This sounds simplistic, but it’s the basis of

all Technical Analysis.

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Determining Trend

● Linear Regression is a nice way, but it’s not

the standard way.

● We look at the peaks and troughs of the

chart.

● Price does small oscillations around the

larger trend.

● This chart is showing the peaks and troughs

as H & L.

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The Trend Line

● We draw trend lines as a visual cue of a

break in the line.

● This is a possible signal of a change in trend.

● Where we draw a trend line depends on the

direction of the trend:○ Uptrend - we connect troughs○ Downtrend - we connect peaks○ Sideways - connect peaks and connect

troughs

● There is a “fudge” factor.

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The Trend Line

● Often candles are used and shadow breaks

are ignored.

● Even though the trend line was broken,

there was no lower peak to draw a down

trend-line to.

● A break in a trend does not mean that a

reversal is happening.

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The Trend Line

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Downtrend Trading Range

Internal Trend Lines

● A Trend Line added in the middle of the

price action.

● An attempt to repeat what Linear

Regression would be giving us.

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Trend Line Rules

● The more times a line is touched, the more

significant it is.

● The steeper the line, the sooner it will be

broken. Steep is a relative concept.

● Should never be considered “exact”.

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Accelerating or Logarithmic Trend Lines

● As a market accelerated, new steeper lines

would have to be drawn.

● Applying a logarithmic function to the line

gives us the same result.

● Green line gives us much earlier warning of

a possible change in trend.

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Trend Line Tools

● Channels● Volume● Retracements● Speed Lines● Andrew’s Pitchfork● Point & Figure

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Channels

● Often prices appear to travel in a channel.

● Very similar to a trading range.

● Watch for peaks that are no longer reaching

the upper line.

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Volume to confirm Change in Trend

● High Volume confirms significant reversal

points.

● Blue zones - volume peaked on the trough.

Peaks have weak volume.

● Don’t know for sure until the day after.

● Red zone—did not work—Change of trend?

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Retracements

● Trends rarely follow straight lines without a

number of smaller trends.

● The smaller counter-trends are called

retracements.

● We measure the retracement as a

percentage of the impulse before it.

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Fibonacci Retracements

● Many traders will watch defined

retracement levels for signs of a reversal.

● Fibonacci Levels (38.2%, 50%, 61.8%) are

common levels.

● If retracement is below 38%, shows there is

conviction in the current move. Above 62%

and it gives a warning.

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Speed Lines

● Developed by Edson Gould

● Draw Lines from the start point through the

end of the Fibonacci Retracements Levels

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Gann Fans

● W.D. Gann found from his hand charting

that many times securities would bounce off

angled lines.

● Using the Graph Paper (Charting Paper), he

would count squares to make angles:○ 1x1 = 45 degrees○ 2x1 = 63 degrees

● Great way to identify Trend Speed.

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Gann Fans

● Note: This is not a geometric angle on a

chart.

● Often used in pairs, paying careful attention

to the intersection points.

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Gann Fans

● Note: This is not a geometric angle on a

chart.

● Often used in pairs, paying careful attention

to the intersection points.

● Falls into a subjective area of Technical

Analysis that is hard to quantify.

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Andrew’s Pitchfork

● Again, a subjective tool that is hard to

quantify.

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Andrew’s Pitchfork

● Extra lines can be added.

● With most TA, we stand on the shoulders of

those who went before, and we are able to

experiment.

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Support & Resistance

● What is Support and Resistance?

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Buyers and Sellers

● Every transaction is where buyers and

sellers agree on price.

● Economic Theory tells us that when there

are more buyers, demand increases and the

price will rise (more sellers...price falls).

● Aggression of Buyers is a factor too.

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Resistance

● A peak in the market is when the number

(or aggression) of the sellers has grown to

balance out the number (or aggression) of

the buyers.

● We say that price met Resistance at that

price.

● The sellers did not let the price-rise

continue.

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Support

● A trough in the market is when the number

(or aggression) of the buyers has grown to

balance out the number (or aggression) of

the sellers.

● We say that price met Support at that price.

● The buyers did not let the fall in price

continue.

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Support & Resistance

● Previous Peaks and Troughs have a habit of

stopping the market in the future.

● They become zones where there is a high

probability of the market turning.

● The reasons for this:○ Recency Bias○ Exiting a bad trade○ Second chance○ Large institutions (looking at P/E)

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Support & Resistance

● The reasons are psychological but have

been evident in the markets for decades.

● Best to think of them as spongy zones

rather than hard barriers.

● When we see peaks repeating and troughs

repeating, we know we are in a trading

range.

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Trading Range Breakouts

● The longer the market has been “bound” in

a range, the bigger the move out will be.

● Everyone is on the side waiting for

confirmation.

● Breakouts indicate that the balance has

shifted.

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Support and Resistance Zones

● Lots of reversals “around” the same price

tells us we have a zone.

● We draw zones by considering all the peaks

for a resistance zone and all the troughs for

a support zone.

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Donchian Breakout Method

● Channel shows the highest and lowest

prices over the past four weeks.

● When the high is broken—Buy.

When the low is broken—Sell.

● Best in strong trending markets.

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Support & Resistance Switch

● Once broken, previous Support zones

become Resistance zones.

● Previous Resistance → Support

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Trends and Support & Resistance