Blog #28 : Trends
Contrary to what a lot of people think, technical analysis is the art of trend following rather than one of predicting prices and turning points. Trend following remains the single most effective strategy for making big trading profits in the stock markets.
#01. A trend is a series of rising or declining prices over any length of time.
#02. An uptrend is a market which seeks consistently higher prices over time.
#03. A downward trend is a market which seeks consistently lower prices over time.
#04. At any given time the market is comprised of three trends, namely the primary, the secondary and minor rends.
#05. Primary trend can be either a series or rising or declining prices. Primary trend can last from one to several years.
#06. Secondary trends are intermediate corrective trends to the primary trend. These reactions generally last from one to three months and retrace one third to two third of primary trend.
Minor trends are short term movement lasting from day to three weeks.
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| Trading vs. Trending |
The Big Question: Is Market Trending or Trading?
Market movements can be characterized by two distinct types of phases. In one phase, the market shows trending movements either up or down. Trending movements have a direction bias over a period of time. In the second phase the market shows trading range movements or consolidation where the market shows no consistent directional bias and moves two levels. These two phase of the market require the use of different types of technical indicators.
#01. Trending market need the use of trend following indicators such as the moving averages, MACD, etc.
#02. Trading range market, on the other, need the use of oscillators like the RSI, stochastic etc. which use overbought and sold levels.
So identifying the phase of the market is extremely critical, for that decide the methodology a trader needs to follow.
ADX: Answering the Big Question
The ADX or the Average Directional Movement Index fills this need for identifying whether market is in the trending or the trading phase. Welles Wilder developed the ADX which to my mind is his most useful but least understood innovation. The concept of trends is central to the ADX. The ADX can tell the strength of the move that a market may be in and thus help keep you of a whipsawing market or keep you in long enough during a trending market to make huge profits.
ADX forms the core of my trading style since my training is based on trend following. The ADX is a standard indicator available in all technical analysis software. Traders would do well to incorporate the key aspects of ADX in their trading style.
ADX defines – or strength – of the directional movement and not its direction. The directional movement system is a trading system based on the use ADX and gives timing information based on the strength of the underlying trend. We will now discuss the interpretations of ADX reading and timing signals provided to the trader by the direction movement system.
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