In the world of technical analysis, we often encounter three types of trends: short-term, intermediate-term, and long-term. A popular saying within this realm is "A trend is your friend," reflecting the importance of recognizing and understanding trends.
Some individuals rely on averages to identify trends, recognizing that market psychology plays a crucial role in initiating and concluding these trends.
To navigate the complexities of market psychology, it becomes imperative for students of technical analysis to master the skill of trend identification. For many investors, once they've entered an upward trend, they remain vigilant for any signs of weakness that may indicate an opportune moment to exit and secure profits.
Primary Markets
Primary markets, which include both bull and bear markets, typically have a duration of one to three years, as demonstrated by historical data.
Secular Trends
Secular trends, which can span one to three decades, encompass a multitude of primary trends and are generally easy to identify due to their temporal scope. For about twenty-five years, the price-action chart would seem to consist of nothing more than several straight lines that were progressively rising or falling.
Take a moment to examine the S&P 500 chart below. The graph illustrates the market's development from the 1980s to the mid-2000s, highlighting the market's ascent to the turn of the century.
Intermediate Trends
Within the broader trends that dominate financial markets, there exist intermediate trends, captivating the attention of business journalists and market analysts as they continuously seek explanations for sudden shifts in market direction. These abrupt changes, constituting intermediate trends, often result from economic or political events and subsequent reactions.
Historical patterns reveal that bull markets typically experience robust rallies and comparatively mild reactions. Conversely, bear markets witness forceful reactions and brief rallies. Reflecting on the past also indicates that each bull and bear market undergoes at least three intermediate cycles, each lasting anywhere from two weeks to six to eight weeks.
Long-Term Trends
To identify enduring patterns on stock charts, seasoned analysts often employ technical indicators, with one of my personal preferences being the Rate of Change (ROC) momentum indicator rather than the more commonly used Stochastics indicator.
The typical timeframe for ROC analysis is set at 10 days, calculated through the formula: Rate of Change = 100 (Y/Yx), where "Y" signifies the most recent closing price, and Yx represents the closing price from a specific number of days ago.
When today's closing price is higher than it was 10 days ago, the ROC value point surpasses the equilibrium, signaling an upward trend. Conversely, a lower closing price today compared to 10 days ago results in a ROC value point below the equilibrium, indicating a downward trend.
In essence, a rising ROC offers a short-term bullish signal, while a falling ROC suggests a bearish signal. Chartists closely consider the chosen time period for ROC calculations. For a more extended perspective, such as viewing the market or a specific sector or stock over 26 to 52 weeks, a longer Yx period is used.
For a shorter outlook spanning 10 days to six months, or thereabouts, a shorter Yx period is employed.
By adjusting the timeframe, chartists gain insight into the trend's direction and duration, allowing for a more nuanced analysis of market movements.
Conclusion
The identification of these trends is critical to the success or failure of your short- and long-term investing, as markets consist of a variety of trends.
Disclaimer
Derivative investments involve significant risks that may result in the loss of your invested capital. You are advised to carefully read and study the legality of the company, products, and trading rules before deciding to invest your money. Be responsible and accountable in your trading.
RISK WARNING IN TRADING
Transactions via margin involve leverage mechanisms, have high risks, and may not be suitable for all investors. THERE IS NO GUARANTEE OF PROFIT on your investment, so be cautious of those who promise profits in trading. It's recommended not to use funds if you're not ready to incur losses. Before deciding to trade, make sure you understand the risks involved and also consider your experience.
