Basic Concepts of Trends

A trend is simply the general direction of the market. Markets do not move in a straight line, but instead move in zigzags, creating sequences of tops and bottoms. It is the sequence and direction of these tops and bottoms that identifies the trend.

Market Trend Directions

Price movement has three primary directions:

  1. Uptrend
  2. Downtrend
  3. Range (Sideways)

Defining Tops and Bottoms

Tops and bottoms are confirmed by specific candle patterns:

  • Top: After a series of green candles, the appearance of at least two consecutive red candles confirms a top.
  • Bottom: After a series of red candles, the formation of at least two consecutive green candles confirms a bottom.

The Uptrend

An uptrend is described as a series of higher tops and higher bottoms.

According to principles stated by Charles Dow, a well-structured uptrend is intact as long as:

  • Each top is higher than the previous top.
  • Each bottom is higher than the previous bottom.

The Downtrend

A downtrend is the opposite of an uptrend, characterized by a series of lower tops and lower bottoms. The downtrend remains intact as long as each top and bottom is lower than the previous one.

The Range (Sideways Movement)

A range is characterized by a series of tops and bottoms that occur at around the same horizontal levels. The market moves in a sideways price pattern without a clear upward or downward direction.

Trend Persistence and Trader Decisions

Statistically, a trend is more likely to continue than to reverse. A trend is assumed to be in effect until it gives a clear signal that it has reversed. This is the basis for the popular sayings:

  • "The trend is your friend."
  • "Never go against the trend."

By following trends and avoiding non-trending markets, traders can increase their profit opportunities.

The Three Trader Decisions

A trader faces three core decisions: when to buy, when to sell, and when to do nothing. These decisions should align with the identified trend:

  1. When to Buy: Buy in an uptrend.
  2. When to Sell: Sell in a downtrend.
  3. When to Do Nothing: Do nothing in a range.

Understanding Time Frames

Traders may feel confused when looking at charts in different time frames, as the market may appear to be moving in several directions at once (e.g., up on the weekly chart but down on the daily chart).

To understand which trend to follow, market movements are categorized by duration:

Categories of Market Movement

  1. The Primary Movement (Main Trend):
    • Duration: More than a year, possibly several years.
    • Characteristics: Can be bearish or bullish.
  2. The Secondary (Intermediate) Movement:
    • Duration: Usually lasts between three weeks to six months.
    • Characteristics: Represents corrections within the primary trend.
  3. The Minor (Near Term) Movement:
    • Duration: Usually lasts less than three to four weeks.
    • Characteristics: Represents corrections within the secondary movement.

Detailed Summary

The text introduces the basic concepts of market trends, defining a trend as the general direction of the market identified by sequences of tops and bottoms. Markets exhibit three primary directions: uptrend, downtrend, and range (sideways). An uptrend is characterized by higher tops and higher bottoms, while a downtrend features lower tops and lower bottoms. A range shows tops and bottoms at similar horizontal levels. Tops and bottoms are confirmed by specific candle patterns (two consecutive opposing colored candles). Based on the principle that trends tend to persist ("The trend is your friend"), traders are advised to buy in an uptrend, sell in a downtrend, and remain inactive in a range. Finally, the text explains that market movements exist across different time frames, categorizing them as the Primary Movement (over a year), the Secondary Movement (3 weeks to 6 months), and the Minor Movement (less than 3-4 weeks).

Key Takeaways

  • A trend is the general direction of the market, identified by the sequence and direction of tops and bottoms.
  • The three primary market directions are Uptrend, Downtrend, and Range (Sideways).
  • An Uptrend is defined by higher tops and higher bottoms, consistent with principles stated by Charles Dow.
  • A Downtrend is defined by lower tops and lower bottoms.
  • A Range occurs when tops and bottoms are at approximately the same horizontal levels.
  • A Top is confirmed by at least two consecutive red candles following a series of green candles; a Bottom is confirmed by two consecutive green candles following red ones.
  • A trend is assumed to continue rather than reverse, leading to the trading mantra: "The trend is your friend."
  • Traders should buy in an uptrend, sell in a downtrend, and do nothing in a range.
  • Market movements are categorized by duration: Primary (more than a year), Secondary (3 weeks to 6 months, representing corrections in the primary trend), and Minor (less than 3-4 weeks, representing corrections in the secondary trend).