One of the basic concepts of technical analysis is the trend. It is based on assumption that market participants make decisions in herds making asset price movements sustainable for some time.
The Trend is one of the most basic concepts in Technical Analysis. Simply put, it is the general direction of either a market or the price of an asset. Trends are identified as trendlines in Technical Analysis; this highlights whether the price movement is in the uptrend, thus making higher swing highs and higher swing lows or it is in a downtrend, hence a making lower swing lows and lower swing highs.
Understandably, a lot of traders choose to trade following a trend, others prefer to know reversals beforehand or trade opposed to the trend. Needless to say, uptrends and downtrends happen across all kinds of markets, namely stocks, bonds, and futures. You can also find trends among data like the rising of monthly economic data or month to month dives.
Traders employ various forms of Technical Analysis to determine and analyse trends. Subject to analyses are trendlines, price action, and technical indicators. For instance, trendlines provides traders with the direction of a trend. The Relative Strength Index (RSI) on the other hand, is shows the strength of a trend at any given point in time.
The 3 Types of Trends
There are 3 kinds of trends in accordance to the direction of asset prices:
- Upward Trend
An Uptrend is defined by the general increase in price. This entails that the general direction has to be higher to be an uptrend.
An upward trend means that the demand is higher than the supply. Because of this, investor are compelled to pay higher for the same asset. It must be noted that a break below the trendline means that the trend is weak and might be a signal to sell.
- Downward Trend
Downtrends have lower swing lows and lower swing highs. Here, the prices making lower local highs and lower local lows.
A downward trend means the demand is overwhelmed by the supply. In this scenario, sellers are made to accept lower prices for the same asset. Ideally, the downtrend continues up to the point prices exceed the trendline, this signals a new buy.
- Sideways Trend
A sideways trend is represented by two (2) horizontal trendlines. This protects prices from either large upward or downward movements; fluctuations then are kept at bay.
A sideways trend occurs when there is a balance between supply and demand. The price will stay within the trendlines until broken.