When is a trend not a trend?

When it’s a range. A trading range or a range-bound market is a market that remains confined within a relatively narrow range of prices. In currency pairs, a short-term (over the next few hours) trading range may be 20 to 50 pips wide, while a longer-term (over the next few days to weeks) range can be 200 to 400 pips wide.

For all the hype that trends get in various market literature, the reality is that most markets trend no more than a third of the time. The rest of the time they’re bouncing around in ranges, consolidating, and trading sideways.

Although medium-term traders are normally looking to capture larger relative price movements — say, 50 to 100 pips or more — they’re also quick to take smaller profits on the basis of short-term price behavior. For instance, if a break of a technical resistance level suggests a targeted price move of 80 pips higher to the next resistance level, the medium-term trader is going to be more than happy capturing 70 percent to 80 percent of the expected price move. They’re not going to hold on to the position looking for the exact price target to be hit.

Higher Time Frame Confirmation and Quantifying the Trend

In this section we consider the words intermediate and secondary,
with the words long-term and primary interchangeable. We
generally refer to a market movement as secondary and
describe the trend that constitutes that movement to be intermediate-
term. Similarly, we measure a primary move by identifying
the long-term trend.

Knowing how to use a higher time frame chart to confirm
a price signal on a lower time frame is a skill that can reward
a trader greatly. Many students will become impatient and
take a trade that is coordinated on the lower time frames,
not on the higher time frames. This is a mistake and often
a waste of time, energy, and, more important, money.

Although you may not always have all the time frames line
up, there will be times when this happens. More often than
not, though, if you are trading an intraday chart and have
the current trend on the daily chart lined up in the same
direction, you are going to have the wind at your back. If you
have the knowledge to identify markets in which the intraday
trends are moving in the same direction as the daily and
weekly trends, you are going to put yourself in a position to
reap a reward.

Here are the time frames we analyze and trade from:
Monthly >> weekly >> daily >> 240 minutes >> 60 minutes >> 15 minutes >> 5 minutes

The different time frames we use must remain three to six
increments apart to maintain continuity:


Monthly/4 weekly chart
Weekly/5 daily chart
Daily/6 240-minute chart
240/4 60-minute chart
60/4 15-minute chart
15/3 5-minute chart

In analyzing a market we never skip over a time frame. If we
are trading off a 60-minute chart, we look to our 240-minute chart
for confirmation. We never jump time frames because we would
lose continuity. If we see a signal on the daily chart, we look to
the trend on the weekly chart for confirmation. If we see a signal
or setup on the 15-minute chart, we look to the 60-minute chart
for confirmation. It is paramount to maintain this continuity.

The collage of charts in Figure 9-9, with the long-term on the
left, the intermediate-term on the lower right, and the short-term
on the upper right, provides an excellent perspective from which
to analyze and trade markets. (For this example we are using
the monthly chart for the long term, the weekly chart for the
intermediate term, and the daily chart for the short term.) Here
we see the market’s stance, with the higher time frame charts
encompassing all the activity on the lower time frame charts.

We’ve overlaid most of the significant support and resistance
levels and trendlines on the charts, along with the MACD,
stochastic, and RSI at the bottom. (For ease of viewing we have
omitted the RSI on the lower time frame charts.) We should
always take direction and identify a trade setup from our
intermediate-term chart, in this case the weekly chart. We can
look to the long-term chart for confirmation or support—though
this is not a prerequisite, particularly if one is day trading—and
use the short-term chart to hasten our entry and exit signals.
Source: Mastering the Currency Market: Forex Strategies for High and Low Volatility Markets

HOW TO TRADE THE TREND?

Once you understand significant swing highs or lows, trading the markets becomes easy. Go long when the market turns into a bull market, go short when the market turns into a bear market, and stand aside when the market is in any other condition. Let’s take a look at some examples.

In Figure 2.4, start at the top swing high in August. That is our first swing high. It is then followed by a swing low and then a swing high. Note that I have drawn a horizontal line at the low of the first swing low. Our rule is to go short when the market breaks that horizontal line at the low of the first swing low. I’ve put an arrow pointing down on the day that we go short. We go short the moment the market drops below the low of the
first swing low. I don’t have to wait until the second swing low is in place to go short. Note that I am getting short before the second swing low is in place because I know that we will definitely be putting in a lower low in the future. I don’t know when, but it will happen. There is no possible way that we won’t put in a new lower swing low after we break that first low. In this case, the lower low that confirms that we are in a bear market actually occurs on the day the market breaks down through the first swing low.

In other words, I can put in a sell short order under the first swing low as soon as I have a confirmed lower high. At the second high, I have conformed half of the definition of a bear market: lower highs. Now all I
need to get short is to wait for a break of the first swing low to confirm that we will be making a lower low, again confirming a bear market. Once again, I don’t need to wait until the lower low occurs to get short. I just
need to know that it will be coming. And that knowledge comes as soon as I break the first swing low.

The stop on short positions is the most recent three-bar high. The protective stop on long positions is always the most recent significant swing low. I get to move the stop up whenever I am long and we make a new
higher low. I get to move the stop down whenever I am short and we make a new lower high.


So, in this case, we go short on a break of the first swing low and place a protective stop loss just above the most recent swing high, which, in this case, is the second high on the chart.

The market then sells off and we are off to a good start on our short position. However, the fourth swing low turns out to be a higher low as you can see in Figure 2.5. I’ve marked it as a higher low. Now, we didn’t know that low was a higher low until the close of the next day. We need to see that extra day to let us know that day was a swing low. So we now see at the end of the day after the swing low that the swing low was, indeed, a swing low! We look back at the two most recent highs and see that the market is still making lower highs but we are now making higher lows. That is one of the definitions of a neutral market and our rule is that we must be on the sidelines whenever there is a neutral market. We exit the position on the open the next day for a modest profit.

We are now flat on the open of the day after the day after the swing low.
We now look at the chart and notice that a break to below the most recent swing low would turn the market bearish. We put in a sell order to sell on a break of the most recent swing low. This move occurs later that day and is marked in the chart with a downward pointing arrow. We don’t know when we will make a new swing low but we do know that it is guaranteed to occur so we go short. Our protective stop on this trade is way above the current market at the most recent swing high, which is the second high on the chart and was also our protective stop on the first trade. Remember, we don’t need to actually see a lower low; we just have to know that one is guaranteed to come. And that guarantee comes when we break the most recent swing low.

We then make a lower swing low the following day and a lower swing high four days after getting short. We now get to lower our protective stop to just above the new lower swing high. Four days later, we make an even lower swing high so we lower our protective stop to just above that level.

The market then collapses, putting us into a nice profit position. Notice that we don’t lower our stop at all until we finally make a lower high in mid- October. We go over two weeks with the old stop. This is one of the interesting features that you will have to deal with as a trader. Remember that we want all stops to fulfill two conditions. First, we don’t get stopped out on some random move and, second, we don’t want to exit a position until after we know we are wrong. Trend analysis often gives the trader lots of room to work so that he or she is only stopped out when those two conditions are in place.

It can be psychologically difficult to watch a market drop dramatically, producing a big profit, yet the stop is not moved closer in the hopes that a bigger profit is to come. It is better to sometimes sit back and let the market run. Here’s what legendary trader Jesse Livermore said in Reminiscences of a Stock Operator (John Wiley & Sons, Inc., 1994):


And right here let me say one thing: After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve known many men who were right at exactly the right time, and began buying and selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine—that is, they made no real money out of it. Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money. It is literally true that millions come easier to a trader after he knows how to trade than hundreds did in the days of his ignorance.

That’s right: Sitting is how he made his money. The point here is that traders should stick with positions that are making money. Don’t exit them prematurely. Going back to Figure 2.5, we see that the market continues to drop off a cliff to the circled swing low seen in late October. Two sharp up days create a new lower swing high and we get to lower our protective stop to that new swing high. We then get stopped out for a significant profit five days later.

This sequence of swing highs and lows and the resulting trades gives you a clear idea of how to trade the trend in the market. It is technical analysis stripped down to the absolute essentials. Let me repeat the rules. Go long the moment the market moves into a pattern of higher highs and higher lows. Note that all four points don’t have to exist to get long but three of them do have to exist and the fourth must be in the process of being formed. The reverse is true for bearish markets.
To find complete reading :  How to Make a Living Trading Foreign Exchange: A Guaranteed Income for Life (Wiley Trading)

Trending and Countertrending Behavior

In Chapter 4 we touched on the difference between trending
and countertrending markets by pointing out that elongated
candles extending up or down identify trending, or impulsive
price action, whereas shorter candles with smaller bodies

indicate countertrending price action, or reactive trading. This
is an important distinction for a trader because although our
indicators and overlays remain the same, our trading strategy
will differ slightly with the type of market we are in. A trending
market is one in which the directional bias is obvious and
can be seen on the chart by a pattern of highs, lows, and closes
moving in the same direction. Acountertrending market is one
in which there is no obvious direction other than sideways.

Trending markets call for making quick decisions upon entering
a trade but showing more patience once one is in the market,
whereas countertrending markets give the trader more
time in taking a trade but require less time in the trade and
speed in exiting. Trending markets by definition are impulsive
and move easily in one direction, whereas countertrend markets
are reactive by nature and exhibit indecisive price action.

We can define a trend trade as a position taken in the same
direction as the overall pattern of highs, lows, and closing
prices. Acountertrend trade is one in which the trader is going
against, or fading, the overall direction of the market in anticipation
of a correction or a reversal or a trade in which
the objective is to take advantage of a sideways market by
selling near the top of the current price range and buying near
the bottom.

Beginning traders often are attracted to countertrend trading
because of the perceived level of risk. To someone with a small
account, buying a market at a support level after a sharp price
drop and then placing a tight stop-loss order can seem like a better
choice than waiting for a market to correct or retrace and then
turn before entering the trade and then placing a stop-loss order
some distance away, below the last swing high. We believe a

indicate countertrending price action, or reactive trading. This
is an important distinction for a trader because although our
indicators and overlays remain the same, our trading strategy
will differ slightly with the type of market we are in. A trending
market is one in which the directional bias is obvious and
can be seen on the chart by a pattern of highs, lows, and closes
moving in the same direction. Acountertrending market is one
in which there is no obvious direction other than sideways.

Trending markets call for making quick decisions upon entering
a trade but showing more patience once one is in the market,
whereas countertrending markets give the trader more
time in taking a trade but require less time in the trade and
speed in exiting. Trending markets by definition are impulsive
and move easily in one direction, whereas countertrend markets
are reactive by nature and exhibit indecisive price action.
We can define a trend trade as a position taken in the same
direction as the overall pattern of highs, lows, and closing
prices. Acountertrend trade is one in which the trader is going
against, or fading, the overall direction of the market in anticipation
of a correction or a reversal or a trade in which
the objective is to take advantage of a sideways market by
selling near the top of the current price range and buying near
the bottom.

Beginning traders often are attracted to countertrend trading
because of the perceived level of risk. To someone with a small
account, buying a market at a support level after a sharp price
drop and then placing a tight stop-loss order can seem like a better
choice than waiting for a market to correct or retrace and then
turn before entering the trade and then placing a stop-loss order
some distance away, below the last swing high. We believe a

behavior on the higher time frames is mimicked by price
behavior on the lower time frames. If we are seeing pronounced
trending behavior on the daily chart, we can expect
trending behavior on the intraday charts. This does not mean
that the intraday movement will always be in the same direction
as the primary trend; it means that the candles will be
longer, which can seem counterintuitive to untrained traders.
Similarly, if the market is in a narrow sideways range over an
extended period on the daily chart, we would expect similar
reactive behavior on an intraday basis.

A very important difference between a trending market
and a countertrending market is that in a trending market
the higher time frames will dictate price movement and
direction, whereas in a countertrending environment the
lower time frame charts can dictate direction. This means
that in a trending market you do not want to go against the
trend on the next higher time frame. In a countertrending
market you are taking signals on the lower time frames
routinely regardless of the previous direction on the higher
time frames.

We titled this section “Trending and Countertrending Behavior”
instead of “Trending versus Countertrending Behavior”
because to be a complete trader, you must do both. The easiest
way to define whether you are in a trending or a countertrending
market is to define the trends on the different time
frames and see if they are in agreement, which would mean a
trending market, or are conflicting, which would mean a countertrending
market. We are going to teach you how to do that
in the next section.
Source: Mastering the Currency Market: Forex Strategies for High and Low Volatility Markets

Intrepretation Of Coherent Closing Bias Of Trend Days

In considering the very striking difference between the distribution of the closing bias when all of the sessions are considered and only those that made it though the extreme filter, we can begin to formulate some hypotheses about the dynamics of price development. The coherent closing bias pattern lends itself to explanation by models that have been proposed from the worlds of econophysics and other disciplines focused on nonlinear systems.

In the natural sciences a “phase transition” occurs when a physical object that can take variable values passes through certain critical stages and its behavior or the behavior of its constituent parts and processes undergoes a transformation or change in its morphological characteristics. In effect quantitative changes to the variable, i.e. changes that can be measured, produce qualitative changes in which the variable’s state changes so radically that it takes on entirely different qualities or attributes. The often cited example is the change in H20 as it changes from ice to water to steam or vapor.

We have seen for KLAC, INTC and AMGN (and the behavior is typical of most time series data for equities) that there is a transformational change in each stock from its “normal” behavioral characteristics (i.e. how it performs in the majority of circumstances when the intraday movements are less than ±4%) to how it behaves in the more extreme sessions that we analysed. These extreme sessions can vary from approximately 25% of the total trading sessions in the case of KLAC to less than 10% in the case of INTC. But in all cases there is phase transition taking place. The price dynamics that are characteristic of smaller intraday fluctuations show a random quality that is strikingly absent when range expansion and larger movements are taking place.

When we consider all of the data series it would appear that the closing bias acts in a random (i.e. independent and identically distributed) fashion. The closing position with respect to the intraday range is, by and large, equally as likely to be in any one of the decile ranges. But as the magnitude of the intraday directional change grows, traders’ opinions about the likely direction of prices begin to cohere, they become more and more aligned in their estimation of the near-term course of the market. There is a virtual unanimity of opinion that leads to a dramatic diminution of liquidity. Price takes the path of least resistance as even those who longer term do not subscribe to the prevailing view of the day, step aside to allow those in control of the agenda for that day to achieve their objective. During this trading session the market participants may have decided to suspend their usual fractious modus operandi (i.e. fading a trend after it reaches a certain point such as a moving average). This is not to overlook the fact that in the following session they may resume their more typical behavior or even decide to reverse the unidirectional nature of the previous session.

Why would normally argumentative and skeptical traders, who usually have very different views about the feasibility of the current price, decide to suspend their normal intraday tactics such as fading a price advance? This is a reformulation of the chapter’s opening question and to come closer to an answer to it we need to discuss the reflexive notion of price formation. The classic treatment of the reflexivity in financial markets was proposed by the great English economist J.M. Keynes in his epic work, The General Theory of Employment:

Professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be.

Once a certain price threshold is crossed (a tipping point) during intraday trading, the majority of market participants or average opinion begins to concur that for this particular day’s trading average opinion has already chosen today’s winner of the beauty contest. To use an expression taken from a totally different context but which can be adapted for the present purpose, it is as if for this trading session all have agreed that “There is nothing more powerful than an idea whose time has come.” But the cynic would be right to add “Until the next day when everyone looks at the idea again and decides that it wasn’t so clever after all.” The usual market contrarians move to the sidelines and those positioned on the wrong side during a coherent session add fuel to the fire as they rush to correct their inappropriate positions. When average opinion realizes that average opinion is becoming increasingly uniform and coherent (e.g. a “bandwagon” is starting) it very soon becomes entirely coherent. Entirely coherent markets lose their liquidity, at least for the duration of the session in question. Liquidity could thus be said to go through “phase transitions” as opinions among market participants move along a spectrum of fractiousness→coherence.
Read More : Intrepretation Of Coherent Closing Bias Of Trend Days

RANGE CONTRACTION AS A PRECURSOR TO TREND DAY

Range contraction sessions are very often precursors to breakouts which often coincide with powerful trend days in which the trader who is forewarned can earn substantial profit within a single session. The attractiveness of the reward potential from trend days has commanded the attention of many well-known traders who have developed different trading strategies for anticipating breakouts and powerful range expansion sessions. In essence the technique is the same as the one that Farley alluded to earlier and that owes much to the suggestions of how to play the breakouts by Toby Crabel. Crabel’s book is entitled Day Trading With Short Term Price Patterns and Opening Range Breakout and has become something of a cult classic. In essence the principle is that one determines certain price points, for the sessions that follow on from an NR7 session, that can act as automatic triggers which, if they are touched in the subsequent session, will leave a trader positioned to benefit from a strong trend day should it occur. The formula that has been proposed for determining an upward trigger by Crabel is the following. One finds the 10 day average of the minimum value between the following variables the high-open and the open-low and then one multiplies this resulting value by 1.1 (some other variations have been suggested).

An alternative method which allows one to be positioned on both sides is to set the triggers for the opening range breakout on both sides enabling one to benefit from both uptrend days and downtrend days. Once again Larry Williams has one of the simplest approaches which is to take the opening price on the session following an important range contraction event and then add (or subtract) a percentage of the previous day’s true range. For a trigger to catch a bullish move the percentage could be 80% of the previous day’s range and for a bearish move the figure could be to subtract 80% of the previous day’s range.

A lot of articles have been written about the exact methods to follow to determine the opening range breakout with some believing that there is a magical formula that allows you to be sure of capturing the trend days when they should occur. But we would suggest that the more refined triggers suffer from a spurious degree of accuracy. It is interesting that Crabel’s book has achieved almost mythical status with some traders and, since it is out of print, it can sometimes be found on eBay at prices measured in thousands of dollars.

We suggest that LarryWilliams has it about right when he describes the mechanics of playing the breakout – “it is really just as simple as that, a pickup in range, substantially greater than yesterday’s range implies a change in the current market direction . . . price almost always opens within the previous day’s range . . . if there is an expansion or moving away from the opening, price will probably continue in that direction.” This exactly echoes the point that John Paul Tudor Jones made in his interview with Jack Schwager. When markets speak with a united voice it makes a lot of sense to listen carefully to what they are saying.

There may not be the quantitative precision that one would need to program an algorithm to deliver the exact trigger points but essentially the simple rule of thumb is to put buy stops on either side of the opening price after an NR7 session that take into account a margin (based on the previous day’s range) that prevents one from any obvious whipsaws. The next thing is to remember to be patient and to hold tight until the end of the session. As we have seen in connection with the Coherent Closing Bias phenomenon it is vitally important not to be impatient on a trend day as the chances are very strong that if you are correctly positioned for the directional surge you will want to exit on the close as it will probably be near the best levels of the day from the point of view of profitability.
Read More : RANGE CONTRACTION AS A PRECURSOR TO TREND DAY

Three Types Of Trends

Just as the market tends to have three phases related to mood or market sentiment, market trends can be divided into three types. The most important to investors, those who look to buy and hold stocks for as long as a stock is tending to command an increasing price over time—is the primary or major trend. The primary trend is one lasting a year or more, up to several years.

There are countertrend movements in the direction of the major trend, and these trends Dow called secondary price movements. As we have seen, bullish or bearish expectations for the market get overly onesided and ahead of the fundamentals related to earnings prospects. Eventually a reaction develops that causes prices to correct back to a more realistic price level. Reactions or corrections are price swings that are in the opposite direction of the main or major trend. Once these run their course, the primary trend resumes. The segments that make up the price swings both in and against the direction of the primary trend can also be referred to as intermediate price swings or moves and last a few weeks to a few months only. Within these intermediate price moves are day-to-day price fluctuations that Dow called minor trends.

These can be a few hours to a day or a few days—they’re most often contained within a one-to-two-week period. Both intermediate and minor trends are of importance to traders primarily—minor trends are all that concern a day trader who will likely complete every trade within the same day. Intermediate trends are of some importance to investors when they are looking for the best point to enter the primary trend or to add to their position(s) in a stock or the market.

The Primary Trend
The primary or major trend is a price movement that usually lasts for a year or more. The exceptions to this time duration do exist and I pointed out the very short duration of the 1987 decline. It’s considered to be a major trend because of the percentage decline involved and by the prior intermediate lows it exceeded, as can be seen in Figure 3.1. One widely accepted measure of what constitutes a bear market is when there is a de cline that takes prices more than 20 percent below the high point reached in the prior advance. Dow didn’t have a rule or guideline on this subject.

The primary trend is composed of smaller movements of an intermediate duration of a few weeks to a few months. Some of these intermediate trends run in the same direction as the primary trend and occur after a market move that runs in either the opposite direction or sideways. These are also called secondary trends and will be discussed in the following section. There are often, not always, three intermediate movements or waves in the same direction as the primary trend, as will be discussed in a later chapter that has a description of Elliott wave theory.

An essential guideline as to a trend being a primary bull market is that each advance within the advancing trend should reach a higher level than the rally that preceded it. And each secondary reaction or countertrend move should stop at a level that is above the prior decline. The reverse movement occurs in a primary bear market trend as prices fall to lower and lower secondary laws. An analogy to the primary trend is that it is like the tide of the ocean. In the rising tide, each wave comes in to a higher and higher point. And just as the rising tide lifts all the boats, a bull market takes all stocks higher. The waves in an outgoing tide gradually recede from a high point and everything falls with it.

A primary up trend is considered to be a bull market and a primary down trend, a bear market. If you are an investor in terms of your time horizon and investment goals, you should attempt to buy stocks as soon as possible after a bull market has begun. An example is shown in Figure 3.2, taken from the 1990–1991 period, showing both a primary down trend or bear market and the primary up trend or bull market that developed following it. You have noticed from this and the other earlier bear market example from 1987, that the duration of primary bear market trends can be relatively short, compared to the duration of primary uptrends. On average this has been true since the 1950s due to the longer periods of economic expansion and shorter periods of recession, as there is more urgency to end a recession. It also relates to the fact that investors tend to stagger their purchases over the duration of bull markets, providing ongoing buying power, whereas selling out is often a one time decision and would be buyers stay away and don’t support the market on the declines, especially in a panic phase.

Secondary Trends
Secondary trends are of a shorter duration—typically, three weeks to three months—and interrupt the major direction of stock prices with a countertrend movement. Such moves are also called corrections in a bull market as they correct the situation where prices have risen too far, too fast. Secondary rallies are also called recovery rallies in a bear market. Frequently, these secondary countertrends retrace anywhere from a little more than a third to as much as two-thirds of the prior advance or decline. Very common is to see retracements of 50 percent of the prior price swing in the direction of the primary trend. It is not always easy to decide when and if a secondary trend is underway, but there are technical analysis measurements that will help us tell, which we will be examining in later chapters.

To continue the ocean analogy, the secondary trend is like the waves of the ocean. They can be big and they can knock you over, but they will come in and go out within the bigger movement of the tide—the primary trend.

Minor Trends
The minor trends are the price fluctuations that occur from day to day and week to week, although a minor trend will rarely last more than two to three weeks. In terms of the overall market trend these are just noise and relatively unimportant. They can be compared to mere ripples on a wave.

Together, however, the minor trends make up the intermediate trends. According to the wave theory devised by R.N. Elliott, who was influenced by Rhea’s Dow theory work of the 1930s, there are usually three distinct minor movements in the same direction as the secondary trend. Elliott wave theory also recognizes the importance of the three phases of a bull or bear market, as we discuss later also. Last, we could say that the minor trend could be one that is set off by the actions or words of an individual—for example, the chairman of the U.S. Federal Reserve Bank when that individual makes a statement hinting at the direction of Fed policy regarding interest rates. Or the precipitating action might be a statement from a key company in a key industry about their actual or expected earnings or profit trends.
Read More : Three Types Of Trends

Highs Lows And Support Resistance Define Trends

The question often comes up as to why prior highs and lows, or peaks and troughs, are so important. Prior highs and lows largely define or allow us to make an educated guess at, support and resistance levels or areas. A low becomes a low because buying becomes strong enough at that point to start pushing prices back up. “Support” often refers to a prior low and is a price point or area where there is anticipated buying interest based on what happened in the past. We continually rely on what happened in the past in technical analysis because we see that the market patterns and interests repeat and repeat. This is no more than a reflection of human nature and the analysis we make of relative values, which we tend to stick to until we’re forced to make an adjustment—by the actions of others, in this case via the market. Support could be just prices digging in where there is buying interest and may not be in the area of a prior low—in that instance we would just take note that this new low was above the prior low. Support is a price level at or below the current level of an index, stock, or other financial instrument.

You hear that a market index or stock “finds” support—meaning buyers started purchasing in a certain price area. You also hear that prices “bounced from” support—this is often referring to a prior low or series of lows—or that prices “held” support. When support is “broken” it refers to prices exceeding a prior low or series of lows—there is a downside penetration of the support area as willing buyers withdraw, and/or sellers offer more than all buyers want, so prices fall if the sellers persist. A test of support is that prices go back to a prior low. A successful or failed test of support is determined by whether buyers again come in to buy and prices rebound from the support area or not. Support is always an implied aspect to price levels.

“Resistance” is just what is implied by the word, a price area where sufficient selling develops to push prices lower and to resist the buying pressure. Resistance is a price level at or above the current level of an index, stock, or other financial instrument. Resistance is often a prior upswing high or series of highs. Prices also “bounce off from” resistance or are deflected by, or “turned back” and “fall back” from it. A common statement is that a rally “failed” at resistance, or an advance failed to “take out” resistance— meaning that prices fell once they got into the area of a prior high. These are some of the terms that are bandied about.

The important thing to remember about resistance is that it was an area where holders of the stock or other financial instrument found it attractive to sell previously—enough so that their selling overwhelmed willing buyers, so to speak. If it was attractive once to sell in this area, it may well be again. A push through resistance is where prices rise above the prior low or series of lows. You also hear for example, that a stock “overcame” resistance in a certain price area.

Areas of stock support indicate a price(s) where a stock is being accumulated by buyers, hence the term accumulation to refer to this process. A particular price support area may be said to be an area of long-term accumulation. Areas of accumulation are areas of support, as there is buying interest there. Stock market bottoms occur when some savvy buyers begin to accumulate stocks, anticipating an end to the decline.

Areas of stock resistance indicate a price(s) where a stock is being “distributed” (sold) to other willing buyers, hence the term distribution for this process. Areas of distribution are areas where previous owners of a stock are willing sellers. Stock market tops tend to begin forming when some of the more savvy holders of stock begin to sell their holdings. You may hear terms like “distribution tops” to describe this process.
Read More : Highs Lows And Support Resistance Define Trends

New Highs Lows That Are Followed By Trend Reversal

I may have heard the term elsewhere, but technical analyst Jack Schwager, during the time that we worked together at PaineWebber especially, drummed into me the terms bull and bear traps—describing, in the case of a bull trap, a rally that goes to a new high after which the advance then collapses. A bear trap is the reverse situation where a decline exceeds (takes out) a prior low, and then is followed by a strong rebound in prices.

These reversals differ somewhat from what are called key reversals, the definition of which is an occurrence of a new low (or high), followed by a close above (below) the prior bar’s high (low)—this applies to any period the bar measures, for example, hourly, daily, weekly, and so on.

There will be more on key reversals in the section on chart patterns. The main point is just to note that with a key reversal, the new low or high is in relationship to the prior bar or two (e.g., day or week) and not necessarily to the preceding price swing.

In a bull trap reversal, the rally that takes out a prior high tends to bring in new buying because this often signals a new up leg—another wave or price movement of intermediate proportions. Otherwise, the new high serves to convince those long a stock or other security that they are on the right side of the market. If this rally then fails, by reversing to the downside, it has the effect of trapping the bulls or those with the conviction that prices will keep rising—hence the term “bull trap” or “bull trap reversal.”

An example of a bear trap reversal is shown back in Data , as the weekly chart of International Paper (IP) also provides an example of a bear trap as noted in the lower right. After a prolonged downtrend, there is yet another in a series of new lows and it exceeds the prior low by a comfortable margin—however, this time the lower low was followed by a rapid and good-sized advance. Renewed selling had no doubt come in as the old low was exceeded. Sellers, or buyers who had finally liquidated their positions, would have had expectations of another downswing or another down leg. The bears instead were trapped by the rapid reversal. Of course, they are only trapped as long as they don’t cover (buy back) their short positions, but as I said before, there is often a considerable period of disbelief that a trend reversal is occurring. Remember that prices have to exceed the prior upswing high to confirm a new trend, and prices may have to travel some distance before this occurs.

There are implications of the trend reversals of the type described here as bull and bear traps, that go beyond the significance of affirming that market trends can reverse suddenly, even after exceeding prior lows and highs. Very often, such trend failures and reversals after a lengthy trend, offer excellent opportunities to take a position in the direction of the new trend, as it may be very powerful. Price moves often reach a point of exhaustion, where the forces driving prices in the direction of the trend become spent or come to a conclusion. After almost everyone who is a potential buyer, or potential seller as the case may be, has bought or sold, there are few left to keep the trend going. When there are few or no sellers left, only a modest amount of buying can drive prices back up sharply.

When there are few or no buyers left, a modest amount of selling can drive prices sharply lower. This is what is meant in the saying that “bull markets die of their own weight”—a market that has no group of substantial buyers left, will fall simply due to the removal of new buying and only a modest amount of selling.
Read More : New Highs Lows That Are Followed By Trend Reversal

The Five-Wave Structure of a Trend

As the preceding analysis shows, a trend consists of a five-wave structure. In an uptrend, for example, the first wave is the result of unexpected positive fundamental pressure. The second, corrective, wave occurs as the true believers of the previous trend attempt to reassert themselves. The third, and most powerful, wave occurs as the market at large recognizes the new bullish fundamental paradigm and rapidly tries to jump on board. The fourth wave, which follows the inevitable exhaustion of the third wave, occurs perhaps for no other reason than because of the dearth of financial participants. The fifth wave occurs because the underlying fundamental pressure has not subsided—although its enthusiasm in overshooting the mark can create pressure on the fundamental forces to such an extent that the fundamental pressure can itself be reversed.

Here is a summary of this series of five waves:
1. Unexpected fundamental pressure—impulsive
2. True believers reassert—corrective
3. Everyone on board—impulsive
4. Exhaustion consolidation—corrective
5. Final overshoot—impulsive


To some readers, the parallels of my trend analysis to the tenets of Elliott wave theory will be obvious; however, I would contend that warrior traders have a deeper knowledge of the process that allows them to maximize the opportunities presented by these swings about the underlying fundamental shift rate. This trending process is also not something that occurs in isolated instances; rather, it can be seen repeatedly, from within the grand scale of many years to within the minutiae of just a few hours. While the pattern does not replicate perfectly, it is there like an evolving musical pattern left only to the skillful trader to play it by ear. The warrior trader, understanding the process and not just the simple technical wave count, can adjust in real time to where the market is at, and therefore remain ahead of the enemy in every stage of the battle.

The two human emotions that dominate in this trend, and any other market trend for that matter, are fear and greed. But it is not simply a case, as many writers and so-called experts suggest, of people being greedy then fearful in rotation. Rather, it is a far more complex interplay among the recent experience of the market, fundamental forces, market positioning, and then fear and greed that dictates the price action. Ultimately, while fundamental forces will always drive the market in the long run and will always win out, the swings and roundabouts are driven by an overlay of other forces. The good news is that the whole process can be understood. It is also worth remembering that the markets are never irrational—they just sometimes appear to be as they try to catch up to what is really happening.

Impulsive versus Corrective Waves
The distinction between impulsive and corrective waves is paramount to the reading of any chart in technical analysis. An impulse wave is identified by its clear directional movement, covering a lot of ground in a relatively short period of time. Any hesitation during an impulse wave is relatively brief, and the market rarely dips back during these periods of hesitation once a new high or low has been made. Corrective periods, by contrast, are easily recognized by their quite whippy and chaotic price action. If there is any period in markets that tends toward the random walk that some theorists have suggested—that is, that markets are completely random in behavior and without rationale—it is during these corrective consolidation phases.

Indeed, while various theories are promulgated to explain what is happening during these corrective periods in price action, I have yet to find one that is able to predict the internal price action of these phases in real time. There are, however, several that, in hindsight, can be applied in a relatively successful manner.

In general, impulse waves are the domain of the trend traders, and corrective periods the domain of range traders. We will discuss this important distinction—which will greatly impact the profitability of your personal trading—in detail a little later. In summary, you should note that markets follow an endless cycle of underestimating the fundamental forces in the direction of the trend and then systematically overpricing those forces. Swinging from one extreme to the other, our actions compounded by the conflicting emotions of fear and greed, we view price action as a constant intertwining path of emotion and reality.

In simple terms, the market gets ahead of the fundamental forces at work, starts to doubt itself, and promptly turns in the opposite direction. The market eventually hits the wall that is the still-trending fundamental force, begins to believe again and reinvests, only to finally fall victim to the changing underlying fundamentals. This is the process that causes significant alternating swings around the central fundamental shift rate.
Read More: The Five-Wave Structure of a Trend

A Trend Reversal Criteria

Just as a statement in physics says that a body in motion will tend to stay in motion until impacted by a countervailing force strong enough to divert its direction, a primary trend is assumed to continue in effect until a reversal is definitely indicated. A primary trend reversal, according to Dow, must be confirmed by the actions of both averages. It is not enough for the averages to diverge for a time—each must establish an intermediate low or high that is clearly under or above as the case may be, the point where the prior intermediate trend stopped. Dow did allow that the longer a bear or bull market goes on, the probabilities of a reversal increases. But because he felt that you could not know how long the trend would last, an end to it should not be anticipated until definitely signaled—meanwhile, hold your position.

I tend to be more ready to take market action on extreme divergences such as seen in Figure 3.4 for 1999, perhaps not waiting for confirmation. However, this steps outside the bounds of Dow theory and in another similar situation I might be premature in assuming an end to the primary trend. Also, the 1999 circumstances were unusual; the Industrials did eventually confirm a downside primary trend reversal and the next rally in the Industrials after that was a high-potential shoring opportunity within the tenets of Dow theory.

VOLUME CONSIDERATIONS
An important advantage that exists in stocks is that volume information is readily available. One of the great lost arts is that of tape reading. When brokerage offices made widespread use of the big running tapes, it was very clear when a rally or decline was significant—you could easily see the blocks of stock being traded, indicating big institutional activity. Volume should go in the direction of the trend and expand as prices moved that way. Dow related this to the rule that volume will increase in the direction of the primary trend. However, the same rule is often true for intermediate trends. It is likely that volume will ratchet up even more in the direction of the primary or major trend. We are talking here about the volume trend over time. I especially like to watch upside volume activity. It should increase as the market moves up and decline as prices fall. Upside volume is the sum of transactions done on up ticks. A true test of buying interest or strength is the willingness to pay up for stocks. However, this is an aside from Charles Dow’s writings on volume.

The corollary of volume increasing in the direction of the primary trend is that volume will tend to subside on price swings counter to the direction of this trend. In general, volume will expand on a move with the trend and contract on a move against the prevailing trend. Volume is however, secondary to price in terms of forming conclusive evidence of a trend or trend reversal. Price is king in terms of studying market trends and volume is like the prince of it.

LINE FORMATIONS
Dow described a sideways price movement in one or both of the averages, lasting anywhere from a week or two up to a few months, as a line. This would typically be where prices fluctuate within a relatively narrow price range, such as within a few percentage points of the high or low that preceded the line formation. The line can substitute for a secondary up or down trend. Such a sideways trend—I consider a sideways movement to be a third type of trend, whereas many analysts consider trends to define only an up or down direction—indicates that buying and selling are in relative balance. Eventually, buyers are willing to pay more or sellers take less and this moves the market back into an up or down trend. A penetration of the upper or lower part of the line formation usually signals the direction of the next intermediate price swing.

Usually, the longer that these sideways trends go on, the more significant is the next move in the average. There is often a direct correlation between the time duration and the extent of the next price move above or below the line. The sideways move in the Dow Industrials, seen in Data from 2000 on, while more on the order of a 10 percent fluctuation (between approximately 11,500 and 10,000), shows a duration of more than two years. The number of tops and bottoms made within the same pricearea, forming well-defined upper and lower boundaries, define this pattern as a line. These well-defined boundaries are more important than the fact that the price range lacked the more typical narrowness between the highs and lows. The line formation today is more often called a rectangle pattern, especially as it relates to individual stocks.

Lines mostly form as a pause in the trend or a period of price consolidation of the averages. The line in this situation is part of the formation of the major trend and can take the place of an up or down secondary move.

Sometimes a line forms after a lengthy bull or bear market. Some technical analysts assume that a major line formation is a distribution top if the trend was up preceding it and an accumulation bottom if the prior trend was down. Dow himself did not indicate that the direction of the next price move after a line pattern ends could be forecast.

USE OF CLOSING PRICES
Dow theory does not take into account intraday highs or lows in terms of determining a change in trend. Only a new closing high or low is considered. There has been discussion in the past by interpreters of Dow theory as to whether the averages should simply clear an old high or low by any amount or whether they should be by some point margin or even some percentage amount. I would look at the circumstances and tend to look for some degree of separation. If the new high or low is very close to the other, this second high or low could qualify as a double top or bottom, if prices then reversed from there.
Read More : A Trend Reversal Criteria

What is a trend?

Turns out that there is a classic definition of a bull or bear market. A bull market is any market that is making higher highs and higher lows. A bear market is any market that is making lower highs and lower lows. A
neutral market is any other condition. Once again, this is very simple.

However, it is simple only if we agree on what a high or low is. And that has traditionally been a subjective decision. First, let’s make a definition. The highs and lows that we are looking for will be called swing highs and swing lows. That will clear up some confusion with the highs and lows on each daily bar.

I’ve circled a number of swing highs and lows on this chart during the period August through November. In this chart, you and I likely agreed on where the swing highs and lows were. We intuitively agreed. We didn’t have a rule that said what constituted a high or low because, as humans, we can intuitively agree.

But what if we disagree? What if you pick one high and I don’t agree? What about the high five bars before the end of August? We skipped over those because we agreed that they were not important or significant. So the real key is to understand which swing highs are significant. We intuitively skipped over the insignificant highs and lows. But there may come a time when we may disagree on the significance of a given high or low. It would be better to have an objective way to determine the significance.

My friend Tom DeMark is perhaps the most innovative technical analyst in history. He has probably added more and better technical indicators than anyone in history. One of his innovations is the idea of creating objective standards for what was traditionally considered subjective. For example, how do you label Elliott Waves? More germane to this discussion:


What highs should be used to create a downward sloping trendline? His objective criteria eliminates the subjectivity that is often found in such types of technical analysis as Elliott Wave and classical chart analysis. No longer will you and I disagree about the proper slope of a trendline or the Wave count.

First, let me clarify some terms. The words high and low have two meanings. They can refer to the high or low of a given day’s bar (or candle) or the high or low point of a move over several or more days. Let’s call this
last meaning swing high and swing low. So the highs and lows on the chart that I circled are swing high and swing lows.

Basically, DeMark showed that certain swing highs and swing lows are significant and other swing highs and swing lows are insignificant. The way he did it was ingenious.
I think we can agree that the high in the middle of April is more important than the highs in the middle of October. We can see that very clearly on the chart. DeMark created a method for determining how significant a swing high or swing low is. (The following is my interpretation of what I learned from him. Give him the credit for the initial genius and I’ll take the blame for screwing it up!)

The basic idea is to identify every swing high with an objective rating system. The high in mid-August is the most important high on the chart because it is the highest high on the chart. The lows made in December
and January are the two most important lows because they are the lowest lows on the chart. Major highs and lows show up as major highs and lows because they are the most extreme.

DeMark’s rating system is simple. Choose a swing high or swing low in Figure 2.1. For example, let’s look at the first circled high on the chart from August. Now, look at the bar after this one and all the bars to the left
of it. To be defined as a swing high there must be one bar to the right that has a lower high than the day we are looking at and at least one bar to the left of it with a high lower than the high on the day we are looking at.

That simple test defines a swing high (reverse everything for a swing low). We have objectively defined every swing high. The circled bar at the high in August is a swing high but the bar to the left is not. Note that it has a bar to the left with a lower high but the bar to the right, the circled bar, has a high that is higher than the bar’s high. So it is not a swing high. The bar to the right of the circled bar is also not a swing high because it has a lower bar to the right but the circled bar has a higher high than the bar that we are looking at.

The next step in the analysis is to rank the swing highs and lows. We do this by simply counting the number of bars to the left of the bar in question. Let’s do this with the highest bar in August. We know that it is a swing
high because it has at least one bar on either side of it with a lower high.


However, there are 41 bars to the left of it with a high on the bar that is lower than the high on the circled bar. I would call that a 41-bar swing high because there are 41 lower highs to the left of it. There might be even more than that but we got to the edge of the chart.

Let’s now look at the next circled bar to the right of the one we just looked at in Figure 2.1. That would be a low four days after that major 41-bar high. Once again, let’s count bars. We know that there is one to the
right and 10 bars to the left before we run into a bar that has a lower low.

I’d call that a 10-bar low.
You can go through all the highs and lows on the whole chart rating them by how many bars they have to the left. It is clear that we intuitively rank bars with higher numbers as being more significant than bars with
fewer numbers. This then leads to the concept that we can now use objectivity when describing chart patterns. For example, we can now agree that we will only draw up trendlines that connect five bar or higher lows.

Looking at the chart, identify all the five-bar lows and draw a trendline connecting the two most recent five-bar lows. We will never disagree about where to draw the trendline because we have agreed that five-bar lows are significant.

Which leads to the next step in our journey. What bar level is significant? What bar level should we be focusing on to eliminate little random blip movements and keep us focused on what is really important?
My experience is that three-bar highs and lows are significant and that two- and one-bar highs and lows are not. Of course, there can be exceptions but that is a strong general rule. Markets can often retrace against the trend for a day or two but rarely will they move three days without it meaning something.

To check this, look back at Figure 2.1 and look for three-bar highs and lows for trend analysis. I find that this bar level keeps me in the trend and avoids getting stopped out on random little blips.
Let me digress for one moment. Every technique I teach has a stop loss attached to it. Most techniques taught in other books have stops attached to them. For me, I want every stop loss technique to have two attributes.

First, the stop should only be triggered when something significant happens. I don’t want to be stopped out on some little squirrelly move in the market. Or perhaps just one big trade moves the market. I only want to exit a trade on a significant move.

Second, I only want to be stopped out when I know that I am wrong. As long as there is no evidence that my original thesis is wrong, I must stay with the trade. I’ll let a trade go against me a little when that movement is
insignificant and does not invalidate my original trade idea.

The ranking of swing highs and lows allows us to measure how significant a move is, thereby satisfying condition number one. We will not be stopped out on trivial moves but only moves that have some power behind them. Later in the chapter, I’ll show you how this ranking allows us to satisfy condition number two.


From now on, I’m going to focus only on significant swing highs and lows, previously defined as three-bar highs or lows. We’re going to ignore all swing highs and lows that are two-bar highs or lows. Let’s take a look at Figure 2.2. This chart shows the same currency pair over basically the same time frame but I have changed the circles from what I intuitively identified as significant swing highs and lows to what I have now objectively defined as three-bar high and lows. Note that there are not too many changes. The chart is roughly the same. However, now the significant highs and lows are objectively defined. Using our agreed-upon definitions, our significant highs and lows would be the same.
Source: How to Make a Living Trading Foreign Exchange: A Guaranteed Income for Life (Wiley Trading)

What is The Trends Direction?

In order to adopt the Trend Riding Strategy, you must first identify a trend
direction.

You can easily gauge the direction of a trend by looking at the price chart of a
currency pair. A trend can be defined as a series of higher lows and higher highs in
an uptrend, and a series of lower highs and lower lows in a downtrend. In reality,
prices do not always go higher in an uptrend, but still tend to bounce off areas of
support, just like prices do not always make lower lows in a downtrend, but still
tend to bounce off areas of resistance.

There are three trend directions a currency pair could take:
1. uptrend,
2. downtrend or
3. sideways.

1. Uptrend
In an uptrend, the base currency (which is the first currency symbol in a pair)
appreciates in value. For example, if EUR/USD is in an uptrend, it means that EUR
is rising higher against the USD. An uptrend is characterised by a series of higher
highs and higher lows. However in real life, sometimes the currency does not make
higher highs, but still makes higher lows. Base currency bulls (henceforth referred
to simply as “bulls”) take charge during an uptrend, taking the opportunities to bid
up the base currency whenever it goes a bit lower, believing that there will be more
buyers at every step, hence pushing up the prices.

2. Downtrend
On the other hand, in a downtrend, the base currency depreciates in value. For
example, if EUR/USD is in a downtrend, it means that EUR is declining against the
USD. A downtrend is characterised by a series of lower highs and lower lows, but
similarly, the currency does not always make lower lows, but still tends to make
lower highs. The downward slope of lower highs is formed by the base currency
bears (will simply be known now as just “bears”) who take control during a
downtrend, taking every opportunity to sell because they believe that the base
currency would go down even more.

3. Sideways trend
If a currency pair does not go much higher or much lower, we can say that it is
going sideways. When this happens the prices are moving within a narrow range,
and are neither appreciating nor depreciating much in value. If you want to ride on

a trend, this directionless mode is one that you do not wish to be stuck in, for it is
very likely to have a net loss position in a sideways market especially if the trade
has not made enough pips to cover the spread commission costs.


Stages of a Trend
A trend has a start point and an end point; in between these two points, the trend
can exhibit different behaviours. As a trend rider, it is important to note the various
stages of a trend so that you don’t get on the trend train at the last stage, just when
smart people are starting to disembark from it. The stages of a trend are not clearcut,
and that includes the starting and ending stages; and each stage can vary in
length of time.

Let’s take a look at the different stages of a trend .
1. Nascent trend
2. Fully charged trend
3. Aging trend
4. End of trend


Stage 1: Nascent trend
Right after a reversal, the embryonic trend emerges into the new territory with the
greatest amount of uncertainty, as traders have the least amount of confidence in the
direction of the nascent trend. Price moves are often sharp, and may even retest the
price levels seen before the entry into the new territory as bulls and bears wrestle for
power. This characterises Stage 1 of a trend, and it is where aggressive traders get
into the currency market, hoping to be right about the new direction of the trend and
reap potentially the most profits by getting in early. Since this stage of the trend has
the greatest level of uncertainty, it is also where the risk of trend failure is greatest.

Stage 2: Fully charged trend
By the time the trend reaches Stage 2, it is fully charged. Either the bulls or the
bears have won the battle over the other by now, and are persistently pushing the
currency prices higher during an uptrend, or lower during a downtrend. The highly
confident behaviour of the bulls in the uptrend and of the bears in the downtrend
gives little room for uncertainty about the trend direction. This stage is ideally the
best time for the risk-averse trader to join in the prevailing trend, after getting
confirmation from the technical picture and market sentiment.

Stage 3: Aging trend
As with human beings, a trend gets old and tired eventually. Aging of a trend
typically occurs in Stage 3, and it is at this stage that you can witness the fallacies
of man. Overly eager traders, especially those who have missed out on the initial
stages of the trend, are now realising their tardiness, and are hopping onto the trend
bandwagon, hoping to still be able to get a piece of the action. The more experienced
traders are more than happy to pass on the closing legs of their transactions over to
these inexperienced traders as they try to take their profits while the trend is near the
peak of an uptrend, or near the bottom of a downtrend. Seasoned traders begin to
lose their confidence in the strength of the trend, whereas inexperienced traders who
are still hoping to gain more profits remain optimistic about the trend. So there is a
mix of waning confidence and overconfidence in the trend at this stage. More price
consolidation periods could be seen at this stage, and chart patterns like head-andshoulders

or double top/bottom are commonly found here.

Stage 4: End of trend
The last stage is when the trend begins to crumble and lose its staying power. In an
uptrend, shortage of bullish newcomers halts the advance of higher prices, and
some begin to take their profits, pushing the prices lower and lower. In a
downtrend, a lack of new bears coming into the market stops the currency prices
from going lower, and when they start to take profits, prices start going up. The
crumbling and ending of a trend can come fast and furiously, without much warning
to traders, or it can be a more prolonged process as power changes hands between
the bulls and bears. Usually a trend reversal is brought about by a major change in
the underlying sentiment about a currency. Jumping onto this stage of a trend in
order to ride the underlying trend can be very risky as the trend is close to ending,
and there is a high chance of the trade getting stopped out.

The most profitable entry points into a trend are at Stages 1 and 2, where the
potential for the trend to grow and continue is great. Profit potential at Stage 3 may
be limited as the trend has matured, and it is where most profit-taking takes place.
When it comes to riding a trend, potential for loss becomes huge when getting in at
Stage 4.



Source: 7 Winning Strategies for Trading Forex: Real and Actionable Techniques for Profiting from the Currency Markets

Anatomy of a Trend

For a moment, let’s have a look at the macroelements that are usually at play in trending markets. Inevitably, this is a journey into the pop psychology of a trend and the market crowd that participates in it. What is most relevant, though, is that warrior traders know and understand each element of the trend prior to its unfolding and are able to position themselves time and time again to achieve maximum profit from the movement. Many will profit at different times in small and even largish amounts, but only the warrior will systematically take money out of the market on each turn of events.

Unexpected Fundamental Pressure
When a price trend starts, it is usually already running late relative to the fundamentals—in all probability it will be lagging behind the fundamental economic reality. Rather than preempting the future, markets are usually preoccupied with simply trying to figure the future out, and often in a quite emotional way. At the start of a new trend—for example, a bull trend—it is usually the case that the fundamental forces have already shifted in real time, but the market has been busy overshooting the previous bearish reality. But once the market crowd recognizes the new dominant fundamental forces, it has to do two things: first, get out of the now-unjustifiable short (that is, sold) positions it is holding because of its previous bearish beliefs, and second, actually buy so as to get long and try to take advantage of the bull swell in the offing.

True Believers Reassert
Once everyone who believes in the new paradigm takes a position, there will appear to be a pause in the trend before it proceeds. Now, remembering these are early days in a new trend and many participants will see this upward movement as a bounce in a bear trend rather than a fresh bull trend, those who are bearish may misread the price hesitation and decide to sell again. This will, naturally, lead to a down move. This movement can be severe, and price can often go all the way back to near the starting point (the absolute low) that had preceded the start of the new bull trend.

Everyone on Board
The new fundamental paradigm is in full swing, however, and the same forces that were pushing the market higher due to the imbalance in supply and demand again begin to dominate. As the market moves higher this time, the psychological impact is magnified and becomes much more powerful. The buyers are greatly encouraged as the previous low holds and begins to look like a handy support point (and a double bottom for any revisionist technical analysts out there), and the bears are discouraged at the failure of the market to break to new lows as they had expected. Now we have a market that is psychologically or emotionally leaning to the upside, overlaying a bullish fundamental reality. The converging of these two currents (fundamentals and emotions) can create the most powerful move to the upside of the whole trend, but there is a lot more still to come.

As this very fast uptrend continues, more and more participants have greater confidence in it. Even fringe-dwelling market observers, such as everyday mom-and-pop investors, may eventually be drawn into the excitement.

Exhaustion Consolidation
At some point, however, it is inevitable that, despite the immense size and nature of modern financial markets, the finite number of participants who can sustain the buying pressure will simply run out. This leads to an exhaustion phase. This phase is when basically everyone who could possibly want to buy into this stock or market has already done so. There is simply no one left to buy. In such circumstances, it does not matter whether any fresh news is bullish or not, as there simply is no one left to buy. The market, unable to sustain itself, now begins to fall back on any selling that occurs as a normal part of the market, with sellers looking to recoup funds for all manner of reasons.

As the market approaches this exhaustion point, it simultaneously reaches the maximum potential energy to the downside. The potential energy to the downside is a direct consequence of all the buying that has been done—some for real business purposes, but the most significant portion for speculative purposes based on the bullish emotions that were flowing at the time and the perception that this would materialize as capital appreciation.

Speculation is, of course, successful only when unrealized profits are made concrete through the closure, or the sale, of those positions. Thus, the more buying that has been done into a market, the greater the potential energy to the downside should there be fresh bearish news or should simple market exhaustion occur.

Added to this is the potential for significant selling pressures as speculators race to realize profits. It is worth noting here that the underlying fundamental forces to the upside have not altered one iota during this period; however, the market continues to move as a result of the emotional energy that flows from the interaction of people who sustain it. All that has happened is that, first, market participants have recognized the new bullish paradigm and got more and more wound up about it as the market continued to move higher.

After the exhaustion, however, a high degree of confusion usually emerges. For the latest arrivals, there will be losses on bought positions. There might even be some short sellers who begin to make small profits again. It is this state of discord that results in what is usually the most drawn out, and quite choppy, price action of the whole trend.

Final Overshoot
The bull trend has not yet concluded, however. The underling bullish fundamental forces are constantly, gradually, readjusting the balance, recovering the balance, and then relentlessly shifting the net pressure again to the upside. Once again, the nonbelievers convert and the market participants begin to buy aggressively. They have made money before from being long and so are now quick to get on board again. Typically, this movement results in the last sharp overshoot to the upside.

The market continues to gather momentum to the upside until ultimate exhaustion is in place and/or the fundamental forces have again returned to the downside. Indeed, it is sometimes the case that the overshooting nature of the market to the upside can swing the underlying fundamental forces to the downside. This is because the market can also be shown to have a cause relation to the fundamentals of which it is often the effect. At this point the whole process may begin again to the downside as a major bear trend. Alternatively, it could simply be a period of hesitation on a grander scale, of a greater quantum, to that which followed the penultimate exhaustion high.

Read More: Anatomy of a Trend

How To Ride The Trends?

Who doesn’t like a trend?

Many traders live by the often-repeated “the trend is your friend until the end” rule; they are comforted with the knowledge that they are with the majority of the market. Being able to ride on a trend is akin to making full use of the wind direction to steer your ship towards your destination. For a ship to go against the wind requires a tremendous amount of effort – one has to fight the stubborn resistance from the opposing wind. Indeed, for most of the time, it pays more to be on the side of the current trend than to go against it. In the forex market, trend riders can capture any trend regardless of whether it is rising or falling in an attempt to generate trading profits.

Forex tends to have quite trending markets, regardless of which time frame you are looking at – trends are often formed on hourly, daily or weekly charts. This is due to the fact that currency price movements are very much influenced by the underlying macroeconomic factors which in turn shape the market players’ views of where currency prices should be heading. With trends possibly having a long lifespan stretching to months, or even years, it is no wonder that many traders and fund managers exalt the strategy of hitching onto trends, with the glorious aim of capturing enormous profits from start to finish.

Trend riding is one of my favourite trading approaches, and I often ride the uptrend or downtrend after the trend has been established, rather than anticipating the move before it happens. I would say that even though the trend is your friend most of the times, one has to use a variety of methods to distinguish between a continuation of the trend and a possible trend reversal. But before you can ride on trends, you first need to identify what the current trend is, and to determine the time frame of the trend.


Time Frames of Trends
Sometimes, people ask me for my opinion on the current trend for certain currency pairs, I reply with another question in return, “According to the past 5 mins, 5 hours, 5 days or 5 weeks?” Some traders are not aware that different trends exist in different time frames. The question of what kind of trend is in place cannot be separated from the time frame that a trend is in. Trends are, after all, used to determine the relative direction of prices in a market over different time periods.

There are mainly three types of trends in terms of time measurement:
1. primary (long-term),
2. intermediate (medium-term), and
3. short-term.

These are discussed in further detail below.
1. Primary trend
Aprimary trend lasts the longest period of time, and its lifespan may range between eight months and two years. This is the major trend that can be spotted easily on longer term charts such as the daily, weekly or monthly charts. Long-term traders who trade according to the primary trend are the most concerned about the fundamental picture of the currency pairs that they are trading, since fundamental factors will provide these traders with an idea of supply and demand on a bigger scale.

2. Intermediate trend
Within a primary trend, there will be counter-cyclical trends, and such price movements form the intermediate trend. This type of trend could last from a month to as long as eight months. Knowing what the intermediate trend is of great importance to the position trader who tends to hold positions for several weeks or months at one go.

3. Short-term trend
A short-term trend can last for a few days to as long as a month. It appears during the course of the intermediate trend due to global capital flows reacting to daily economic news and political situations. Day traders are concerned with spotting and identifying short-term trends and as such short-term price movements are aplenty in the currency market, and can provide significant profit opportunities within a very short period of time.

No matter which time frame you may trade, it is vital to monitor and identify the primary trend, the intermediate trend, and the short-term trend for a better overall picture of the trend.
Source: How To Ride The Trends?

Trends In Raising Capital

Capital markets have undergone profound changes over the
past generation, and we are confident that they will continue
to do so in the future. Anyone hoping to raise substantial
amounts of capital these days should have at least some understanding
of these changes and the trends behind them. The
most important trends include globalization, technological advances,
financial innovations, changes in savings and investment,
and dominance of institutional investors.

Globalization
Capital markets are now global. This trend has been spurred by
a number of events and circumstances, beginning with the gradual
disappearance of exchange controls in the 1970s. Throughout
the 1980s and 1990s, deregulation was the major
contributing factor. Today, capital tends to flow to countries
where the risk-return trade-offs are attractive and restrictions on
inflows and outflows are small. As countries have opened up
their markets to foreign issuers seeking capital and to foreign investors
seeking outlets for their investment dollars (or euros or
yen), companies and investors have responded with massive
capital flows. In turn, countries now find it hard to maintain
highly restricted capital markets because the key players can
avoid these restrictions simply by doing business elsewhere.

In one important area, however, regulation has actually increased.
Where previously regulation was designed primarily
to stifle markets, more recently policy makers have striven to
make securities trading a fairer game. As a result, insider trading
rules have been strengthened, especially in Europe where,

until recently, insider trading prosecutions were extremely
rare. Also, recent accounting scandals notwithstanding, corporate
disclosure requirements have increased, making it easier
for investors to track and compare the performances of publicly
traded companies.

Large multinational corporations routinely raise debt and
equity capital outside their home countries, but these days
even smaller companies are moving beyond their home country
borders to lure investors. This trend is largely a positive
one because it gives companies access to much broader pools
of capital, and it also allows companies to take advantage of
differences in taxes and regulations across countries, thereby
lowering their cost of capital. However, globalization also
means that companies compete for capital not just against industry
or national rivals, but also against investment opportunities
outside their home markets. The increased fluidity of
capital can be both a benefit and a curse.

Advances in Technology
The most important reality of today’s capital markets is that
huge amounts of capital can flow from one company to another,
from one instrument to another, and from one country to
another, practically in the blink of an eye. These capital flows
would not be possible without the processing power offered by
today’s computer technologies. These technologies make it possible
to simultaneously issue billions of dollars of securities in
several countries around the world, to trade trillions of dollars
of securities on stock exchanges and other trading platforms,
and to efficiently price new instruments as they reach the market.

We are now converging to a truly continuous, 24-hour

global trading regime, at least for the equity of the world’s
largest, best-known companies. Eventually, such trading opportunities
will extend to a much broader range of securities.

Financial Innovation
Globalization, deregulation, and information technology have
spurred the creation of innovative financial instruments. Investment
bankers have designed new instruments that allow
companies to (1) tailor securities that appeal to a well-defined
set of investors, (2) reduce the effects of fluctuating interest
and exchange rates, and (3) convert illiquid assets into highly
liquid financial instruments. The result is an astonishing array
of financial instruments available in global capital markets.
An important example of such innovation is the growth of
securitization, a trend that began to accelerate in the 1980s.

This is the process of combining assets or financial instruments
that are not securities, registering the combined, or bundled,
units as securities, and selling them directly to the public. Securitization
practically revolutionized the mortgage market in the
United States by creating publicly traded mortgage instruments.

The practice was later extended to cover a broad range of assets,
leading to a whole new market in asset-backed securities.
For example, companies can now sell their trade receivables,
and raise much needed capital, at lower cost than before.
An interesting consequence of financial innovation is that
it has helped to blur the lines that distinguish one type of financial
institution from the others. For example, as we explore
in Chapter 5, commercial banks aren’t the only institutions
providing commercial loans. Insurance companies, pension
funds, and other investor types are in the business, too. Simi-

larly, securitization and similar innovations have allowed other
institutions to compete on turf that previously belonged exclusively
to investment banks.

Changes in Attitudes toward Savings and Investment
While all of these developments took shape, a new generation of
investors emerged, flush with cash and possessed as well of
more favorable attitudes toward capital market investing than
earlier generations. Aided by a seemingly endless bull market
(interrupted by the odd crash, such as in 1987 or in 2000 with
the collapse of technology stocks) and solid evidence that with a
long enough investment horizon a person is almost certainly
better off investing in equities than in government bonds or
bank accounts, millions of people whose parents never even
thought about buying stocks have taken the plunge and become
shareholders. This trend was accelerated in Europe by privatization
campaigns that sought to ensure the permanence of private
ownership by encouraging dispersion of the shares of newly privatized
companies among a large cross section of citizens.

Growing Dominance of Institutional Investors
Interest in stocks, and in investing generally, has grown in
ways unimaginable to finance professionals as recently as the
1970s. The result is a veritable worldwide explosion in mutual
funds, unit trusts, and other forms of institutional investment.
Not only do many more people have a financial stake in companies,
typically through mutual funds or pension funds, but
of particular importance to corporate managers is that these
funds are run by professional managers who care only about

performance and delivering the highest returns possible to the
people who hired them. There is little doubt that the explosion
in pension fund investing over the past generation, and the
growth of professional money management that came with it,
is the single greatest factor behind the emphasis on shareholder
value creation in U.S. companies.

This trend is beginning to intensify in Europe, too, thanks
in part to its own mutual fund industry but also because of the
growth of pension funds. With aging populations and an unsustainable
safety net, a growing number of Europeans now
recognize that underfunded social security programs will be
unable to serve the retirement needs of today’s workforce. To
provide for the needs of an aging population, and to stimulate
savings and corporate investment, many countries have implemented
or are planning to implement pension and savings
plans that will channel unprecedented amounts of equity capital
to European companies.
Read More : Trends In Raising Capital