CHAPTER 5
Trend Analysis
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
- Understand the significance of a market trend and its underlying characteristics
- Recognize the limitations of defining trend and market action
- Identify early indications of a potential market reversal
- Read the markets in terms of wave cycles of various degrees
- Set up effective price filtering for more efficient entries, exits, and trend identification
- Calculate the optimum tradesize for breakout trades
- Learn to use channels, trendlines, fan lines, and Drummond geometry to track market action
Trend trading has transfixed traders for decades with the promise of rapid profits. Countless books have been written expounding the virtues and advantages of such an approach. In this chapter, we shall attempt to unveil the underlying characteristics of trend action and how to decipher pure price action to better understand the behavior of the market. We will also discussing price filtering and the effective application of tradesizing and stopsizing to with respect to technical trade setups.
5.1 DEFINITIONS OF A TREND
Classification of a Trend According to Dow Theory
In Dow Theory, trends are classified and defined by their duration and extent:
- Primary or major Trends are longer term and spans from months to years
- Secondary trends or reactions are medium term and spans from weeks to months
- Minor trends are shorter term and spans from days to weeks
FIGURE 5.1 Peak and Trough Representation ...
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