Profiting from Market Trends: Simple Tools and Techniques for Mastering Trend Analysis

CHAPTER 1

Introduction to Trend Analysis

Markets move in trends. This phenomenon is one of the major organizing principles of market behavior and one of the tenets of the Dow Theory. Some well-known axioms have been coined over the decades regarding market trends, such as “The trend is your friend” and “Don't fight the trend.” Numerous trading and investment strategies have been developed around the fact that markets move in trends. Most traders find it easier to profit when a market is trending than while it is in a period of prolonged consolidation.

■ What Is a Market Trend?

A simplistic definition of a market trend is a directional price move—either up or down. An uptrend is a price move that starts from a specific low point. A downtrend is a price move starting from a certain high point.

Traders ask many questions about the trend, such as the following:

• Which direction is it moving?
• How long might it last?
• How strong is it?
• How can I spot opportunities to participate in a trend's movement?
• What signs should I look for that suggest the trend may be weakening or changing direction?
• Is this a good time to get aboard the trend?
• When should I exit the trend?

My answers to these questions fill the chapters of this book. The charting tools and techniques described herein are intended for the purpose of identifying and participating in a trend, gauging its strength, and responding to changes in its direction. In my opinion, these trend analysis tasks are among the most important ...