Technical analysis is built on the premise that prices move in trends. The financial implication of this concept is essentially no different from the general definition – the trend is none other than a direction in which market moves.
Trends can be divided on the basis of different directions of movement:
- Upward trend consists of a sequence of rising tops and bottoms.
- Downward trend consists of a sequence of decreasing tops and bottoms.
- Sideway trend is composed of tops and bottoms which are not higher then the previous tops or bottoms.
We can divide trends also on the basis of duration:
- Long term trend covers the period longer than one year
- Medium term trend covers the period of between one and three months
- Short term trend covers the period of less than one month.
What is trend line?
Trend lines are an important tool of technical analysis to identify and validate trends. The trend line is a straight line that connects two or more price points and then extends into the future and function like point of reference for determining the purchase / selling point.
What is the trend channel?
Trend channel consists of two parallel trend lines, which serve as strong support / resistance level. Upper trend line connects the sequence of tops, the lower trend line connects the sequence of bottoms. Trend channel can be tilted up, down or sideways. Irrespective of the direction of movement remains the interpretation of the trend channel the same. Traders which take account of the trend channel will try to buy a financial instrument when the price is closer to the lower trend line and sell when approaching the upper trend line.
How to use knowledge about trends, trend lines and trend channels?
The most important commandment, which all the traders should be holding is that it is necessary to follow the trend and not fight it. This means that during the growing trend we buy and during downward trend we sell. In short term it is possible to create return in sideways trend, so you can try to buy when price is closer to the lower support level and sell when price is approaching the upper resistant level.