User:Altafqadir/Trend and trendline

The simplest way to define a trend is the direction in which prices are moving. The three elementary forms of price movements are the downtrend, the horizontal trend and the uptrend. The news with new informations keep on entering the market, causing change in trends to move up or down. Trends which are very brief or for a short period are known as minor trends. Those lasting for months are called intermediate and trends prevailing for years are considered as major trends.

An imbalance between supply and demand moves prices in trends. When there are more sellers and the supply is greater than demand, prices come down, indicating a down trend; when demand exceeds supply, the trend will be up as buyers bid up the price. If the supply and demand is moving parallel, the market will move sideway in a trading range.

Profit can be taken out in both trends either by going long or by selling short. In an uptrend, there is an opportunity to profit by being bullish or "stay long" until the time one sells out. A major downtrend is a bear market and with a bearish approach those who "go short" can be profited.

Many investors tend to think that a share whose price move up is good, whereas the one whose prices moves down is bad. The experienced and knowledgeable investors spend more time studying price trends instead of prices.

Convergent trend: When prices move in a wider range and their movement narrow down over a period of time, a trend (pattern) is formed with upper and lower borders which meet at some point if are extended to the right. Ascending triangle, Descending triangle, Pennants, Symmetrical triangle and Wedges are all Convergent trends (pattern).

Divergent trend: When prices start fluctuating in a narrow range and widen with the passage of time a trend (pattern) is formed with upper and lower lines which meet at some point if they are extended to the left. Broadening top is one of the example.

Logic behind trend
Logically, every price rise should reduce the number of buyers and increase the number of sellers. After all, higher prices discourage buyers and encourage sellers. However, logic based on common sense does not always work in the stock market. The fresh demand can come from buyers who adopted a wait and see attitude. Additional demand also comes from existing holders and from new buyers who may have just become aware of the share's future potential. The supply is reduced because a price rise often convinces potential sellers that if they keep on holding they will get a higher price. This (rational or irrational) behavior of buyers and sellers explains how price trends comes into existence and why they often seem to acquire a momentum of their own. Price trends are caused by the changing opinions of buyers and sellers as they pull in opposite direction. Every price at any given moment of time is a temporary compromise between these conflicting perceptions and opinions. It is not so that share prices represent the collective judgement of the market. All that a share price reveals is that, at that particular price level, the perceptions and opinions of buyers and sellers are evenly balanced. Price trends not only reveal how these perceptions and opinions change over time, they also indicate the direction of their change.

Trends do exist and their existence indicate that more and more investors are beginning to interpret the available information in the same way. As a bull trend gets underway, bearish opinions gradually get transformed into bullish ones and the reverse happens in a bear trend. Trends can convert the conflicting investors' opinions and perceptions to a common point of view. When these differences narrow down, it can be a signal that the trend is coming to an end.

There is no infallible method of determining whether or not the major trend is still in force. However, there are vaious methods of estimating whether or not a change of trend has taken place.

Trendlines
Though various method and alternatives has been developed to get around the difficulties of dealing with simple Trendlines but none of these is entirely satisfactory. A consideration should be given to the fact that any method can be better than no method at all. Alleast, any of them will ensure investors to an extent in making a decision not to hold a stock indefinately or to avoid losses after a major reversal.

Trendline based on 10-day moving average, 100-day moving average etc. tends to stabalize trivial moves, at the same time introduces other problems related to moving averages. To face these, short term moving average and longer term moving average are used together to find any indication of the change in trend when they cross.

Types
Ascending: The price advance in a commodity or stock is composed of a series of lows and highs. When the bottom of these rallies form on by an upward slanting straight line, an Ascending Trendline is formed.

Descending: In a downtrend, when the top of these highs form on by a downward slanting straight line, a Descending Trendline is formed. Atleast two highs or two low are required to draw the such line.

Horizontal: The simplest way to see a trend is to draw a Trendline which touches two or more bottoms as a result of the reactions when the trend is on upward direction. In the downtrend, Trendline is drawn across the top of two or more rallies. In sideway moment, Trendline connect a series of higher lows or lower highs on a horizontal line of a chart. A dramatic breakdown though the Trendline can underscore a change of trend. Trendlines are easy to draw but difficult to deal with. To coup up with the diffculites of Trendline and to be sure of the change, some analysts require a breakdown that penetrate the line by a certain minimum amount which can vary from 3% to 5% of the price. Others will consider a channel consisted of double Trendlines. This channel includes a warning area to judge whether the breakdown is a straight penetration or a full scale signal.

Gentle or steep line: It is considered that gradually raising or falling trendlines are more authoritative and reliable than steep trendlines which are broken by a brief sideways movement or in consolidation stage after which prices shoot up or fall down again. A gentler sloping trendline (either upward or downward) is usually offer more technical significance to analysts.

Fan line: As a result of sudden fall in prices, a steep downtrend line is drawn. As a rebound, occasionally, this trendline is broken by the demand and at such point a new trendline comes into existence. At some later stage, the last trendline will be broken and a third trendline will be required. All such lines are consisdered as fan lines. It is generally assumed there is a change in the trend after the break of third fan line. This rule can applied in reverse in the uptrend or raising market.

Trend channels and return line
In a downtrend or an uptrend, a trend channel is constructed by drawing parallel lines between two successively tops or bottoms. The starting point will be two intermediate bottoms in an uptrend and two intermediate tops in a downtrend. The second line is often known as "return line" since it marks the area where reaction against the prevailing trend originates. The area between the basic trendline and the return line is known as "trend channel". The return line can be less reliable than the basic trendline but is valuable enough to be considered. A short-term trading strategy can be applied in an uptrend by buying on or near the basic trendline and selling on or near the return line. Another variation of this technique is to draw a parallel line equidistant between the basic and return trendline to make a upper channel as "selling zone" and lower channel as "buying zone".

If prices fail to move up to the area of the return line, one can consider the market is weakening that means a return line can also be used to forewarn an impending change in the present trend.

Pullbacks effect
An interesting phenomena that occur after Trendline is broken is known as pullback or throwback. When an uptrend line is broken, prices continue to go lower for a few days, then they rally up to the trendline again. Finally, the prices proceed in the same direction in which the trend was broken. Does this rally up stop at the point where the price broke the trendline? It depends upon the angle of the ascending trendline. If it is steep, it can move up further beyond the point where the trendline was broken. The reverse is occurred upon breaking of a downtrend line.

Validity of Trendline
Observations show that stock moves in trend. For any particular stock, it is necessary to understand the way in which Trendline is broken. When it is penetrated three things should be considered:


 * a) To which extent the Trendline is penetrated.
 * b) Trading volume on the penetration.
 * c) The trading activites after the penetration.

Validity of penetraion

Analysing a chart is an art not a science. When Trendlines are penetrated, there are other factors to consider before appraising the validity of the peneration. Did the closing price below the trendline or was it merely the low of the day that broke the trend? An intraday breakdown is not sufficient prove to confirm that there is a change in the trend. As far as the close itself is concerned, it should be significantly below the trendline. Another consideration should be given to the volume, if there is a increase in volume on that particular day, there are possiblilites, the trendline break was valid. When the break is accompanied by a gap or any reversal pattern, it can also lend credence to a change. When the break occurs after several days of consolidation in sideways movement, it should be not be considered as a valid peneration unless prices further move up or down before a conclusion is drawn.