Trends
Trends
● ● ●
Define the term “Trend” Explain why Trend is important Identify Primary, Secondary, and Short-Term trends
1
What is a Trend? Uptrend
●
Prices rise and fall in Trends
●
Trend is defined as: ○ ○ ○
Up (Rising) Higher Peaks and Higher Troughs Down (Falling) Lower Peaks and Lower Troughs Sideways (Trading Range) Peaks and Troughs are at roughly similar prices
Downtrend
Higher Peaks
Lower Peaks
Higher Troughs Lower Troughs
Sideways Trend Horizontal Peaks
Horizontal Troughs
2
What is a Trend? ●
Linear Regression (line of best fit) is a good way to identify trends.
●
Trend is dependent on time: ○ Green is Yearly UpTrend ○ Blue is Monthly Sideways Trend ○ Red is Monthly DownTrend
●
Trend must be defined in the context of the time horizon.
●
Each Analyst must make their own determination on which time horizon to use. 3
What is a Trend? Trend is a direction, not a straight line.
4
Trend Classification ●
Technical Analysts have divided trends into three categories: ○ ○ ○ ○
●
Primary Measured in Months or Years Secondary (or intermediate) Measured in Weeks or Months Short-Term Measured in Days Intraday Measured in Minutes or Hours
Charles Dow first defined this model.
5
Trend Classification ●
If we stop our chart at July 2016, we can see this better: ○ ○ ○
The green Primary trend is up The blue Secondary trend is slightly down (almost sideways) The red Short-Term trend is sharply down
6
Fuzzy Logic ● ●
Q:Does the slope of the trend matter? A:It depends! If we saw slopes that are wildly different from the norm, then yes.
●
This is the “art” part of Technical Analysis.
●
All Analysts occasionally make statements that seem like facts, but they are often subjective observations.
●
There will be many concepts that are built on years of observation.
●
Many of these were developed before there were any quantitative techniques.
●
In time, as evidence is presented, these will be proven or dismissed.
7
Trends - The Key to Profits ●
Every TA Signal and theory is centred on capturing the trend.
Keys to Profit 1.
2.
Determine, with minimum risk of error, when a trend has begun at it’s earliest time and price.
3.
Close those positions when the trend is ending.
4.
The more objective and rules-based we can be, the better.
●
This sounds simplistic, but it’s the basis of all Technical Analysis.
Select and enter a position in the trend that is appropriate to the existing trend, regardless of direction. 8
Determining Trend ●
Linear Regression is a nice way, but it’s not the standard way.
●
We look at the peaks and troughs of the chart.
●
Price does small oscillations around the larger trend.
●
This chart is showing the peaks and troughs as H & L.
9
The Trend Line ●
We draw trend lines as a visual cue of a break in the line.
●
This is a possible signal of a change in trend.
●
Where we draw a trend line depends on the direction of the trend: ○ ○ ○
●
Uptrend - we connect troughs Downtrend - we connect peaks Sideways - connect peaks and connect troughs
There is a “fudge” factor. 10
The Trend Line ●
Often candles are used and shadow breaks are ignored.
●
Even though the trend line was broken, there was no lower peak to draw a down trend-line to.
●
A break in a trend does not mean that a reversal is happening.
11
The Trend Line
Downtrend
Trading Range
12
Internal Trend Lines ●
A Trend Line added in the middle of the price action.
●
An attempt to repeat what Linear Regression would be giving us.
13
Trend Line Rules ●
The more times a line is touched, the more significant it is.
●
The steeper the line, the sooner it will be broken. Steep is a relative concept.
●
Should never be considered “exact”.
14
Accelerating or Logarithmic Trend Lines ●
As a market accelerated, new steeper lines would have to be drawn.
●
Applying a logarithmic function to the line gives us the same result.
●
Green line gives us much earlier warning of a possible change in trend.
15
Trend Line Tools
● ● ● ● ● ●
Channels Volume Retracements Speed Lines Andrew’s Pitchfork Point & Figure
16
Channels ●
Often prices appear to travel in a channel.
●
Very similar to a trading range.
●
Watch for peaks that are no longer reaching the upper line.
17
Volume to confirm Change in Trend ●
High Volume confirms significant reversal points.
●
Blue zones - volume peaked on the trough. Peaks have weak volume.
●
Don’t know for sure until the day after.
●
Red zone—did not work—Change of trend?
18
Retracements ●
Trends rarely follow straight lines without a number of smaller trends.
●
The smaller counter-trends are called retracements.
●
We measure the retracement as a percentage of the impulse before it.
19
Fibonacci Retracements ●
Many traders will watch defined retracement levels for signs of a reversal.
●
Fibonacci Levels (38.2%, 50%, 61.8%) are common levels.
●
If retracement is below 38%, shows there is conviction in the current move. Above 62% and it gives a warning.
20
Speed Lines ●
Developed by Edson Gould
●
Draw Lines from the start point through the end of the Fibonacci Retracements Levels
21
Gann Fans ●
W.D. Gann found from his hand charting that many times securities would bounce off angled lines.
●
Using the Graph Paper (Charting Paper), he would count squares to make angles: ○ ○
●
1x1 = 45 degrees 2x1 = 63 degrees
Great way to identify Trend Speed.
22
Gann Fans ●
Note: This is not a geometric angle on a chart.
●
Often used in pairs, paying careful attention to the intersection points.
23
Gann Fans ●
Note: This is not a geometric angle on a chart.
●
Often used in pairs, paying careful attention to the intersection points.
●
Falls into a subjective area of Technical Analysis that is hard to quantify.
24
Andrew’s Pitchfork ●
Again, a subjective tool that is hard to quantify.
25
Andrew’s Pitchfork ●
Extra lines can be added.
●
With most TA, we stand on the shoulders of those who went before, and we are able to experiment.
26
Support & Resistance
●
What is Support and Resistance?
27
Buyers and Sellers ●
Every transaction is where buyers and sellers agree on price.
●
Economic Theory tells us that when there are more buyers, demand increases and the price will rise (more sellers...price falls).
●
Aggression of Buyers is a factor too.
28
Resistance ●
A peak in the market is when the number (or aggression) of the sellers has grown to balance out the number (or aggression) of the buyers.
●
We say that price met Resistance at that price.
●
The sellers did not let the price-rise continue.
29
Support ●
A trough in the market is when the number (or aggression) of the buyers has grown to balance out the number (or aggression) of the sellers.
●
We say that price met Support at that price.
●
The buyers did not let the fall in price continue.
30
Support & Resistance ●
Previous Peaks and Troughs have a habit of stopping the market in the future.
●
They become zones where there is a high probability of the market turning.
●
The reasons for this: ○ ○ ○ ○
Recency Bias Exiting a bad trade Second chance Large institutions (looking at P/E)
31
Support & Resistance ●
The reasons are psychological but have been evident in the markets for decades.
●
Best to think of them as spongy zones rather than hard barriers.
●
When we see peaks repeating and troughs repeating, we know we are in a trading range.
32
Trading Range Breakouts ●
The longer the market has been “bound” in a range, the bigger the move out will be.
●
Everyone is on the side waiting for confirmation.
●
Breakouts indicate that the balance has shifted.
33
Support and Resistance Zones ●
Lots of reversals “around” the same price tells us we have a zone.
●
We draw zones by considering all the peaks for a resistance zone and all the troughs for a support zone.
34
Donchian Breakout Method ●
Channel shows the highest and lowest prices over the past four weeks.
●
When the high is broken—Buy. When the low is broken—Sell.
●
Best in strong trending markets.
35
Support & Resistance Switch ●
Once broken, previous Support zones become Resistance zones.
●
Previous Resistance → Support
36
Trends and Support & Resistance
● ● ●
Define the term “Trend” Explain why Trend is important Identify Primary, Secondary, and Short-Term trends
1
What is a Trend? Uptrend
●
Prices rise and fall in Trends
●
Trend is defined as: ○ ○ ○
Up (Rising) Higher Peaks and Higher Troughs Down (Falling) Lower Peaks and Lower Troughs Sideways (Trading Range) Peaks and Troughs are at roughly similar prices
Downtrend
Higher Peaks
Lower Peaks
Higher Troughs Lower Troughs
Sideways Trend Horizontal Peaks
Horizontal Troughs
2
What is a Trend? ●
Linear Regression (line of best fit) is a good way to identify trends.
●
Trend is dependent on time: ○ Green is Yearly UpTrend ○ Blue is Monthly Sideways Trend ○ Red is Monthly DownTrend
●
Trend must be defined in the context of the time horizon.
●
Each Analyst must make their own determination on which time horizon to use. 3
What is a Trend? Trend is a direction, not a straight line.
4
Trend Classification ●
Technical Analysts have divided trends into three categories: ○ ○ ○ ○
●
Primary Measured in Months or Years Secondary (or intermediate) Measured in Weeks or Months Short-Term Measured in Days Intraday Measured in Minutes or Hours
Charles Dow first defined this model.
5
Trend Classification ●
If we stop our chart at July 2016, we can see this better: ○ ○ ○
The green Primary trend is up The blue Secondary trend is slightly down (almost sideways) The red Short-Term trend is sharply down
6
Fuzzy Logic ● ●
Q:Does the slope of the trend matter? A:It depends! If we saw slopes that are wildly different from the norm, then yes.
●
This is the “art” part of Technical Analysis.
●
All Analysts occasionally make statements that seem like facts, but they are often subjective observations.
●
There will be many concepts that are built on years of observation.
●
Many of these were developed before there were any quantitative techniques.
●
In time, as evidence is presented, these will be proven or dismissed.
7
Trends - The Key to Profits ●
Every TA Signal and theory is centred on capturing the trend.
Keys to Profit 1.
2.
Determine, with minimum risk of error, when a trend has begun at it’s earliest time and price.
3.
Close those positions when the trend is ending.
4.
The more objective and rules-based we can be, the better.
●
This sounds simplistic, but it’s the basis of all Technical Analysis.
Select and enter a position in the trend that is appropriate to the existing trend, regardless of direction. 8
Determining Trend ●
Linear Regression is a nice way, but it’s not the standard way.
●
We look at the peaks and troughs of the chart.
●
Price does small oscillations around the larger trend.
●
This chart is showing the peaks and troughs as H & L.
9
The Trend Line ●
We draw trend lines as a visual cue of a break in the line.
●
This is a possible signal of a change in trend.
●
Where we draw a trend line depends on the direction of the trend: ○ ○ ○
●
Uptrend - we connect troughs Downtrend - we connect peaks Sideways - connect peaks and connect troughs
There is a “fudge” factor. 10
The Trend Line ●
Often candles are used and shadow breaks are ignored.
●
Even though the trend line was broken, there was no lower peak to draw a down trend-line to.
●
A break in a trend does not mean that a reversal is happening.
11
The Trend Line
Downtrend
Trading Range
12
Internal Trend Lines ●
A Trend Line added in the middle of the price action.
●
An attempt to repeat what Linear Regression would be giving us.
13
Trend Line Rules ●
The more times a line is touched, the more significant it is.
●
The steeper the line, the sooner it will be broken. Steep is a relative concept.
●
Should never be considered “exact”.
14
Accelerating or Logarithmic Trend Lines ●
As a market accelerated, new steeper lines would have to be drawn.
●
Applying a logarithmic function to the line gives us the same result.
●
Green line gives us much earlier warning of a possible change in trend.
15
Trend Line Tools
● ● ● ● ● ●
Channels Volume Retracements Speed Lines Andrew’s Pitchfork Point & Figure
16
Channels ●
Often prices appear to travel in a channel.
●
Very similar to a trading range.
●
Watch for peaks that are no longer reaching the upper line.
17
Volume to confirm Change in Trend ●
High Volume confirms significant reversal points.
●
Blue zones - volume peaked on the trough. Peaks have weak volume.
●
Don’t know for sure until the day after.
●
Red zone—did not work—Change of trend?
18
Retracements ●
Trends rarely follow straight lines without a number of smaller trends.
●
The smaller counter-trends are called retracements.
●
We measure the retracement as a percentage of the impulse before it.
19
Fibonacci Retracements ●
Many traders will watch defined retracement levels for signs of a reversal.
●
Fibonacci Levels (38.2%, 50%, 61.8%) are common levels.
●
If retracement is below 38%, shows there is conviction in the current move. Above 62% and it gives a warning.
20
Speed Lines ●
Developed by Edson Gould
●
Draw Lines from the start point through the end of the Fibonacci Retracements Levels
21
Gann Fans ●
W.D. Gann found from his hand charting that many times securities would bounce off angled lines.
●
Using the Graph Paper (Charting Paper), he would count squares to make angles: ○ ○
●
1x1 = 45 degrees 2x1 = 63 degrees
Great way to identify Trend Speed.
22
Gann Fans ●
Note: This is not a geometric angle on a chart.
●
Often used in pairs, paying careful attention to the intersection points.
23
Gann Fans ●
Note: This is not a geometric angle on a chart.
●
Often used in pairs, paying careful attention to the intersection points.
●
Falls into a subjective area of Technical Analysis that is hard to quantify.
24
Andrew’s Pitchfork ●
Again, a subjective tool that is hard to quantify.
25
Andrew’s Pitchfork ●
Extra lines can be added.
●
With most TA, we stand on the shoulders of those who went before, and we are able to experiment.
26
Support & Resistance
●
What is Support and Resistance?
27
Buyers and Sellers ●
Every transaction is where buyers and sellers agree on price.
●
Economic Theory tells us that when there are more buyers, demand increases and the price will rise (more sellers...price falls).
●
Aggression of Buyers is a factor too.
28
Resistance ●
A peak in the market is when the number (or aggression) of the sellers has grown to balance out the number (or aggression) of the buyers.
●
We say that price met Resistance at that price.
●
The sellers did not let the price-rise continue.
29
Support ●
A trough in the market is when the number (or aggression) of the buyers has grown to balance out the number (or aggression) of the sellers.
●
We say that price met Support at that price.
●
The buyers did not let the fall in price continue.
30
Support & Resistance ●
Previous Peaks and Troughs have a habit of stopping the market in the future.
●
They become zones where there is a high probability of the market turning.
●
The reasons for this: ○ ○ ○ ○
Recency Bias Exiting a bad trade Second chance Large institutions (looking at P/E)
31
Support & Resistance ●
The reasons are psychological but have been evident in the markets for decades.
●
Best to think of them as spongy zones rather than hard barriers.
●
When we see peaks repeating and troughs repeating, we know we are in a trading range.
32
Trading Range Breakouts ●
The longer the market has been “bound” in a range, the bigger the move out will be.
●
Everyone is on the side waiting for confirmation.
●
Breakouts indicate that the balance has shifted.
33
Support and Resistance Zones ●
Lots of reversals “around” the same price tells us we have a zone.
●
We draw zones by considering all the peaks for a resistance zone and all the troughs for a support zone.
34
Donchian Breakout Method ●
Channel shows the highest and lowest prices over the past four weeks.
●
When the high is broken—Buy. When the low is broken—Sell.
●
Best in strong trending markets.
35
Support & Resistance Switch ●
Once broken, previous Support zones become Resistance zones.
●
Previous Resistance → Support
36
Trends and Support & Resistance
