STEP 3 :- IDENTIFYING THE STRENGTH OF THE TREND…. CONTINUED… PROJECTION AND DEPTH ANALYSIS…
This is the continuation of the third step.
Projection and Depth analysis is another way of finding the strength and weakness within a trend. You might wonder why I am explaining another technique to determine the strength/ weakness if we have Momentum analysis for that. Let me clear that doubt first.
There is a Chinese proverb. It goes like this,
If you have only a hammer in your hand, everything looks like a nail.
Remember the above sentence as I am going to repeat it a thousand times in the future articles.
If you don’t have a plan B, you always try to use the only plan you have, i.e. plan A, even though it is not the right one to follow at that moment. When something doesn’t work, you must have an alternative so that you won’t be stuck in the middle of the process.
Look at the above image. If you compare the slopes of FG with that of DE and slope of FG with that of EF, there is no evidence of weakness in the trend as the slopes remained the same. Does that mean the trend is healthy? Or, are there any other ways to look at it differently?
Let’s get back to the strength and weakness of the trend. Just because there is no change in the slope of the swing doesn’t mean that there is no change in strength or weakness. In the momentum analysis, we have compared the speed of the price to make a conclusion on strength. If you remember from the introduction of strength and weakness, you can also identify strength by comparing the Force with which the attackers and the defenders and fighting.
The force of Bulls and Bears in a trend can be seen with the help of Projections and Depths.
So, what are they?
It is the distance that price has moved in the direction of the trend after breaking the pivot high( in an uptrend) or the pivot low (in a downtrend). Some call it as extensions. Not clear?? Have a look at the following figures and you will understand.
The above figures show the projections in uptrend and downtrend.
In the above figures, after breaking the pivot A, it has moved a distance P1 before forming a new pivot C. After breaking pivot C, it has moved a distance P2 before forming a new pivot E. So on, so forth. I hope now you understand what projections are. Then what are depths??
Depth is the price movement against the trend. Some call it as a retracement. Some call it as Pullbacks.
The above diagrams show the depths in uptrend and downtrend. I hope you can form the explanation from the diagrams itself.
So, here is the main point.
Projection is the force in the direction of the trend.
Depth is the force against the direction of the trend.
The trend is showing strength when Projections are increasing and Depths are decreasing.
The trend is showing weakness when Projections are decreasing and Depths are increasing.
So now, we have two techniques to define strength and weakness in the trend, namely,
Momentum Analysis and
Projection and Depth analysis.
Are these only ways to find strength and weakness. No. There are plenty of techniques available and if you are already following them in your trading, feel free to add them in your analysis Taking ideas from different sources and building your own plan is the key to success in every business.
This concludes the third step, ie. identification of strength and weakness in the trend. With the help of the information we got from these three steps, we will predict the high probable future direction which I will start in the next article. Like I promised earlier, it will be fun