Structure Continued… Trend and its types..
After reading all these posts, did you get any weird doubt about all these things I am explaining? If you haven’t got any, let me seed one into your mind. 😀
Three years back when I have first read about this psychology studying from charts and forecasting the future, the concept seemed really weird to me. How can the future be predicted just by reading the past??? It isn’t rational, is it? How can I put my money on something that doesn’t have a logical explanation?
This kind of self-talk went on and on in my crazy mind. In fact, I stopped reading about trading as I am not feeling comfortable inside my mind with the concepts being taught in the books. Around 2 months later, when I was watching some regional local news (Telugu, my mother tongue), the news about the stock market was reported and my mind again started wandering around the same questions I have quoted in the above paragraph. Just something struck my mind. My mind is telling me that it is not logical to predict the future by reading the past. I questioned back my mind, what else do you have to predict future apart from the past?? Then the news reporter started to give the weather report. The weather report is also a prediction. I opened Wikipedia immediately and started searching the techniques in forecasting weather. I learnt that they look for some patterns in the past (like wind speed, direction etc.) that resulted in some kind of weather in the past and then they predict that there is a higher possibility of happening the same if the same patterns repeat.
That is very closely related to our trading, right? 😀 We are doing the same with support/resistances. We expect the support and resistances which are drawn from our past data will hold in the future as they have done the same in the past. Any forecasting techniques we know till now will do the same. We interpret the past data to predict the future. I am emphasizing predict here. No reporter says that its definitely gonna rain. There is a possibility of raining, this is what they can say. 😀
You might be wondering what is the relationship between the title of the article and the BS discussed until now. 😀 Sorry if you felt so, but there is a subtle link between this and the things that I am going to explain in this article.
We are only one step short to start predicting the future price movement. Just recall the concepts of inertia and memory of markets that I have explained here. Support and resistances are formed because of the market memory. What are the consequences of inertia of the market then?? These will be answered in this article and it’s very very important. Almost 50 percent of your profitability depends on identifying the inertia which we call here as a trend.
You can just google search about trend in financial markets, you will find hell lot of quotes like
“Trend is your friend until it bends”
“Don’t buck the trend”
“You will be profitable 80 percent of the time if you follow the trend.”
Having that much of hike created for the trend in internet and trading textbooks, people are so interested in finding the perfect definition of what the trend is. But as always, perfection doesn’t exist in the market and you must stick to the definitions which work most of the time for you. When you know that it is not possible to find perfection no matter how much you try, it will be stupid to make the definitions complex. In trading, like Warren Buffet says, “K.I.S.S is the key. It stands for keep it simple stupid“. Let’s get into the discussion of the trend.
What is the trend?
It is the direction in which the scrip that you are trading is moving. There are 3 directions in the market. Up, Down and Sideways.
It is as simple as that. Don’t make an opinion that it is easy to identify trend yet. Look at the following image and try to find the trend. No problem, if you are wrong and confused. Just for food of thought.
It’s moving up, down, sideways, in fact in all the directions it can, isn’t it? So, without an objective definition, we fail to identify the trend. So, let’s make one with one of the tools we have learnt till now. ie. pivots/ swing highs.
I assume that you know what are pivots and how to identify them by now. If you don’t, please read this article before proceeding further.
Now, that you can identify the pivots, look at the following figure.
Here Highs are the pivot highs/swing highs, lows are the pivot lows/swing lows, which you can identify in a chart.
In the above image, notice that the Low 3 > Low 2 > Low 1 and High 3 > High 2 > High 1.
ie. Higher pivot highs and Higher pivot lows. Recent pivot high is higher than the last pivot high and recent pivot low is higher than the last pivot low. This is what we call Uptrend.
trend2 Now look at the above image. Without any doubt, we can say that the trend is up till the end of the green arrow as it has made higher pivot highs and higher pivot lows till then. We will get back to the other details of this image after covering the downtrend and sideways.
If you are smart enough, you might have already formed the definition of downtrend by now. Look at the following image and form your definition if you haven’t already.
Low 3 < Low 2 < Low 1 and High 3 < High 2 < High 1.
ie. Lower pivot highs and lower pivot lows. Recent pivot high is lower than the last pivot high and recent pivot low is lower than the last pivot low. This is what we call Downtrend.
Look at the example I am attaching below from the real market.
Remember, you can correctly identify the trend only when you are comfortable with identifying the pivot highs and lows. So practice them before going into trend identification.
Now look at the following image and try to identify the trend.
Its awkward,isn’t it?
There is no particular sequence of Higher pivot highs and lows or Lower pivot highs and lows to name it as an uptrend or a downtrend respectively. This is what we call Sideways trend. Sideways trend moves in between a support and a resistance.
We will learn how to draw them in the next article.
When will we say that the uptrend/downtrend is violated?
An uptrend is said to be violated if the pivot low that is responsible for the highest high in the trend is broken. Confused??? Look at the following image and you will understand.
In the above image point, 7 is the highest high in the trend and point 6 is the pivot low responsible for that highest high. So Uptrend is said to be violated when point 6 is broken.
In the above image, pivot low at point 8 is broken in the uptrend, but point 8 is not responsible for the highest high, ie. point 7 hence the trend is not violated yet.
In the above image, point 6 is broken and hence we can say that the uptrend is violated.
Just do the same with the downtrend while identifying the trend violating pivot. I am attaching the images below and they are self-explanatory.
Look at the following real time example for a better understanding.
Market shifts from an uptrend to a downtrend, downtrend to uptrend, uptrend/downtrend to sideways, sideways to uptrend/downtrend or it continues to remain in the trend it is currently moving. Your profitability depends on deciding when to trust the trend and when to take a trade in the opposite direction of a trend.
I know you are overloaded with information in this article. 😀 But let me tell you, the process of identification of the trend is very simple. Don’t catch up in the trans of complications looking at the lengthy article. It was written too long so that you clearly understand what I am saying. Understand the definitions and apply them on charts. It will be comfortable once you start practising it.
It will be much more exciting from the next article as we have all the tools that are required to start looking at the charts and we are ready to predict the most probable future direction. I will start the practical aspects of how I am making money in trading. For your curiosity sake, there are 6 steps to be considered before entering the trade.
Drawing the structural support and resistances to define the framework.
Identifying the trend and trend violation point
Finding Strength and weakness of bulls and bears within the trend
Identifying high probable future direction.
Visualizing the future price action.
Identifying High probable trade locations. We call these as setup areas or wholesale areas.
You know by now what are the first two steps. But the questions of how will be answered in the next article. Trust me, It will be fun as we are going to look into real-time charts and apply the concepts we have learnt till now.
just to be sure… if it was a typo in the above sentence “In the above image, pivot low at point 6 is broken in the uptrend, but point 8 is not responsible for the highest high, ie. point 7 hence the trend is not violated yet.”
Should it be “In the above image, pivot low at point 6 is NOT broken in the uptrend…….”
Thanks for letting me know. It’s a typo. Corrected.