[Very Important!] What is the definition of "trend" and how is it judged? Technical Analysis Basic Course #6
Hello! This is SAKU.
This time, we will delve into something indispensable in trading that you cannot cut away: trend.
The previous Dow Theory articlealso mentioned the words here and there, but properly understandingthe definition of trend and how to judge trendin technical analysis is extremely important, so please make sure to learn this content thoroughly!
What is a trend
Trend (Trend) ... literally means tendency, direction, or current.
In price movements, this trend also occurs.
In rough terms, during an uptrend there are more buyers, and during a downtrend there are more sellers.
Trends in Dow Theory
・Uptrend and downtrend ...According to Dow Theory,higher highs and higher lowsconfirm anuptrend,lower highs and lower lowsconfirm adowntrend.
In other words, if you cannot confirm higher highs and lower lows, a trend has not formed → it is a range market or no-trend scenario.
・Range market・・・a market where price moves within a certain range.
Also called a consolidation market or a box market. (The range market in the diagram is actually a rectangle-shaped formation.)
・No-trend market・・・a market where no clear trend appears and price movements are irregular. Often equated with range markets.
Generally, it is said that trend markets account for about 30%, while range and no-trend markets account for about 70% of total.
※More strictly speaking, according to Dow Theory there is no such thing as “range market” or “no-trend”; it is believed that some form of trend is always present. In other words, common range or no-trend conditions are states of churn within a trend. Here, for convenience, we use terms like range market or no-trend state to describe those conditions as continuing upward or downward movements.
Trend continuation, termination, and reversal
・What are pullback lows and pullback highs
Higher highs and higher lows are formed, but you may wonder what the basis is for deciding this.
Therefore, as one basis for price movement, the concepts of pullback lows and pullback highs exist.
If you express it in words, themost recent peak updated wave’s starting low is called a pullback low, and the most recent trough updated wave’s starting high is called a pullback high.
・Trend continuation
As long as the pullback low is being updated upward, we can say we are in an uptrend, and as long as the pullback high is being updated downward, we are in a downtrend.
Because the pullback low moves when the latest high is updated, you can regard the movement of the pullback low as trend continuation (the opposite is true for pullback highs).
・Trend termination
(In an uptrend) when the pullback low breaks below, it is first judged that the prior uptrend has ended.
“Trend termination”
・Confusing patterns
The red circled areas in the figure are not a downtrend, but a corrective decline stage. Overall, the trend is upward.
・Trend reversal
In an uptrend, as explained, when the pullback low is broken below, the uptrend up to that point is considered ended; however, in this case, ending the uptrend does not mean the trend has reversed.
In other words, the uptrend has ended but it is not yet a downtrend.
So, what would cause a trend to reverse?
Here is what you should remember: confirming higher highs and higher lows indicates an uptrend, and confirming lower highs and lower lows indicates a downtrend.
For the uptrend to end and a downtrend to form,
① pullback low must be broken below → ② lows and highs must begin to lower.
Please look at the diagram below.
So, just because the pullback low breaks below doesn’t immediately mean a downtrend has begun!
If you short thinking a downtrend will follow, it may still not be a downtrend yet, and the price could resume upward or range for a while, only to be stopped out by temporary rises.
Of course, if you are aware of this and short with the expectation of a downtrend forming, you should set proper stop losses and position sizes so that you can exit quickly if it goes against you.
We have looked at Dow Theory’s trend continuation, termination, and reversal up to this point; how was it?
For beginners, it may be hard to grasp in one reading, so reread multiple times and practice on your own charts.
This part is extremely important in any analysis method, so make sure you thoroughly internalize it and practice until you can judge it instantly when looking at a chart.
Summary
Finally, I have organized the overall flow into a diagram for your reference.
・Description in chronological order
① Break above high A → pullback low A’ confirmed
② Break above high B → pullback low moves to B’ (trend continues)
③ Break below pullback low B → confirmation of pullback high C (uptrend ended)
④ Break below low D → pullback high moves to D’ (downtrend formed = trend reversal)
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