Trend is a very important aspect of trading. Without trends it would be extremely difficult to earn money by trading. Trend can be defined as a long-term and quantitative change in the price of the underlying asset (e.g. a particular commodity futures contract) in time. Trends may last for minutes, days, weeks, or even years. Trends can have the following character:
a) Upward trend
Fig. 1: Upward trend Source: TradeStation
b) Downward trend
Fig. 2: Downward trend Source: TradeStation
If the market trends upward (see Fig. 1) the price of the underlying asset increases and in the trading terminology we speak about a Bull Market (or Bullish Market, or Uptrend.) The explanation of this designation is simple: When the bull attacks, it thrusts its horns up into the air. When traders speculate on the bullish side of the market they try to buy at a lower price and then sell at a higher price and cash profit, in trading terminology they enter into a “Long Position”.
On the other hand, if the market is decreasing for a longer time (see Fig. 2), we speak about a Bear Market (or Bearish Market, or Downtrend). Imagine a bear that stands up on hind paws and attacks by swiping its pawns down. Many people are unaware of the fact that a trader can speculate on the bear market and thus profit on price decreases. When doing so the trader sells a contract first and then tries to buy it back for a lower price. In this case we say that the trader entered into a Short Position. Speculation on market declines are typical for derivatives, including futures. In underlying assets, such as stocks, it is somewhat more complicated to open short positions.
There are usually (but not always) differences in the trending intensity between the bull and the bear trend, especially for example in stocks or stocks indices (S&P 500, etc.). Bull markets tend to grow in a mild, long-lasting way, while bear markets often fall steeply and for a shorter period. An example of such a steep decrease may be the crisis in 2008.
Besides increasing and decreasing markets there are also periods when markets “go the side” (see Fig. 3). Supply and demand in such a stagnant market (called Chop Market) are balanced and the market tends to form long-term horizontal price channels.
Fig. 3: Chop – a non-trading “sideways” market, Source: TradeStation
There are traders who have profitable trading systems based on trading in the chop and who earn very respectable sums of money in these markets. However, as beginners you should rather focus on trend utilising trading systems. Look at markets and see when they trend in Long or Short direction and when they go sideways. Learn to perceive the overall structure of the market. In this way you will begin to understand how markets actually work and start to see various interesting circumstances that affect the market development. These circumstances will help you later in building your own trading systems.
If we look at trends in terms of time, we can divide them into several categories, namely:
- Short-term trend – it lasts for a few minutes only, at most a few hours. In the context of a long-term market development (matter of weeks) the market can go in the opposite direction than the medium or long-term trend is for a short time.
- Medium-term trend – it lasts for a few days, at most a few weeks. In the context of a long-term market development (matter of months or years) the market can temporarily trend in the opposite direction than the long-term trend is.
- Long-term trend – it lasts for many weeks, months, or even years
Why should we distinguish between short, medium, and long-term trends? The general definition of a functioning trading system says that it is best to trade with the trend. We can only agree with the well-known traders´ slogan “follow the trend” or “trend is our friend”. Our trading systems make profits thanks to the accurate and timely identification of different types of trends. For this reason many traders monitor overall long-term market developments and enter only into positions in the direction of the market´s long-term trend. Such approach often increases probability of profitable trades. So be very cautious when trading against the trend. Always keep in mind that thanks to trends we, traders, achieve long-term profits.
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