THE NATURE OF TRENDS
"KNOWING THE FUTURE IS NOT IMPORTANT, KNOWING THE TREND IS."
The price movements do not develop on periods of time of equal duration, but they do it in Waves of different sizes. The price do not move between 2 points in a straight line; it does so in a Wave pattern.
By studying and comparing the relationship between waves, their duration, velocity and range, we will be able to determine the nature of the trend.
It is only by understanding what a trend is that you can determine when a change of trend occurs. And it is only by accurately identifying a change of trend that you can accurately time your buys and sells to maximize profits and minimize losses in any market.
The fastest and most risk-free way to make money in the markets is to identify a change of trend in a market as early as possible, take your position (long or short), ride the trend, and close your position before or shortly after the trend reverses again. Any market professional will tell you that it is impossible to buy at the lows and sell at the highs (or sell at the highs and buy at the lows) consistently: but with practice, it is very possible to catch 60 to 80% of many intermediate-term and long-term market movements.
Bear in mind that the technical consistency of charts is best in the long term, slightly worse in the intermediate term, and the most variable in the short term.
Trading with Trend increases the probability of a successful trade. When trading with the trend, I am trading in the direction of least resistance.
The first step in adopting a risk-averse approach to trading is to identify the trend of a timeframe
From Dow Theory:
Upward Trend - An upward trend is a series of successive rallies that penetrate previous high points, interrupted by sell-offs or declines which terminate above the low points of the preceding sell-off. In other words, an uptrend is a price movement consisting of a series of higher highs (HHs) and higher lows (HLs)
Downward Trend - A downward trend is a series of successive declines which penetrate previous low points, interrupted by rallies or increases which terminate below the high points of the preceding rally. In other words, a downtrend is a price movement consisting of a series of lower lows (LLs) and lower highs (LHs).
The trend is simply the line of least resistance as the price moves one point to another.
Depending on the direction of movement, we can differentiate 3 types of trends:
Bullish: prices makes a series of rising impulses and corrections, where Highs and Lows are increasing (HH and HL). Prefer to see at least 2 higher highs for an Uptrend.
Bearish: a series of decreasing impulses and regressions, where Highs and Lows are decreasing (LH and LL). Prefer to see at least 2 lower lows for a Downtrend.
Lateral: when Highs and Lows remain fluctuating within a range
DIFFERING STRENGTHS OF TRENDS
Within uptrends and downtrends, the directional moves vary in their impulse strengths.
A/B is an impulse move of Subnormal strength
- Low profit potential
- If this occurs as first pattern of a bull market, its presence is Bullish; if it occurs as the 3rd or 5th pattern, its presence is probably Bearish.
C/2 is an impulse move of Abnormal strength
5/D is an impulse move of Normal strength
When the price is in trend, we have to see it as a battle between Buyers and Sellers where we will try to analyze the Strength or Weakness of both.
Speed refers to the angle at which the price moves; so if the price is moving faster than in the past, there is strength. If on the other hand it is moving slower than in the past, it suggests weakness.
For a trend to remain alive, each impulse must surpass the previous impulse. If an impulse is not able to make new progress in the direction of the trend, it is an alert that the movement may be reaching its end.
Distance of the impulse:
The distance between 3 and 4 > the distance between 1 and 2 = trend strength.
The distance between 5 and 6 < the distance between 3 and 4 = trend weakness.
Distance between extremes:
The distance between 2 and 3 > the distance between 1 and 2 = trend strength.
The distance between 3 and 4 < the distance between 2 and 3 = trend weakness.
Distance of the pullback:
The distance between 3 and 4 < the distance between 1 and 2 = trend strength.
The distance between 5 and 6 > the distance between 3 and 4 = trend weakness.
Distance between extremes:
The distance between 2 and 3 < the distance between 1 and 2 = trend weakness.
The distance between 3 and 4 > the distance between 2 and 3 = trend strength.
Lines are very useful to evaluate the health of the movement; so much to identify when the price reaches a condition of exhaustion, as to value a possible turn in the market.
In general they help us to foresee levels of support and resistance at which to wait for the price. At the same time, an approach or touch of those lines suggests the search for additional signs to look for a turn, offering diverse operative opportunities.
In analyzing a trend on the charts, the most useful tool is the trendline. One of the biggest mistakes made by amateurs and professionals alike is inconsistently defining and drawing the trendline.
For an uptrend within the period of consideration, draw a line from the lowest low, up and to the highest minor low point preceding the highest high so that the line does not pass through prices in between the two tow points. Extend the line upwards past the highest high point. It is possible that the line will go through prices past the highest minor high point. In fact, this is one indication of a change in trend, as will be demonstrated shortly.
For a downtrend within the period of consideration, draw a line from the highest high point to the lowest minor high point preceding the lowest low so that the line does not pass through prices in between the two high points. Extend the line past the lowest high point downward
There are 4 basic trendlines - Support, Supply, Oversold and Overbought.
Trendlines define the stride of price movement, and direct the analyst's attention to prices that may be changing pace or actually reversing their trend. Basically, any threatened violation of a trendline may be signaling that the force of Demand or Supply that was in effect is now weakening.
As long as the price remains within the established levels, it is said that the movement is healthy and it is appropriate to consider maintaining or adding positions.
An indication that Demand may be dying out on a rise or that Supply is gainning the upper hand is the tendency of prices to flatten out.
An indication that Supply may be dying out on a downswing or that Demand is gainning the upper hand is the tendency of prices to level off.
The significance of trendlines is not just that a line is broken, but How it is broken and the Conditions under which it occurs. Interpreting the Quality of buying or selling around the violation point dertermines if the direction of breakthrough will continue or if it is a temporary change.
Breakout a trend line by itself is not a conclusive sign of anything, as it may be a true or false break
After a movement of a certain distance, the price may find resistance to continue and this will cause the trend to change its speed and rest. During the break (lateral movement or range) the force that originally drove the trend may be renewed or even strengthened, resulting in a continuation of the trend with greater momentum than before. For this reason, it should not be accepted that the mere fact of breakout the trend line is a reversal of the same.
The ideal channel will have several touch points and should capture most of the price within its limits.
The trader should be aware of:
overbought conditions: when the price exceeds the high end of the bullish channel.
oversold conditions: when the price exceeds the low end of the downstream channel.
VICTOR SPERANDEO: THE 1-2-3 METHOD THAT PREDICTS A CHANGE IN TREND 80% OF THE TIME
The three steps are:
A trend line “breakout” or “breakdown” from the current trend.
A “test” and “failure” of the previous “high” or “low” after the trend line breakout or breakdown.
The breakout or breakdown of a “swing high or “swing low” prior to the rule 2.
Trading Trader Vic’s 1-2-3 Bearish
1. A trendline is broken
The trend has not changed yet. Stocks will often break a trendline and then continue to move in the direction of the prevailing trend. At this point we are concerned about the trend - but we do not know if the trend will change.
2. There is a retest and failure
When a stock fails to do this, we should be begin to question the trend. This stock has now tested that prior high - and failed. So, this stock is no longer making higher highs.
3. Price falls below the prior low
This stock has now fallen below the previous swing low. We now have confirmation that the trend has changed. Why? Because this stock is now making lower highs and lower lows. And that is the definition of a downtrend!
VICTOR SPERANDEO: 2B PATTERN
The 2B Rule
In an uptrend, if a higher high is made but fails to carry through, and then prices drop below the previous high, then the trend is apt to reverse. The converse is true for downtrends. This observation applies in any of the three trends; short-term. intermediateterm, or long-term.
When trading on the 2B criterion, it is essential that you admit defeat quickly if the trade moves against you. For example, if you are day-trading and you short the market on a 2B and then the market rallies to new highs again, you should immediately close your position when prices break past the new 2B high. When day-trading, the 2B criterion may be right only 50% of the time, but if you limit losses when you're wrong and let your profits run when you're right, you'll make a lot of money trading on this basis. The probabilities of success using the 2B in the intermediate term are much higher
@ Victor Sperandeo. Trader Vic: Methods of a Wall Street Master
@ Hutson, Jack. Charting the Stock Market
@ Ray Barros. The Nature of Trends
@ Villahermosa, Rubén. The Wyckoff Methodology in Depth