Use of Trend in Technical Analysis

One of the most important concepts in technical analysis is that of trend. The meaning in finance isn't all that different from the general definition of the term - a trend is really nothing more than the general direction in which a security or market is headed. In any given chart, you will probably notice that prices do not tend to move in a straight line in any direction, but rather in a series of highs and lows. In technical analysis, it is the movement of the highs and lows that constitutes a trend.

Types of Trend

There are three types of trend:

1.) Uptrends - A formal uptrend is when each successive peak and trough is higher than the ones found earlier in the trend. It describes the price movement of a financial asset when the overall direction is upward. The goal of most technical traders is to identify a strong uptrend and to profit from it until it reverses. Selling an asset once it has failed to create a new peak or trough is one of the best ways to avoid the large losses that can result from a reversed trend. Many technical traders will also draw trendlines to identify an uptrend and will use this tool as a guide for when to sell as it can also be an early indication of a trend reversal.

2.) Downtrends - A formal downtrend occurs when each successive peak and trough is lower than the ones found earlier in the trend. It describes the price movement of a financial asset when the overall direction is downward. Many traders seek to avoid downtrends because they can drastically affect the value of any investment. A downtrend can last for minutes, days, weeks, months or even years so identifying a downtrend early is very important. Once a downtrend has been established (series of lower peaks) a trader should be very cautious about entering into any new long positions.

3.) Sideways Trend - A sideways trend is often regarded as a period of consolidation before the price continues in the direction of the previous move. It describes the horizontal price movement that occurs when the forces of supply and demand are nearly equal. A sideways price trend is also commonly known as a "horizontal trend". Sideways trend is generally a result of the price traveling between strong levels of support and resistance. It is not uncommon to see a horizontal trend dominate the price action of a specific asset for a prolonged period before starting a move higher or lower. Brief consolidation is often needed during large price runs, as it is nearly impossible for such large price moves to sustain themselves over the longer term.