What is a trend?

Trend definition

A trend, in the sense of price formation on the stock market, is an extraordinary development of the valuation of securities in a particular direction over a period of time. A trend is created by an initial movement in a corresponding direction, a subsequent correction of this initial movement, and the reoccupation of the original direction with the exceeding or short-coming of the first high or low point. There are three possible states in which there is a trend. This is the upward trend, the downward trend, and the sideward phase, which is also called trendless.

Darstellung Aufwärtstrend

Upward trend

An upward trend is characterised in that the highs are always higher than the previous high, and the lows are always higher than the previous lows. The extreme points are thus always higher.

Darstellung Abwärtstrend

Downward trend

A downward trend is characterised by the fact that the lows are always lower than the previous low, and the highs are always lower than the previous highs. The extreme points are thus always lower.

Darstellung einer Seitwärtsphase

Sideways phase

The sideways trend is characterised in that the conditions of the upward trend and the downward trend are not fulfilled. There is thus a trendless phase.

Trend phases

The two trend phases, movement and correction, are distinguished by characteristic features. The stronger these characteristics are, the more significant the trend will be for the trade.

Movement

A movement usually proceeds quickly and swiftly within a few candlesticks towards the trend. Here, it is usually large candlestick bodies in which the closing price ends within an upward trend at the upper end of the candle. In a downward trend, the closing price is usually at the lower end. Thus, it is already apparent from the candlestick image that there is much more pressure in the movement phase than in the correction phase. The volume usually increases during the movement phase.

Correction

The correction is usually tough and slow. Corrections run in the opposite direction as the trend direction and can also establish themselves as subordinate trends. In most cases, the corrections are not clean-cut, which often leads to trend breaks within the subordinate trend. A correction can correct up to 100% of the previous movement without invalidating the current trend. The volume increases during the correction.

Trend variables

The difficulty when trading is the recognition of trends. A trend takes place in different trend variables. Thus, the trader has to recognise which trend phase of a certain trend variable he is in. The following figure shows the different trend variables in colour. The red trend is the largest, the blue trend is in the middle, and the green trend is the smallest. It is possible that there are more than 3 trend variables in a chart.

It is therefore possible to see the different trend variables in each chart. In order to see the smaller trend sizes better, it is useful to change the time unit in the chart display. This makes the subordinate trends more visible. This also clearly shows the difference between trend variables and time units. They have nothing to do with one another. The choice of the time units has no influence on the trend variables. The latter are present in each chart and can more or less be seen clearly, regardless of the selected time unit and zoom level.

Break in the trend

One speaks of a break in the trend when:

  • the last low in an upward trend is fallen short of.
  • the last high in a downward trend is exceeded.

After a trend break the market is trendless. Professional traders now wait to see how the market develops and usually remain flat until a new trend is established. Often, however, important points like this cause stop-fishing, and the old trend continues again. Accordingly, one must look closely at the force with which a trend is broken.

Not only the trend break can indicate that the trend is no longer intact. There can also be a counter-signal on the same trend size, thus challenging the old trend. This is depicted on the following graph.

Darstellung eines Trendbruchs

The old upward trend is still intact. However, in the other direction, a downward trend has developed in the same size. Most market participants are now likely to consider the new trend rather than the old one.

How is a trend created?

A trend is created through the interaction of the market participants. The cause of a trend can be for fundamental, political or other reasons. What one sees in the form of a chart at the end, is ultimately the sum of all the actions of all market participants.

The first movement of securities has to be followed by a correction, since the market participants, who entered at the beginning of the movement, get the idea to take their profits out. In addition, fewer and fewer traders will be willing to enter into the securities as the prices have already gone so far. The consequence of this is the correction phase, in which the first movement is processed completely or in part. Now, more and more market participants come back to the market as they missed the initial movement and now see a favourable entry possibility in the correction phase. This is the beginning of a new movement.

Many institutional investors have so much money that they can only enter into a security piece by piece. If such investors have a buying interest in a particular security, they always enter exactly in the correction phases. This behaviour can particularly be seen in the chart when the volume in the direction of movement increases, and swift, rapid movements occur.

9. Trends
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