For a Trader or investor it is extremely very important to understand the market trend .You may have heard the famous saying that the Trend is the friend. Lack of knowledge of market trend often leads to bad entry into the market and loss of capital.
We can note that the market behaves in three ways. First, it can go up. Second is it can take a downward trend. The third is it may travel in a sideways which means a consolidation phase
In addition to this, we also come across 1. Short-term trend, which indicates the market trend is short lived. 2. Intermediate term market trend, which is normally followed by upswing or downswing. 3. Long term market trend, which indicates that the market is continuing its course in either way
How can we use these trends for trading stocks
For buying one has to confirm that If the long term trend (seen on monthly charts) is up. Then, wait for the intermediate term trend (seen on weekly charts) to break up out of a long running consolidation. Then check for first short term (seen on daily charts) drop turns up. This could be a comfortable entry point
For selling the hidings one should look for the long term trend (seen on monthly charts) of the market is down. Then wait till the intermediate term trend (seen on weekly charts) of the market to break down out of a long running consolidation Upon confirmation of this condition the trader can initiate selling after the first short term (seen on daily charts) rally turns down.
Low Volatility Entry
Here we take into consideration of Gann’s rule of buying based upon the market making new highs on the monthly and weekly charts. We make use of daily short-term reactions and take up positions. Since the market is trending upwards, the risk involved is not too much. This type of entry can sometimes return big profits.
When assessing the market trend we can conclude safely that the trend is strong when the Long term, Intermediate term and the Short term are all pointing up and in the same direction.
Charts play an important role in deciding the Market trend. To be specific a Monthly chart give us an idea about a long term market trend. A weekly chart tells us the Intermediate market trend and the Daily chart indicates the short-term market trend
Before entering the market it is better to look for market activity that can tell us something about the market trend. The market is likely to have low activity at the bottom and abnormally high activity at the top. The average daily, weekly or monthly range will indicate if the market is near a top or bottom.
When the market trend is likely to change, the number of days of a reaction will increase. This is the first indication of an upcoming change of trend in a market. One has to pay attention to the number of days reaction in both calendar and trading days. When calendar days are counted all days must be taken into consideration.
To count the trading days some points must be noted. When the current trading day’s high and low are inside the previous day’s high and low it is not counted. The market must have two days of consecutive newer highs or lows. If there is break in the rally, it is better to halt the counting and begin a new count.
Understanding the market trend gives the share trader a basic knowledge of important trends, which in turn helps him to make safer decisions