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
