What are Market Trends?
Price of any stock moves up and down like a wave. Trend and counter trend. Even though they move up and down, on the whole they move in one direction - up, down or side ways.
The direction in which the price of a stock or a group of stocks or the stock market as a whole move is termed as trend. The trend of a market signifies the movement of the stock prices, in any one direction compared to its historical prices.
Understanding the trend of a stock or market is the first step in technical analysis. If you cannot determine the trend, you cannot trade the market.
Trend is your friend. Dance with the friend. Tune to the trend.
The price of a stock moves up and down because of the change in the perception of the value of a stock, in the mind of traders. At any given time there are traders who think that a given stock is worth buying. At the same time there are traders who think that the same stock is worth selling.
Buyers and sellers are matching. That is why trade happens.
Usually there will be disparity in the percentage of people thinking that a stock is worth buying and people who think that the same stock is worth selling.
When the percentage of buyers is more than the percentage of sellers, there is increased demand for the stock. So the price keeps rising. Similarly when the percentage of sellers is more than the percentage of buyers, there is increased supply for the stock. So the price keeps falling.
This causes the trends in the market. If the prices are going up then we call it as an up trend. That means that there is more demand for the stock. If the prices are falling down we call it as a down trend. That means that there is more supply than demand for the stock.
Study the charts given below to understand the market trends.
This is an up trend or a bull market.
This is down trend or bear market.
What happens when the supply and demand are almost same? The market temporarily achieves a state of equilibrium. This causes the prices to move up and down, with in a narrow range. The price keep hovering at almost same level, going little that side and this side. This can go on like this for weeks, months or even years. This is called side trend.
See the charts below.
This is side trend or flat market. This stock is trading with in a range og 100 point for the last 5 years.
As already explained there are three types of market trends.
We can see trends with in the trends. These trends within the trends are named based on their importance in the whole picture.
A trend which lasts for 5 to 25 years is called a secular trend. With in this mega trend, whether it is an up trend or a down trend, we can identify three different trends.
These major, intermediary and minor market trends can be seen on all time frames.
Whether up trend or down trend, any smaller trend which goes against to a bigger trend is called a counter-trend.
Trading is all about knowing the market trend and acting accordingly. Trend is your friend. Never trade against the trend the trend.
If you determined that the current market trend is UP, you will plan to take action to buy the stock. Never short sell in a bullish market. Even if your time of entry is wrong, a long trade is always profitable.
Similarly if the current market trend is DOWN, your plan action is to only sell the stock. Never buy in a falling market. Even if your time of entry is wrong, a short trade always gives you money.
What do you do in a side trend?
You do nothing. Do not try to trade when the trend is flat. Many traders who made money in trending market, loose every thing and give out little extra from their pockets back to the market trying to trade side trends.
If the side trend is well established with in a good range then you can attempt for range trading. Here you buy at the bottom of the range and sell at the top of the range.
There is time to go long; There is time go short and
There is time to go for fishing.
Trading in the direction of a major trend gives you more profit than trading in the direction of intermediate trend and trading in the direction of a intermediate trend gives you more profit than trading in the direction of minor trend.
Different trends coexist at the same time in different time periods. At a given time if the trend is down in 5 minutes chart, it may be up in 60 minutes chart and it may be down or up in daily chart. So make it a habit to study the trends in different time charts.