“What seems too high and risky to the majority generally goes higher and what seems low and cheap generally goes lower.” William O’Neil
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We must define the overall trend of the market for the time period in which we are trading, so that we can execute trades within the direction of the trend. As markets do not trend in one straight line, some trend analysis is required.
A trend is not like a bullet fired from a gun which moves quickly in a straight line. It is far more like a dog wandering down a long street.
The dog will meander all over the road pausing at various points even retracing some of its steps before continuing on its journey to its final destination at the end of the straight road.
Technical analysts markets constantly move in one of three trends:
Up or Bull trend
The key point is that for a positive or bull trend to be maintained, each new major peak will be higher than the previous peak and each new trough (or low point of a pullback) will be higher than the previous.
Down or bear trend
The reverse is true for a negative or bear trend. Prices move in a generally downward direction. The new peaks are unable to match the previous peaks and the new troughs reach continuously new lows.
When price is not trending upwards or downwards it is trending sideways. This still counts as a trend when markets lack no clear upward or downward direction.
It is important to recognise a sideways trend as soon as possible because there are good low risk trading opportunities to take advantage of.
In the chart below the trend lines again help us to define the sideways trend that lasted over 3 months. It can be relatively easy to trade this trend, because you can just leave orders to buy around the bottom of the range and sell around the top of the range.
However I find it frustrating as it requires huge amounts of patience to sit and wait for these parameters to be tested.
I am unable to enter a position when prices are trading in the middle of the range as these are not low risk opportunities.