Technical Analysis – Chapter 3

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Technical Analysis is based on the assumption: “Prices move in short, medium and long term trends”. Trend lines are very important tools in pattern recognition.

Simply put, a trend is a direction the prices are moving in consistently and getting stronger with time resulting into a recognizable pattern.  As per theory of Dow, once a stock move in a particular trend, then it will continue to move in same direction until some external factor interrupts it.  Few of those external factors could be: Financial results of a company, a Political event happening with in country, War between nations or may be come natural calamity.

Categories of Trends: Trends can be divided into three categories.

  1. An Uptrend: An uptrend is a result of stock prices continuously moving upwards with consistently moving towards higher up and higher lows or in other word ascending peaks and troughs.                                                                                                                        
  2. A Downtrend: In downtrend, stock prices falls over a period. A downtrend is made up of descending peaks and troughs. Lower highs and lower lows.                                        
  3. A Sideways Trend: A sideways trend also known as consolidation happens when price moves within a price range.

Trend Lengths:

  1. Long Term Trend: When a stock price moves in a particular direction for over a period of year or more then is known as long trend also called primary trend.
  2. Intermediate Trend: If trend continues for a period of 2-3 months is known as intermediate trend. These types of trends are given name waves.
  3. Short term Trend: A trend for a period of month or less than that is known as minor trend also known by the ripples.

 

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