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.
- 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.
- 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.
- A Sideways Trend: A sideways trend also known as consolidation happens when price moves within a price range.
- 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.
- 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.
- Short term Trend: A trend for a period of month or less than that is known as minor trend also known by the ripples.