Education lesson 26
What is a Trend?
A trend is the general direction of a market or an asset's price. In technical analysis, trends are identified by trend lines or price action that highlight when the price is making higher swing highs and higher swing lows for an uptrend, or lower swing lows and lower swing highs for a downtrend.
Many traders opt to trade in the same direction as a trend, while contrarians seek to identify reversals or trade against the trend. Uptrends and downtrends occur in all markets, such as stocks, bonds, and futures. Trends also occur in data, such as when monthly economic data rises or falls from month to month.
Here's an example of the Weekly SPY chart and its trends it went through since 1995. crazy huh? https://www.tradingview.com/x/imbk8fe1/
Work Traders can identify a trend using various forms of technical analysis, including trendlines, price action, and technical indicators. For example, trendlines might show the direction of a trend while the relative strength index (RSI) is designed to show the strength of a trend at any given point in time.
An uptrend is marked by an overall increase in price. Nothing moves straight up for long, so there will always be oscillations, but the overall direction needs to be higher in order for it to be considered an uptrend. Recent swing lows should be above prior swing lows, and the same goes for swing highs. Once this structure starts to breakdown, the uptrend could be losing steam or reversing into a downtrend. Downtrends are composed of lower swing lows and lower swing highs.
While the trend is up, traders may assume it will continue until there is evidence that points to the contrary. Such evidence could include lower swing lows or highs, the price breaking below a trendline, or technical indicators turning bearish. While the trend is up traders focus on buying, attempting to profit from a continued price rise.
When the trend turns down, traders focus more on selling or shorting, attempting to minimize losses or profit from the price decline. Most (not all) downtrends do reverse at some point, so as the price continues to decline more traders begin to see the price as a bargain and step in to buy. This could lead to the emergence of an uptrend again.
Trends may also be used by investors focused on fundamental analysis. This form of analysis looks at changes in revenue, earnings, or other business or economic metrics. For example, fundamental analysts may look for trends in earnings per share and revenue growth. If earnings have grown for the past four quarters, this represents a positive trend. However, if earnings have declined for the past four quarters, it represents a negative trend.
The lack of a trend—that is, a period of time where there is little overall upward or downward progress—is called a range or trendless period
Below is a video by chart guys on drawing trend lines.