Defining trends is the first step in trading, and it is very important. Today, I will discuss three issues related to trends.
1: The basic definition of trends.
2: The standards for defining trends have become very diverse now.
3: Share a method that is very useful for judging trends.
1: The basic definition of trends.
Trends are a very elusive concept. In real life, if you want to define an intangible thing, you need to have certain criteria. For example, air is ethereal, and we might use humidity and temperature to define it, so air also has its own standards.
So, what is the definition of a trend?
This goes back to Dow Theory. Dow Theory was the first to propose a definition of trends. In Dow Theory, an uptrend is characterized by continuously rising highs and pullbacks that do not break the previous lows. A downtrend is characterized by continuously falling lows, and rallies that do not break the previous highs. This is also the most basic trend standard.
On the left side of the chart is the uptrend, where the market keeps setting new highs, and each pullback does not break the previous low.
Advertisement
On the right side of the chart is the downtrend, where the market keeps setting new lows, and each rally does not break the previous high.2: The criteria for defining trends have become very diverse now.
The above is the oldest method of defining trends. It is important to recognize that during the time when Dow Theory was created, there were no technical indicators or technical analysis. As trading has continued to evolve, the methods of technical analysis have also increased, and technical indicators have been invented more and more, with almost every indicator having its own standard for defining trends.
For example, if you use a moving average or MACD, their standards for defining trends are different. See the picture below.
The left and right sides of the image are both 1-hour gold candlestick charts, both showing a section of the trend from August 25th to August 31st.
On the left side of the image, a moving average is used, and the standard for defining the trend is that when the moving average forms a golden cross, the trend is defined as bullish.
On the right side of the image, MACD is used, and the standard for defining the trend with MACD is that when the market forms a bearish divergence at high levels, the trend is defined as bearish.
Different technical indicators, the same section of the market, have completely different judgments on the trend. This is also why I suggest that you do not study too many indicators at the same time, nor discuss your judgment of the market trend with too many people, because everyone uses different indicators and has different judgments on the trend. Such discussions are meaningless and can also affect the execution of your own trading.
3: Share a very useful method for judging trends.
Use trend lines and moving averages in combination to define trends.
After the market reverses and breaks through the trend line and moving average, the trend reversal is confirmed. For example, in a downward trend, if the market rises and breaks through the downward trend line and the 60-day moving average, the trend is judged to have shifted from bearish to bullish. In an upward trend, if the market falls and breaks through the upward trend line and the 60-day moving average, the trend is judged to have shifted from bullish to bearish.On the left side of the chart is a downward trend. At the end of the market, it first broke above the 60-day moving average, and then pierced upward through the downtrend line. Although the market fluctuated, it eventually stood above the trend line and reversed.
On the right side of the chart is an upward trend. After the market consolidated at a high level, it broke below the upward trend line and the 60-day moving average, confirming the reversal of the trend.
Two issues need to be emphasized here:
First, why use both the moving average and the trend line to define the trend? Because this can use resonance to enhance the stability of this standard. In the chart on the right above, everyone can see that after the blue upward trend line was broken downward, the market made a new high again. If only this trend line is used to judge the trend reversal, there would be a false breakthrough at this position, and there would be a stop-loss order. Because of the resonance of the moving average, this stop-loss order can be filtered out, making our standard for judging the trend reversal more stable.
Second, why use the 60-day moving average? Because the parameter of 60 is a relatively neutral parameter, which is close enough to the market, and will not react as sensitively as a small parameter moving average. The resonance effect with the trend line is more ideal.
Finally, I want to say that no matter what indicators you use, there is no right or wrong in judging the current market trend, whether it is more or less. What is important is that you must have your own standard for judgment, because trading is a whole thing. It is not only necessary to consider the judgment of the trend, but also to consider the position of entering and exiting, fund management, etc., in order to build a complete trading system, which is to do a good job in the probability of profit.
So the method of judging the trend I mentioned before is just one of the many methods that I think is easy to use, and it does not mean that the direction of the trend it judges is definitely right. There must be no absolute "prediction artifact" in this world, only the absolute optimization of probability. Everyone's overall understanding of trading must be in place.