Trends are the foundation of stock trading. Any trader should be able to construct trend lines and levels and trade based on them. In this article, you will learn all the information a beginner needs to understand the nuances of trends.

What is a Trend

A trend is a movement of price in one direction that operates over a certain period of time. In other words, it is a distinct segment of falling or rising costs that can be visually identified on a chart.

Trends help the trader:

• Create trading strategies themselves;
• Predict changes in the price of an asset;
• Use indicators on the exchange effectively.

Types of Trends

Trends are classified according to the main criteria – duration and direction. You will learn more about each of these below. By direction, trends are:

• Bullish (ascending). On the chart, each subsequent low and high (peak) should be above the previous ones.

• Bearish (descending). On the chart, there are decreasing highs and lows, which follow one after the other. Each subsequent point will be lower than the last.

• Flat (sideways). On the chart, this price moves without a visible direction. Lows and highs are almost on the same level. Traders assume that there is no trend when there is a flat. But this assumption is incorrect; there is always a trend in the market, but it needs to be correctly identified.

In terms of duration, trends are divided into:

• Short-term. These are tendencies that usually depend on a multitude of events (including random ones). They often do not lend themselves to technical analysis. They are made up of small fluctuations. They usually go against the next type of trends (medium-term). The duration is usually from 1 week to 1 month.
• Medium-term (intermediate or secondary). Duration from 1 month to 0.5 years. These trends are considered corrective and go against the next type of trends (long-term).
• Long-term (primary). Duration from 1 to 2 years. Major investors and market players usually trade on them.

No long-term trend will start or end suddenly. Trends usually develop according to the same scenario.

Now you know about market trends. But there is another important feature – the phases of the trend.

When the first phase (accumulation) begins, major players and investors start selling and buying financial assets.

When the distribution phase begins, other participants appear on the market, after which long (impulsive) and short (corrective) movements begin to appear.

When the final phase begins, the price reaches its maximum. At this point, major investors and players fix their positions and withdraw funds.

How to Draw a Trend Line

A trend line is a universal tool for technical analysis that can help determine the direction of the market. It also helps determine the strength of the current trend, the likelihood of a change in the direction of price movement, and the timing of this change. Knowing the trend value alone is not enough to draw a trend line. Traders need to understand the main rules of construction to master the topic.

Not all lows and highs need to be highlighted, but only the most important ones. For an upward trend, the line can be drawn using the 2 most important lows (support levels), and for a downward trend – using the 2 highs (resistance levels). It is also crucial to accurately select pivot points in order to precisely draw trend lines. There is no universal algorithm here, so you are about to learn one of the best.

For the first point, it is best to choose the highest high or the lowest low. Everything will depend on the trend being analyzed.

The second point will be the high or low adjacent to the first one. After a certain period of time, there will be a breakout of the trend line, and you will be able to draw a new one.

There are two methods for drawing trend lines: by candlestick shadows and by bodies. You will decide which one to choose, they are both correct. But you should always stick to the chosen method. If you use the trend line as a support level, you should consider selling or buying. If you use the trend line as a resistance level, consider buying or selling.

Now you know the basics about trends on the stock exchange and how to draw trend lines. Going forward, it’s about applying this knowledge in practice and gaining invaluable experience.