Trend is the most important concept in technical analysis. A trend designates the general direction of a market movement. It is important to identify trends so that you can trade with them rather than against them.
Types of Trend
A trend may be:
- Upward – this is called a Rally ; the market trends the way up
- Downward – this is called a Downtrend ; the market trends the way down
- Sideways / Horizontal – this is called „flat market” or „trendless” ; the market trends nowhere
A trend of any direction can be classified according to its length
- Short-term Trend ; it usually lasts no more than three weeks
- Intermediate Trend ; it usually lasts somewhere between 3 weeks to several months
- Long-Term or Major Trend ; it is considered to last for a year or more. It is composed of several intermediate trends, which often move against the direction of the Major Trend
A trendline is a simple charting technique that consists of connecting the significant highs (peaks) or the significant lows (troughs) to represent the trend in the market. These lines are used to clearly show the trend and also help in the identification of trend reversals.
A trendline may be classified as:
- Rising trendline
- Declining trendline
- Sideways trendline
On the chart below, you can see a representation of a long-term upward trend in the EURUSD, along with a rising trendline.
A price channel is the addition of two parallel trendlines that act as strong areas of support and resistance. One trendline connects a series of price highs while the other connects a series of lows. A channel can slope upward, downward or sideways. Traders expect a given security or currency to trade between the two levels of support and resistance until it breaks beyond one of the levels. They used channel lines to point out where to place „take profit order” and „Stop Loss Order”.
You can see below a chart of an upward channel in the S&P 500 Index.