The trend is your buddy. This is a basic saying of technical evaluation.
Studying technical evaluation can be a enjoyable and rewarding practical experience. As we progress along our technical evaluation education journey, we will be mastering about a lot of procedures, indicators and formations. But prior to we get as well involved, it is crucial to talk about a single of the most fundamental tenets of technical evaluation: investing WITH the trend.
1 of the basic ideas of technical evaluation is that markets, which includes stocks, futures, forex, and so on., have a tendency to rise or fall for extended periods of time. When they do not go in a straight line, but in jagged moves, there is an general path or trend to costs. Ordinarily, a single of our very first tasks is to determine this trend.
There are, of course, also instances when the marketplace is not trending. It could be choppy, going nowhere, or it could be moving sideways. We also need to have to know when the marketplace is not in a trend.
We have a lot of tools at our disposal to support us to determine these trends. These contain trend lines, moving averages, Bollinger bands and a lot more. We will be covering each and every of these in separate articles.
Never Appear For Turning Points
In basic, we do not seek to determine tops, bottoms or turning points. We as an alternative appear to very first determine what is the acceptable trend for the time frame getting studied and ride that trend. As a result, at tops. bottoms and turning points, we wait till a trend has been established and then trade with the trend.
The Middle 60%
As a result, in a reversal, we do not get into the trade till about twenty % of the trend has currently been traced out. When we exit our trade, we typically do the similar factor, that is, confirm that the original trend has been reversed. Once more we typically drop about twenty % of the trend.
There are, even so, instances when we acquire a reputable signal that the trend has ended, even though a new a single has not but been confirmed. In that case, we could not drop all of the second twenty %,
As a result we have no regrets that we missed just about half of the trend. Rather, we are very pleased with our 50-60% of the trend, since we have been quite specific that a trend had began when we invested and quite specific that it had reversed when we got out. We did not have a lot to be concerned about.
Need to We Ever Buck The Trend?
Now this is not to say that there are no trading techniques that go against the trend (commonly they are as an alternative selecting out a shorter trend), but we need to have to be completely certain that is what we want to do. If you discover your self searching for tops, bottoms and turning points, you genuinely should really ask your self if this is genuinely what you want to be carrying out.
Your objective as a fledgling technical analyst is to, very first and foremost, determine the trend. Never jump the gun to attempt and acquire an additional 5 % or so. Make certain that a new trend has formed. There could be factors, even so, to get out of a trend early, such as a profit objective or worrisome marketplace circumstances, but never take modest gains just to really feel great about your trading.
We all want to have great close friends, and, for a technical analyst, the trend is your very best buddy.