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Any data analyst will tell you that all markets trend. Studying trends, and identifying and determining when and where a market trend may go, is the basis of all data analysis. In fact, the identification of bullish and bearish markets is, at its most basic level, determining trends. Trend represents the direction in which a market is going. A market price will move in a zig-zag fashion creating peaks and troughs. The trend or direction of a market price will be determined by the direction of those peaks and troughs.
An uptrend can be defined as a continuing series of peaks and troughs higher than the previous peaks and troughs. In the simplest of terms, if this pattern does not continue, a trend reversal may be occurring. Conversely, if a series of declining peaks and troughs are illustrated, a downtrend is established. A downtrend reversal is generally indicated by a price staying above the support level and a rising above the resistance level.
In general, the longer a trend has been moving in that trending direction, the more significant that trend is. The direction of a trend will be either up, down, or sideways. This corresponds to bullish, bearish and sideways markets. Trends can also be categorized as major, intermediate and near-term, however there are an infinite number of ways in which trends interact with each other on a single chart.
A major trend is generally considered to be one that has been in motion for a year or longer, although some futures analysts consider a 6-month trend a major trend. The intermediate trend is defined as any motion that continues for at least three weeks or more. The near-term trend is anything less than three weeks.
In any long-term trend, the market may pause to correct itself by trending sideways or down for a couple of months before continuing on its previous course. This could be identified as an intermediate trend within the long-term trend, or near-term trends within the intermediate trend. Simply put, this is how trends interact with each other, and how they are identified on a chart.
Trends can be illustrated using trendlines. When applying trendlines, you will be able to view various chart patterns that can help you identify and predict the strength of a trend and whether a trend reversal may occur. Trendlines are used to determine the slope of a trend and to help identify or indicate when a trend is changing. Generally, trendlines are drawn to identify and follow uptrends and downtrends (sideways trendlines can also be drawn, however, they would be more indicative of a support or a resistance level).
An up trendline is drawn under rising lows (or troughs), and a down trendline is drawn above declining highs (or peaks). A trendline should include all price activity and touch troughs or peaks two to three times. Obviously, the more times prices bounce off of the trendline to test its validity, the more significant the trendline becomes.
Most analysts draw several trendlines on their charts measuring and identifying near-term, intermediate and long-term trends. They will also add or change existing trendlines when the original trendline is either no longer applicable, or incorrect.