Dominate the Markets with Smart Technical Analysis-TA 101 – Part-8
Technical Analysis of Trend Psychology
The psychology of market players’ greed and fear ultimately dictates how prices move in a market. Prices decrease with fear (supply) and increase with greed (demand). Simply said, a price trend is a persistently directional price movement. It can be viewed as a zone of tilting support and resistance.
As long as a market is dominated by either greed or fear, a trend will persist. As the ratio of greed to fear shifts, trends wane or take a different turn. The speed at which prices are going upward or downward indicates the level of fear and greed in a market.
Trending
As previously mentioned, a trend is a consistent, directional change in price. An uptrend is defined by rising peaks and troughs, whereas a downtrend is defined by dropping peaks and troughs. Horizontal peaks and troughs are what define a trading range. In general, trends are divided into three categories: small (less than a month), intermediate (one to six months), and significant (greater than six months). While short-term investors are more interested in minor and intermediate trends, long-term investors are primarily concerned in spotting long-term trends. Examples of the many trend kinds and categories are displayed in the SharpChart that follows.
Trend lines
A trend line is a straight line that connects two or more low or high price points and then extends into the future to act as a line of support or resistance. The first two points establish the trend line while additional points validate it.
An uptrend line has a positive slope and is formed by connecting two or more low points. Uptrend lines act as support. As long as prices remain above the trend line, the uptrend is considered intact. A break below the uptrend line indicates that demand has weakened and a change in trend could be imminent.
A downtrend line has a negative slope and is formed by connecting two or more high points. Downtrend lines act as resistance. As long as prices remain below the downtrend line, the downtrend is intact. A break above the downtrend line indicates that supply is decreasing and that a change of trend could be imminent.
In part 9 we’ll look at trend channels and trend changes.
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