STEP. Establish Short-Term Trend & Retracements. What is a trend?

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Lydia Butler
6 years ago
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What is a trend? A trend is when the market is in an overall up direction, down direction, or sideways direction.

1 Establish Short-Term Trend & Retracements STEP 3 In Step Three, you will establish Short- Term Trend and Retracements on daily charts. By defining the trend and retracement, you will gain knowledge that will help you define market direction and will assist you in determining where the market will move. What is a trend? A trend is when the market is in an overall up direction, down direction, or sideways direction. From this definition, you can see that there are three distinct trends we need to be aware of when trading the futures market: The Uptrend : A market that is consistently developing higher-highs and higher-lows. The Downtrend : When a market changes the pattern and begins making lower-highs and lower-lows

3 Establish Short-Term Trend & Retracements The Sideways Trend : When a market begins trending sideways, and is neither establishing higher-highs and higher-lows or lower-highs and lowerlows but a

Different trading strategies have been established to take advantage of each of these types of trends, as well as the change from one trend to another.

2 3 Establish Short-Term Trend & Retracements The Sideways Trend : When a market begins trending sideways, and is neither establishing higher-highs and higher-lows or lower-highs and lowerlows but a combination of both, this market is indecisive and considered to be trending sideways. Different trading strategies have been established to take advantage of each of these types of trends, as well as the change from one trend to another. These strategies will be covered in greater detail in a following chapter. Establishing the short-term trend lets you know how the market is moving in the overall scheme of things. The short-term trend is either bucking the long-term trend or is moving in line with the long-term trend. Remember, a trend in motion generally stays in motion. A trend in motion generally stays in motion. A short-term trend is the trend on a daily commodity chart as opposed to the longterm trend, which is the trend that appears on a long-term chart, either weekly or monthly. The short-term to mid-term trends are some of the most important aspects of trading. It is the trend that most traders are trying to catch, and therefore begs the question to be asked, How long is a short-term trend, how long is a mid term trend, and how long is a long-term trend? Trends are relative to the length of a contract. In the futures market, our contracts have decisive ending dates when the contract stops. Some contracts are long, lasting

3 3 Establish Short-Term Trend & Retracements years, other contracts are short, less than one year; therefore, the length of a trend is somewhat relative to the length of a contract. A long trend in a short contract may be a short trend in a long contract. The time frames listed below are somewhat of a blanket statement, keeping in mind that this covers many contracts, and also realizing that some contracts last for years while others only last for months. Short-term trends: A short-term trend can be from two or three days to two or three weeks and is found on a daily commodity chart. Mid-term trend: A mid-term trend, would be from a couple of weeks to a month or two and is found on a daily commodity chart. Long-term trend: A long-term trend in the futures market can last from several months to a year and is found on a daily commodity chart. The longer a trendline has been intact, the more significant it is. A trendline that has been successfully tested eight times is obviously a more significant trendline than one that has only been touched three times. Also, a trendline that has been in effect for nine weeks has more effect than one that has been in effect for nine days. The more significant the trendline, the more confidence it inspires, and the more important its penetration is. You must also remember that we look at long-term charts, and on a long-term chart, the overall long-term trend can last for years and years. But, (and this is a big exception) we don't trade long-term charts we only trade daily charts; therefore, the longterm chart is only used as an indication of overall market trend and direction. In this case and example, we are only speaking of trends that we trade, not overall market directional trends, which we will cover in Step Four. Assignment I have analyzed the following charts showing the short-term trends. Study these charts and then analyze the practice charts on page 38 looking for the trends

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6 Activity 3:1 Analyze and mark the short-term trends on the following two charts

7 3 Establish Short-Term Trend & Retracements Retracement Markets have a tendency to move in waves, and in doing so, you will notice a pattern where markets will take two steps forward and one step back, over and over again. These areas of short retracements are where short-term market traders are taking their short-term profits. Once the market retraces aproximately 50%, the traders begin to buy the market once again, and the market begins the process of taking two steps forward once again. You will notice this pattern of stepping forward then retracing not only when a market is establishing short-term trends, but also on the long-term trends as well. Just as a market has traders that only like to trade the short-term trends, you also have traders that only want to trade the mid-term and long-term trends. Each group of traders sees the market as taking two steps forward, then taking one step back. Whether these steps are on a short-term time period, mid-term time period, or long-term time period, each time period has a tendency to make a retracement of half or 50% of the last time period move. We like to see the market retrace half or 50% of the last major move. We use this retracement level as a target point for our profit area when setting our risk vs. reward ratio. (See Step Eight on Risk vs. Reward for more information). Of course, we all want to catch the long 50% or greater long-term retracement moves, catch a rising star and let it take us to the top of the formation where we all jump out right at the perfect time. More often, we will catch the shorter waves and follow these shorter waves and retracements up or down a long-term retracement level, continually watching our risk vs. reward ratio and our money management program to keep us from losing too much money if we are wrong on the market s direction. My hope in providing you with this trading information is that I can somehow help you understand that markets move in waves, and they make small retracements back before making another step forward. The key to your success is knowing how much money to risk in any given market for any given trend and retracement. This takes a lot of practice and market knowledge, and I hope the things you learn here will be a significant step forward in providing the knowledge you ll need to be a successful trader. Assignment On the following four pages, you will find analyzed charts that show trends and retracements. Take a look at these charts and then complete the activity on page 44 by diagraming the trends and retracements on the last two blank charts

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Chapter 1.4 Trends 0

Chapter 1.4 Trends 0 TECHNICAL ANALYSIS: TRENDS, SUPPORT AND RESISTANCE Charts, charts, charts. When most people think about trading Forex, they think about watching price movements flash by them on the