Forex

“The Trend Is Your Friend.” What this means is that the price may trend in
one direction for a long time. You usually want to trade with the trend. Usually
if the long-term trend is down, you want to be short; and if the long-term trend
is up, you want to be long.
There Are Three Types Of Trends
1. The Major Trend
2. The Minor Trend
3. The Near Term Trend (also called The Current Trend)
The Major Trend. Charles Dow, author of the Dow Theory, said that the
major trend lasts a year or longer. However he was referring to stocks when he
said this. When looking at a commodities chart, you can shorten that to six
months. However, some long-term trends can last for years.
The Minor Trend. Most people look at the minor trend as being between three
weeks and three months.
The Current Trend. This is sometimes referred to as the near-term trend, and
should be looked at as the trend in the last two or three weeks.
When you look at charts, you will notice that in the major trend, you will see
minor trends that could be opposite the major trend. Within the minor trend,
you will see near-term trends that could be opposite the minor trend.
Look at the very long-term downtrend in Cocoa on the following chart. It’s
obvious that the major trend is down, but you will also notice that during the
downtrend, the price rallied several times for a week or so. This is quite normal,
as you will soon see.
The price was way up at the start of the contract, and then changed trend as the
price began to drop. This downtrend started in November, hit “bottom” in May,
and then headed back up.
if you had caught this trend back in November and stayed with it
until June, you could have made a lot of money.
Learning to draw trendlines is important in learning to trade correctly. To
understand what a trend is, you need to define it first. A downtrend, as shown
on this chart, is a series of lower highs and lower lows. An uptrend is just
the opposite—a series of higher highs and higher lows.
An uptrend can be intact until a previous support has been broken. Support is a
place the price has a hard time breaking past or through. Same thing for
resistance. You will learn a lot about this in Lesson Three. In the case of a
downtrend, a breakout to the top of the trendline (when the price closes above
the trendline for more than two consecutive days) is a good indicator that the
trend might be broken. Of course the opposite holds true for an uptrend.
When the price jumps above or below the trendline for one or more days but the
closing price remains within the trendline, it’s called a “False Breakout,” and
the trend is still considered to be intact.
By drawing trendlines, you can see when the price breaks out, and when the
trend may be broken. Look again at the previous chart for July 1999 Cocoa.
I’ve drawn the trendlines for you. It’s obvious when this trend ended and the
price reversed direction. When the price reversed and went up, you would have
wanted to get out of all your short trades and go long, or buy a contract.