The concept of trend
One of the clearest definitions of trend was formulated by Charles Dow, founder of Dow Jones Industrial Average.
In his theory, Dow describes how prices do not rise or fall in a straight line, but move in a series of zigzags. The trends may then be defined by the relative position of the peaks and the troughs.
Dow has determined that an asset enters a bullish trend when it presents a succession of peaks (highs) and troughs (lows) growing. Similarly, an asset enters downtrend (see chart on the right) when it presents a succession of peaks (highs) and troughs (minimum) decreasing.
The trends are relatively easy to be identified, but you can not know for sure how long it will last before giving rise to a reversal.
However, by studying some graphic patterns, you can often get a good indication of possible future market movements.
Double bottom and double top
The double bottoms or double tops form after a steady trend, reporting to the technical analysts that the trend could be reversed in the near time.
These patterns are created when a price approaches twice the levels of support or resistance, however, without breaking them. This behavior is often the signal of a reversal of a medium or long-term trends.
The graph on the right depicts the formation of a double top.
maximum three times
The triple top is a bearish reversal pattern, since the price eventually moves downward.
These patterns are formed when an asset tries three times to pass a key resistance level, but fails. After three failed attempts, the asset goes down to the support level and is expected to take a downward trend.
This pattern is difficult to recognize in its early stages, which is very similar to a double bottom or double top. The secret is to wait until the price exceeds the level of support or resistance before entering the market, to avoid that assumes a sideways trend within the same range for a certain period.
The triple minimum is a bullish reversal pattern, since the price eventually moves upward. It is the opposite figure to triple top, given that in this case the market tries to fall below a level of support for three times before to yield and to move above the level of resistance.
head and shoulders
The head and shoulders is another trend reversal figure which is one of the most popular among traders which is also based on three graphic features. Beside the other triple patterns taken into account, this focuses more on volumes. This pattern indicates a possible downward movement.
Here’s how it works. Check the chart to see these steps in action:
Sellers intervene at the highest of the Left ‘shoulder’.
These vendors force the prices to fall to support level of ‘neckline’ ‘.
Buyers soon return to the market giving rise to the formation of the new maximum of ” ‘head.
However, sellers reversed again these highs, trying to put this support again to the test.
Buyers try to return and the market picks up again, but with less force, so that they can not reach the previous high of the ‘right shoulder’.
Buyers give up, running out the demand, and the market heads the media again, maybe even managing to break it.