Standing on the vent of the wind, even a pig can take off. This is how Lei Jun describes the trend.
No matter whether you are in the industry or doing trading, if you can catch the trend and follow it, even a novice can take off.
Since trends have such obvious advantages, what is a trend in trading? What tools can be used to determine trends?
First we need to understand the trend
Trend is the direction in which prices tend to move over a certain period of time. There are ups, downs, and consolidation. They can help traders judge the market sentiment and momentum and choose appropriate entry and exit points. Generally speaking, trading with the trend has less risk and loss and is easier to make a profit.
Commonly used tools include: moving average, K-line patterns, and trend lines. I believe everyone is familiar with moving averages and K-lines, and today we will learn about trend lines.
What is a trend line?
A trend line is a tool used to measure price changes or market movement trends. It connects the high or low points of price fluctuations over a period of time to form an inclined straight line, and its direction reflects the price changes.
To understand trends and trend lines, you need to know how to draw trend lines. Before drawing trend lines, you need to know the three necessary conditions.
Trading cycle. Every trader has his own trading cycle. Only when the trend line is drawn based on the trading cycle is it meaningful, otherwise it has no value. You can use the trend line of the large cycle to understand whether the market is generally rising or falling, and combine it with the small cycle to determine the trading signal. You can also do the big trend and the small trend.
Three points in a line. Find relatively obvious highs or lows in the trading cycle and connect them into a line. The more points on the line, the higher the reference value.
Cannot be deeply broken by K-line. There are two important meanings of trend line: support and pressure. If the trend line is deeply broken, it means that the subsequent trend may change. There is a rule in trading: support becomes pressure after breaking through, and pressure becomes support after breaking through.
After understanding the three elements of trend lines, let’s look at how to draw them in actual combat in the three market conditions: rising, falling, and oscillating.
1. How to draw an upward trend line
For example, in the one-hour chart of the S&P 500mini futures, the low points in the chart are constantly rising, and the initial judgment is that it is a bullish market. Then connect the low points to form a line verified by at least three points. Through the trend line, you can judge whether the price is rising or falling over a period of time, and when the trend will change.
2. How to draw a downward trend line
Before drawing a trend line, you need to determine the cycle. The following is a half-hour chart of the S&P 500 mini futures. It can be seen that the market has turned into a downward trend after a period of rise. In the one-hour chart, this period of market is an upward trend, so we can observe in a small cycle when the downward trend will end and whether it will fall below the one-hour trend line?
As can be seen in the figure, after the downward trend line passes the third high point, this trend line changes from a pressure line to a support line, which means that the small-scale callback is over.
3. Draw the support-pressure area when the market is sideways (shaded area in the figure)
Connect the relative highs and lows that appear during the consolidation period to form a support-pressure area. When the price approaches this area, it reacts quickly. For example, after the low point circled in red touches the support-pressure area, a sensitive rebound occurs, proving that this is a valid area. Then the low point of the K-line begins to rise, and the market shows an upward trend, indicating that the consolidation market has ended.
The above are three common ways to draw trend lines. According to the type of market, there are rising, falling, and consolidation (drawing support-pressure areas). It can be seen that when drawing trend lines, not just one line can form a trading suggestion. Generally, the success rate of trading decisions made by large and small cycles are higher. Because they can:
1. As a signal for opening a position. The period determines the big trend, and the small period determines the small trend. Their intersection can be used as a signal for opening a position.
2. Provide stop loss and take profit positions. Find the nearby low or high points and draw a trend line of a small period. Usually the stop loss is set within the trend line. Determine whether it is worth taking action by judging the stop loss space.
3. Determine the change of trend. Intersection with K-line means that the trend may change. There is a rule in trading that support breakthrough will turn into pressure, and pressure breakthrough will turn into support.
Summarize
Trend line is a tool for judging the market. Combining the trend lines of large and small cycles can be used to judge trading signals. It is simple and easy to use. However, no matter how simple and easy-to-use the tool is, you need to strictly follow your own trading system when using it, grasp the scale of trading, and lay a solid foundation before being "greedy" so that you can bring yourself better returns.
This sharing ends here. Do you have a better understanding of trend lines? If you want to learn more about trend lines, please leave us a message to discuss!
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