Trend Analysis For Short Term Traders

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The Quick Guide To Forex Technical Analysis

By Tyson Clayton

Beside fundamental and sentiment analysis, technical analysis is one of the most popular types of analysis in any financial market. This is especially true for the foreign exchange market, where many traders rely exclusively on technical analysis to draw conclusions about future price movements of a currency pair.

What is Technical Analysis

Technical analysis is based on the assumption that historic price levels can be used to predict future price movement. It is a form of pattern recognition dependent on the idea that humans work in a relatively consistent manner.

One of the most important things required for the successful operation of technical analysis is a lot of historic data, which is why the forex market is a prime opportunity for those who would like to use technical analysis in their trading.

Since the forex market is open 24 hours a day, and has the highest daily turnover of any financial market, it’s perfect for traders who use technical analysis as their primary type of analysis.

Technical analysis helps traders look for trends rather than arbitrage opportunities. It’s not about what can be gained right now, but knowing where a currency is going to move in the future and reacting with prescience.

The flow of capital based on economic, political, and psychological factors is what will determine the future rate of a currency. Technical analysis assumes that all fundamental information is already discounted in the current exchange rate, which makes the chart the best friend of a trader.

While fundamental analysis tends to focus on whether a currency is overvalued or undervalued relative to its equilibrium value, technical analysis is interested on whether the currency moves upwards, downwards, or sideways. If a currency pair breaks above or below an important historic price level, technical-based models will issue a recommendation to go long or short on that pair, regardless of the fundamental “fair” value of a currency.

There are three major trends that can form in the forex market: upward trends, downward trends, or sideway trends.

The sideways range indicates that a currency is range-bound and is going to maintain said rate for a period of time. To identify these trends, traders often draw lines connected by the highs and lows of the price, which then form support and resistance levels. Other popular tools include drawing trendlines and channels to project the current trend into the future.

There is usually a lot of hidden information in this data, and a technical trader believes it can be used to conclude future price movement that will allow him to make some profit.

Upward and downward trends can be visualized as a series of primary and secondary waves, where the primary waves move the currency pair in the direction of the broader trend, and secondary waves act as corrective phases of the primary waves. The following chart shows a typical upward and downward trend in the forex market.

As a general rule, the major currency pairs (anything including the USD, such as GBP/USD, EUR/USD, USD/JPY) tend to form trends, whereas currency crosses (pairs involving major currencies but excluding the USD) remain range-bound. This can be attributed to the way people classify these countries.

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For a long time, some of the major currencies such as USD, JPY and CHF have been seen as safe-havens and when there is trouble in the world, money usually flows into these currencies, forming trends. The interesting part about this is that different currencies have their own personalities and patterns, which creates trading opportunities as traders analyze the movement of different currencies in different ways.

Technical Analysis in Short-Term and Long-Term Trading

When performed on shorter time-frames, technical analysis usually gives better results than any other type of analysis. Short-term trading is in the most part influenced by technical levels, and this is especially true if a currency trades around its long-term fair value.

The reason for this is that fundamental traders will most likely stand beside the market and will not open new positions if a currency is close to its equilibrium level, which gives place for technical traders to fully employ all tools of technical analysis. In the long run, however, currencies tend to move in the direction of their fundamental equilibrium level.

According to a survey of FX dealers published in “How Do UK-Based Foreign Exchange Dealers Think Their Market Operates?”, a whopping 97% of FX dealers believed that fundamental factors played no important role in short-term price movements, while 87% felt that fundamental factors are the main driving force on a long-run basis beyond 6 months.

According to the survey, technical factors are the crucial force behind price movements on an intraday and short-term basis.

This is the reason why technical analysis is so popular with shorter-term traders, such as day traders and swing traders. They use technical models in their daily trading which can be a combination of trend-following rules, counter-trend trading, breakout trading and swing trading.

Using Technical Indicators

Although trends are the most basic aspect of technical analysis; there are also many indicators that are employed for the purpose of predicting where a price is going to move in the future. These include moving averages, stochastics, MACD, RSI, Bollinger Bands and other.

Some of these indicators are used to identify potential oversold and overbought levels, such as stochastics and RSI, while others are used to measure price volatility, such as Bollinger Bands. Although technical indicators can be used in a variety of ways, they all have in common that they use data of previous price levels for their calculation.

Before You Trade

Overall, technical analysis is a way of examining the wisdom of the crowds and using it to your advantage. As a forex trading strategy, it is viable and has a lot of solid data to back it up. Technical analysis is especially popular in short-term trading, where it returns the best results. In the longer-run, fundamental analysis tends to have an edge over technical analysis.

Technical traders can use a variety of tools, such as trendlines, channels, support and resistance levels and technical indicators, to perform their analysis regardless of where the currency stands in relation to its “fair” value.

Trend Analysis For Short Term Traders

Stock prices go up and down. It would seem that it is simple to make a fast profit from day trading. You need to buy stocks after a price drop and sell them after some time with a profit. Unfortunately, this is a minus sum game. Bad stock selection can easily kill you. The faster you trade, the faster your losses become large. Every transaction has a cost: bid-ask spread and brokerage commissions. Very tiny profits will disappear in a long run when you take into account these transaction costs. Nevertheless, day traders still exist and many of them are very rich people. How did they do that? If you are a professional and trading on the floor of the exchange you can look for micro trends and catch the leaving train right on time. Big capital and zero commissions allow you to make micro profits constantly.

These notes are for nonprofessionals. Can you make profits by short term trading? Yes, you can. You should be very selective when buying stocks for trading and try to anticipate the stock price moves before professionals. Is this possible? The answer is yes. Let us show how to do that and what is the risk of short term trading. We will consider trading stocks. We suppose that you are using on-line discount brokers and you are paying small commissions (10 dollars or less). We also suppose that you are able to watch stock quotes a few times a day and you are able to buy or sell stocks during the trading day. These notes are not about day trading. Our time frame is 2 – 5 days. Computer analysis and our own experience has shown that this period of stock holding is long enough to make profits with reasonable risk level.

Consider the situation: an amateur is trading stocks. His choices are terrible and his style of trading is not getting better. What can we do for this guy? How can we improve his return? Suppose the average growth probability of the stocks selected by this amateur is 40%. He cannot believe that his choice is always bad and he just wants to have some trading strategy to improve his return. He likes the stop-limit strategy described in the previous section and he wants to know what stops and limits are best for him. The equations for calculating the optimal stop and limit levels are rather complicated, and here we will just give you the answer: L/S ratio should be more than 10 in this case. So, the stop order should be very close to the stock price at the moment of purchase.

This is the only strategy that can help this guy to survive any longer in the market.
The same idea can be applied to a bear market. If you buy stocks when market is declining your stop orders should be as close to the purchase price as possible. For experienced professional traders, when stock picks are excellent and the growth probability of these stocks is high (for example, 60%) the stop order level should be far away from the purchase price. The same rule can be applied to a bull market. Do not place stop orders close to the purchase price if you are sure about your stocks or when the market is rising. For example, if you expect a profit about 30% your stop orders should be about 20% less than the purchase price. We will consider this problem in detail later, when some specific trading strategies will be analyzed.

It is so easy to lie using statistical analysis. Probabilities, distributions, standard
deviations, . – all this stuff is made specially to leave the truth in the dust. Give us any chart and we will develop an excellent trading system with 90% growth probability. The analysis will show a 20% return on each trade, and we can write a nice book about a new revolutionary trading system. When can one believe in the results of computer statistical analysis? Consider an example. You can start your own analysis. Take the chart of some stock and find the patterns when the stock is ready to rise or to fall. Write down these patterns. Take another chart. Check all previously selected patterns and see what happened. Take another chart. Take another chart. Do it for thousands of stocks. Check your patterns for bull and bear markets. Look for what is working and what is not working.

And give us the percentage of events when your patterns are working. If this number is more than 60%, we will use your patterns for trading. It can be profitable. So, you have to analyze a large number of stocks over a long period of time to draw a conclusion. However, even after such analysis you can not give 100% guarantee of future results. Your statistical analysis will give you the standard deviation of your expected returns, and you should use these numbers to estimate possible troubles. What patterns do we believe in? We like trading ranges if we can call them as patterns. There is a real crowd psychology behind these patterns. All traders know about trading ranges, and this fact makes trading ranges rather reliable. Our computer analysis has shown: yes, they work.

How do trading ranges work? What average profit can you obtain using trading ranges as a basic of your trading strategy? What time scale should you consider to obtain maximal profit? How about the trends? These are the questions we are going to answer. We performed a computer analysis for
thousands of US stocks for a period of almost 5 years. For some stocks, an 11 year trading history has been considered. Now, let us say a few words about general problems of computer analysis. Every day you can load down the files from all the US stock exchanges. You can see in these files the opening price, maximum and minimum prices during the trading day, closing price and trading volume for thousands of stocks.

Trend Analysis

What is Trend Analysis?

Trend analysis is an analysis of the trend of the company by comparing its financial statements to analyze the trend of market or analysis of the future on the basis of results of past performance and it’s an attempt to make the best decisions on the basis of results of the analysis done.

Trend analysis involves collecting the information from multiple time periods and plotting the collected information on the horizontal line with the objective to find actionable patterns from the given information. In Finance, Trend Analysis is used for Technical analysis and Accounting analysis of stocks.

Types of Trend

#1 – Uptrend

An uptrend or bull market is when financial markets and assets – as with the broader economy level – move in the upward directions and keep increasing prices of the stock or the assets or even the size of the economy over the period of time. This is a time of booming where jobs get created, the economy moves into positive market and sentiments in the markets are favorable and the investment cycle has started.

#2 – Downtrend

A downtrend or bear market is when financial markets and assets prices – as with the broader economy level – move in the downward direction and prices of the stock or the assets or even the size of the economy keeps on decreasing over the period of time. This is the time when companies shut down the operation or shrink the production due to a slump in the sales. Jobs are lost and asset prices start declining, sentiment in the market is not favorable for further investment, investors run for the safe haven of the investment.

#3 – Sideways / horizontal Trend

A sideways/horizontal trend means assets prices or share prices – as with the broader economy level – are not moving in any direction, they are moving sideways, up for some time then down for some time. The direction of the trend cannot be decided this is the trend were investors are worrying about their investment and government is trying to push the economy in the uptrend. Generally sideways or horizontal trend is considered risky because when sentiments will be turned against cannot be predicted hence investors try to keep away in such a situation.

What is the Use of Trend Analysis?

It is used by both – Accounting analysis and technical analysis.

#1 – Use in Accounting

Sales and cost information of the organization’s profit and loss statement can be arranged on a horizontal line for multiple time periods and examined the trends and data inconsistencies. For instance, take the example of a sudden spike in the expenses in a particular quarter followed by a sharp decline in the next period, is an indicator of expenses was booked twice in the first quarter. Thus the trend analysis in accounting is important for examining the financial statements for inaccuracies, to see whether the adjustment of the certain heads should be done before the conclusion is drawn from the financial statements.

Trend Analysis in accounting compares the overall growth of key financial statement line item over the years from the base case.

For example, in the case of Colgate, we assume that 2007 is the base case and analyze the performance in Sales and Net profit over the years.

  • We note that Sales has increased by only 16.3% over a period of 8 years (2008-2020).
  • We also note that the overall net profit has decreased by 20.3% over the 8 year period.

For forecasting, estimated financial statements trend analysis is used for the head where no major changes have happened. For example, if employee expense is taken 18 % of the revenue and major changes have not done in the employees then for estimated financial statements employee expense can be taken as 18 %.

Internal use of the trend analysis in accounting (the revenue and cost analysis) is one of the most useful management tools for the forecasting.

#2 – Use in Technical Analysis

An investor can create his own trend line from the historical stock prices, and he can use this information to predict the future movement of the stock price. The trend can be associated with the given information. Cause and effect relationship must be studied before taking coming to the conclusion of the trend analysis.

  • Trend analysis also involves finding patterns which are occurring over the period of time, like a cup and handle pattern, head and shoulder pattern or reverse head and shoulder pattern.
  • In technical analysis, it can be used in the foreign exchange market, stock market or derivative market. With slight changes, the same analysis can be used in all markets.

Examples of Trend Analysis

  • Examining sales patterns to see if sales are declining because of certain customers or products or sales regions.
  • Examining expenses report claims for proof of fraudulent claims.
  • Examining expense line items to find out if there are any unusual expenditures in a reporting period that require further investigation.
  • Forecast revenue and expense line items into the future for budgeting, for estimating future results.

What is the Importance of Trend Analysis?

  • Trend analysis tries to find out a trend lie a bull market run, and make a profit from that trend unless and until data shows a trend reversal can happen, such as a bull to bear market. It is most helpful for the traders because moving with trends, and not going against them, will make a profit to an investor. The trend is the best friend of the traders is a well-known quote in the market.
  • A trend is nothing but the general direction the market is heading during a specific period of time. Trends can be both growing and decreasing, relating to bearish and bullish markets, respectively. There are no criteria to decide how much time required to find out the trend, generally longer the direction more is the reliable considered. Based on the experience and some empirical analysis some indicators are designed and standard time is kept for such indicators like 14 days moving average, 50 days moving average, 200 days moving average.
  • While there is no specified minimum amount of time required for a direction to be considered a trend, the longer the direction is maintained, the more notable the trend.

Conclusion

The trend is a friend, is a well-known quote in trader’s fraternity. The trader makes a good profit by following the trend. Trend analysis is a not an easy task it required eyes on details and understanding of the market dynamics.

The trend analysis in accounting can be used by management or the analyst to forecast the future financial statement. Following blindly trend can turn out to be dangerous if a proper analysis of the past event is not done.

This has been a guide to what is Trend Analysis and its meaning. Here we discuss how Trend analysis works in Accounting & Technical analysis along with practical examples. You can also learn more from the following resources –

EUR/USD Analysis For Short Term Forex Traders

Friday 24/05/2020

EUR/USD had a really nice, strong rally yesterday.

When the price moved up it created two fresh demands.

The one below us is a great level for buy position and in order to continue the short term bullish momentum that we see at the moment, the price just reaches that demand.

If it’s not too late, it’s a great opportunity for a short term buy position. On the other hand, if the price will break out this demand, it indicates that the price tends to reach the demand at the bottom.

In that case, we can look for a price action setup for a short term sell position, there is a 50 pips space between the demands.

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