The Handbook of Technical Analysis + Test Bank_ The Practitioner\'s Comprehensive Guide to Technical Analysis ( PDFDrive )

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ChAPter 5 trend Analysis


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rend trading has transfixed traders for decades with the promise of rapid profits.
Countless books have been written expounding the virtues and advantages of
such an approach. In this chapter, we shall attempt to unveil the underlying charac-
teristics of trend action and how to decipher pure price action to better understand
the behavior of the market. We will also discuss price filtering and the effective ap-
plication of tradesizing and stopsizing to with respect to technical trade setups.

5.1 Definitions of a Trend


Classification of a trend according to Dow theory
In Dow Theory, trends are classified and defined by their duration and extent:

■ (^) Primary or major trends are longer term and span from months to years
■ (^) Secondary trends or reactions are medium term and span from weeks to
months
■ (^) Minor trends are shorter term and span from days to weeks
L e a r n i n g ob j eCt i v e s
After studying this chapter, you should be able to:
■ Understand the significance of a market trend and its underlying characteristics
■ Recognize the limitations of defining trend and market action
■ Identify early indications of a potential market reversal
■ Read the markets in terms of wave cycles of various degrees
■ Set up effective price filtering for more efficient entries, exits, and trend identification
■ Calculate the optimum tradesize for breakout trades
■ Learn to use channels, trendlines, fan lines, and Drummond geometry to track market
action

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