Pick Out Your Trading Trend
by Martin J. Pring
There are three kinds of trends: short, intermediate and long term. This veteran trader and analyst explains how you can spot them and use them.
T echnical analysis assumes that all the knowledge, hopes, and fears of both active and inactive market participants are reflected in one thing: the price. Even if I am in a cash position, I am still influencing the price because it would be higher if my cash were invested. Thus, prices are determined by psychology. This would just be an interesting observation, except that psychology moves in trends, and so do prices.
Most of the technical tools we use are aimed at identifying trend reversals at an early stage. We ride on trends until the weight of the evidence shows or proves that the trend has reversed -- in this case, the number of reliable technical indicators all pointing in the same direction. Hence, the greater the number of indicators signaling a reversal, the greater the probability that a reversal will take place. It is important to remember that technical analysis only deals in probabilities, never certainties. Unfortunately, there is no known method of forecasting the duration and magnitude of a trend with any degree of consistency. Identifying reversals is hard enough.FIGURE 1: PRIMARY TREND. The classic four-year trend is broken almost equally into bull and bear modes.
What is a trend? How long do they last? Before the advent of intraday charts, there were three generally accepted durations -- primary, intermediate, and short-term.
The main or primary trend (Figure 1) is often referred to as a bull or bear market. Bulls go up and bears go down. Typically, they last from about nine months to two years, while the bear market troughs are separated by just under four years. These trends revolve around the business cycle and tend to repeat. This is true whether the weak phase of the cycle is an actual recession or there is no recession or growth.
Veteran trader and technician Martin J. Pring founded the International Institute for Economic Research in 1981. Pring is the author of several books, including the classic Technical Analysis Explained. He may be reached via E-mail at info@Pring.com/.
Excerpted from an article originally published in the April 2000 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2000, Technical Analysis, Inc.
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