Chapter 7 – Trending and Ranging Market

Psychology of Trend

“When a stock moves up, are there more buyers than sellers?”

Price action of uptrend

Price action of uptrend

  • When bulls feel optimistic, they don’t mind paying extra.
  • Bears feel tense in an uptrend, they agree to sell at only a higher price.
  • The stronger the feeling, the sharper the rally.
  • Rally ends only when many bulls lose their enthusiasm.
  • Bullish uptrend
    • Each rally reaches a higher high than preceding rally and each decline stops at a higher level than the preceding decline.
    • Successive higher highs, higher lows.
Price action of downtrend

Price action of downtrend

  • When price slides, bears feel optimistic. Sell short at lower prices.
  • Bulls are fearful and agree to buy only at discount.
  • Bears feel like winners, they continue to sell at lower prices.
  • Downtrend ends when bearss start feeling cautious and refuse to sell at lower prices.
  • Bearish downtrend
    • Each successive rally fails to penetrate the high point of the previous rally. Each decline terminates at a lower point than the preceding decline.
    • Successive lower highs and lower lows.

 

  • Bulls and bears are equally strong or weak.
  • When bulls manage to push prices up, bears sell short into the rally.
  • Bargain hunters step in and break the decline.
  • Bears cover short, their buying fuel minor rally.
  • Cycle repeats until either side (bull or bear) decide to take charge.

 

  • Ranging market
    • Prices go nowhere.
    • Markets spend more time in trading range than trends because aimlessness is more common among people than purposeful action.

 

How to identify trend and range

  • No single magic method
    • Identify trends and trading ranges is one of the hardest tasks in technical analysis.
  • Confluence of many methods
    • If they confirm, go for it.
    • If they contradict, pass it.

 

Checklists for Trending or Ranging Market

1.PatternsHighs and lows and irregularities
2.Trend linesTrend line connecting recent highs and lows. Slope of last trend line identifies current trend
3.Moving averagesExponential moving averages e.g. 20, 100, 200 periods
4.IndicatorsSuitable for trending markets
5.Double screenRefer to higher timeframe

 

Trend Change

Following a strong trend, the trend may reverse or change to a range.

Price action of trend change or reversal

Price action of trend change or reversal

 

How about these patterns? Are they trend change signals?

Patterns that do not conform to typical reversal

Patterns that do not conform to typical reversal

  •  Identify trends and trading ranges is one of the hardest tasks in TA.
  • Trends and trading ranges clearly stand out on old charts.
    • The past is fixed and easy to analyse.
    • Future is fluid and uncertain.
  • Shout when it is a trend market.
    • Probably it is the middle or end of a trend.
    • Nobody rings a bell when a trend dissolves into a trading range.
  • Different tactics when trading in trends and in trading ranges.
    • Trending market: many hearts needed. When you go long on uptrend or sell short on downtrend, buckle your seat belt and hang on as the trend continues.
    • Ranging market: Nimble. Buy low sell high.

 

Trade or Wait?

Trending up → the market is so high, it is about to fall?

Trending down → the market will fall some more, let’s wait?

Ranging market → let’s wait for breakout of this range, buy upon breakout, but is it a false breakout?

  • Money management
    • How much are you willing to lose?
    • Therefore determine your stop loss.
    • Wider stop loss in a trending market.
  • Emotional control
    • Stick to your rules.
    • Start with a few stocks that you know.
    • If unsure, pass. The market is always there for you.

 

Can oscillators help?

  • Indicators can contradict one another; some work best in trending markets, some in ranging markets.
  • Beginners will
  • Start off with indicators – that’s the easiest.
  • Have only one indicator.
  • Or often have too many indicators.
  • 3 main types of indicators
  • Trend following: moving averages, MACD, OBV, A/D etc.
  • Oscillators (help identify turning points): Stochastic, RSI, Momentum etc.
  • Miscellaneous indicators
Practical Technical Analysis by TerraSeeds 2006 Course Material Page 26

Practical Technical Analysis by TerraSeeds 2006 Course Material Page 26

Practical Technical Analysis (2006) Chapters 5-6Practical Technical Analysis (2006) Chapters 8-10

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