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Questions and Answers
How long do short-term trends typically last?
What is the primary concern of long-term investors?
What is the purpose of analyzing intermediate trends?
What represents the short-term trends in the market cycle model?
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Why do short-term traders need to know the direction of the intermediate and primary trends?
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How long do intermediate trends typically last?
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According to the technical principle, where do major surprises occur?
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What is a key difference between intraday and longer-term trends?
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What is the main characteristic of the secular trend?
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What is a common trait of intraday price action?
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What is the primary objective of technical analysis?
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What is constructed from a number of primary trends?
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What does the 'art' in technical analysis refer to?
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What is the average duration of a secular trend?
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What indicates a trend reversal in a series of rising peaks and troughs?
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What is a peak in a trend?
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What is a trough in a trend?
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What is the term used to describe the price action experienced by all securities?
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What is the minimum retracement required for a reaction to be considered legitimate?
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What happens if a retracement move is less than one-third of the previous move?
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What is the maximum retracement that can occur in a reaction?
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What is the percentage of retracement in the example shown in Figure 1.6?
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How precise is technical analysis in determining trends and turning points?
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What is the typical duration of a primary trend?
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What is the purpose of identifying reversals in the primary trend?
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What can be observed in a primary upswing?
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What is the approximate duration of a business cycle?
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Why do bull markets generally last longer than bear markets?
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What are the countercyclical trends within a primary bull market known as?
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Study Notes
Definition and Interaction of Trends
- A legitimate peak and trough is determined by a reaction to the prevailing trend, which should retrace between one-third and two-thirds of the previous move.
- If a retracement move is less than the minimum one-third, the peak or trough in question is considered suspect.
Peaks and Troughs
- Peaks and troughs are patterns developed by the price action of all securities.
- Prices never move in straight lines, whether in an uptrend or a downtrend.
- The term "zigzag pattern" is used to describe the peaks and troughs.
Technical Analysis
- Technical analysis is the art of identifying a trend reversal based on the weight of evidence.
- The "evidence" consists of scientifically derived indicators or techniques that work well most of the time in the trend-identification process.
- The "art" consists of combining these indicators into an overall picture and recognizing when that picture resembles a market peak or trough.
Trends
- There are three widely followed trends: Primary, Intermediate, and Short-term.
- Primary Trend:
- Lasts between 9 months and 2 years.
- Reflects investors' attitudes toward unfolding fundamentals in the business cycle.
- Concerned with identifying reversals in the primary trend.
- Intermediate Trend:
- Lasts anywhere from 6 weeks to 9 months.
- Known as intermediate price movements.
- Important for improving success rates in trading and determining when the primary movement may have run its course.
- Short-term Trend:
- Lasts 3 to 6 weeks.
- Interrupts the course of the intermediate cycle.
- Influenced by random news events.
- Far more difficult to identify than their intermediate or primary counterparts.
Market Cycle Model
- Long-term investors are concerned with the direction of the primary trend.
- Short-term traders are concerned with smaller movements in price, but need to know the direction of the intermediate and primary trends.
- The principle of "surprises occur in the direction of the main trend" applies.
Supplementary Trends
- Intraday Trend:
- Applies equally to very short-term movements.
- Reversals only have a very short-term implication and are not significant for longer-term price reversals.
- Extremely short-term price movements are influenced by psychology and instant reaction to news events.
- Secular Trend (Super Cycle):
- Lasts over 10 years, often as long as 25 years.
- Consists of a number of primary trends.
- A long wave that extends over a substantially greater period.
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Description
Test your understanding of technical analysis, including the application of principles to different time frames, from one-minute bars to monthly charts. Learn about the three widely followed trends, including primary, intermediate, and short-term trends.
