Technical Analysis: Trends and Time Frames

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How long do short-term trends typically last?

3 to 6 weeks

What is the primary concern of long-term investors?

Determining the direction of the primary trend

What is the purpose of analyzing intermediate trends?

To improve success rates in trading

What represents the short-term trends in the market cycle model?

A dashed line

Why do short-term traders need to know the direction of the intermediate and primary trends?

Because of the principle that smaller movements are influenced by larger movements

How long do intermediate trends typically last?

6 weeks to 9 months

According to the technical principle, where do major surprises occur?

With the main trend

What is a key difference between intraday and longer-term trends?

Intraday trends have a very short-term implication and are more influenced by psychology

What is the main characteristic of the secular trend?

It is a long-term trend that lasts over 10 years

What is a common trait of intraday price action?

It is erratic and less reliable

What is the primary objective of technical analysis?

To identify a price trend reversal

What is constructed from a number of primary trends?

The secular trend

What does the 'art' in technical analysis refer to?

Combining indicators to recognize a trend

What is the average duration of a secular trend?

15-20 years

What indicates a trend reversal in a series of rising peaks and troughs?

An interruption in the series

What is a peak in a trend?

The end of a bullish market

What is a trough in a trend?

The end of a bearish market

What is the term used to describe the price action experienced by all securities?

Zigzag pattern

What is the minimum retracement required for a reaction to be considered legitimate?

One-third of the previous move

What happens if a retracement move is less than one-third of the previous move?

The peak or trough is held to be suspect

What is the maximum retracement that can occur in a reaction?

100 percent of the previous move

What is the percentage of retracement in the example shown in Figure 1.6?

50 percent

How precise is technical analysis in determining trends and turning points?

Far from precise

What is the typical duration of a primary trend?

9 months to 2 years

What is the purpose of identifying reversals in the primary trend?

To position short-term trades and long-term investments in the direction of the main trend

What can be observed in a primary upswing?

Several reactions along the way

What is the approximate duration of a business cycle?

3.6 years

Why do bull markets generally last longer than bear markets?

Because building up takes longer than tearing down

What are the countercyclical trends within a primary bull market known as?

Intermediate price movements

Study Notes

  • 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.
  • 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.
  • 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.

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.

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