Trends

Trend is the directed prices’ movement (growth or falling) during some period of time. Upward ("bullish") trend (uptrend) is observed when every new rise of prices reaches the more high level, than previous growth, and every new price decline stops at the more high level, than preceding slump. Thus, the trend line "supports" the chart from below, connecting the series of local minimums of prices. At downward ("bearish") trend (downtrend) the trend line limits the price chart from above, connecting the series of local peaks of prices.
According to some estimations, up to 70% time on the market of price fluctuations do not reveal any distinct tendency. Trading range, also named "sideways trend", is characteristic of this phase of market. Although, formally only two nearby points are enough for the drawing of trend line, there should exist at least one more tangency point of line and prices, in order to ascertain the stability of exposed trend. After the tendency was determined, the breakout by prices of trend lines can signal about the possible change of its direction. Thus, the following criteria matter:
• Size of breakout
Most widely is used the "three percent rule": price change for 3% and more in the opposite to trend direction the next day after a breakout can serve as the signal of tendency break;
• Time of breakout formation
In addition to the first criterion sometimes apply the "two days rule": in two days of prices’ movement in direction, opposite to the trend, it is possible to state the change of the dominant tendency.

   Analysis of trend lines

Foundation of classic trend analysis are lines of resistance and support. All trend lines, models and figures – are just combinations of resistance and support lines.
The resistance line connects important maximums (tops) of market. It appears at the moment when buyers either can not anymore or do not want to buy this commodity at more high prices. Simultaneously with every price movement up grows resistance of sellers and increase sales, that also renders downward pressure on a price.
Trend stops growing and as though rests against the invisible ceiling, it can not break through at the moment. If "bulls" will pull oneself up or "bears" will weaken the grip, a price will probably break through the level of resistance set before. Otherwise, the reverse price movement is inevitable – the so-called "setback".
The support line connects important minimums (bottoms) of market. Origin and existence of support lines is directly opposed to the situation with the resistance line. Here "bulls" change over with "bears". Sellers are active players on the market: they push a price down, and buyers is the defended part here. The more active will be sellers and the more passive buyers, the higher probability that the level of support line will be broken through and a price will go down further.
To draw the resistance and support lines is better through the areas of prices accumulation, but not through their maximal spikes on tops and bottoms. The mass accumulation of prices shows that here the conduct of determining amount of traders has changed the direction, and the maximal spikes of prices in such places indicate aspiration of weak market participants to close the unprofitable positions hastily.

The analysis method of resistance and support lines helps traders to watch after the tendency change – its turn or strengthening. These levels are especially important for giving protective stop-orders.
It is necessary to watch constantly after the dynamics of trend lines. If a trader remembers that recently a price pushed off from some support level and went up, next time he will prefer to make a purchase at this level with the larger likelihood ratio. If a price pushed off from the resistance level and went down and a trader remembers about it, probably, next time he will sell at this level.
However, there is no clear variant of drawing of trend lines; they can be drawn variously on the same chart. It takes place because the trend line usually supposes connection of few relative maximums or relative minimums. If more than 2 points are needed to connect, the exact line will be possible only in that rare case, when their interrelation is strictly linear. In reality the drawn trend line will go only through some relative maximums/minimums, omitting other. The choice of maximums and minimums points, through which will be drawn the trend line, depends on who analyses the chart.

   Basic graphical formations

All price formations are classified by that forecasted value which they bear for further movement:
• formations of trend reversal;
• formations of trend continuation;
• dual formations.

Graphical formations of trend reversal
The major reversal formations include "head and shoulders", "double top", "triple top", "saucer" and V formation. Let’s consider each of them in details.
The "head and shoulders" pattern consists of three successive price peaks, the average among which ("head") rises above two another ("shoulders") by height. "Shoulders" are approximately on one level and identical distance on the left and on the right of the "head". Hence is such an original name. This formation appears at the end of upward trends and signals about the approaching break of tendency and turn of market down.
The reverse situation is observed at the development of downward trends, and in this case proper formation is named "reverse head and shoulders".

The "double top" pattern on the bar charts consists of two successive peaks of prices that have approximately the equal height (difference usually makes no more than 2-3%). This formation reminds the letter "M" and is met in the final phases of strong upward trends.

The "triple top" pattern reminds the "head and shoulders" pattern with only that difference, that the central top has approximately the same height as two another.

Unlike other trend reversal formations, the "saucer" pattern (round top/bottom) is the strongly smoothed, rounded top or bottom, reflecting the slow and gradual change of trend direction to the opposite one. Like other patterns, the "saucer", as a rule, is a rather symmetric figure.
The V pattern is the sharp change of upward trend to the downward and vice versa.

Graphical formations of trend continuation

Formations of trend continuation are formed at temporal pauses in forward prices’ movement that usually arise during development of trends. From the reversal formations they are distinguished by, that in this case usually is only consolidated, and earlier or later continue movement in former direction. The different types of "triangles", "wedge" and "flag" belong to the number of basic continuing formations.
In general case "triangle" pattern emerges during deceleration of growth or price decline in trend, when a market is temporally stabilized before the beginning of the new rise or slump. The typical triangle is formed with two lines converging at the acute angle, executing the role of support and resistance. As a rule, the point of their intersection is on the right and is the top of the triangle. Prices accomplish damped fluctuations between the lines of triangle. Thus, every next rise stops on the more low level, than previous one, and every next slump ends at the more high level, than preceding one.

There are three basic varieties of "triangle": ascending, descending and symmetric.

The "ascending triangle" is characteristic of upward trend where it acts as continuation formation. In it the upper side (resistance line) should run horizontally or with small inclination to the time axis.
The ascending triangle, as a rule, ends in the price breakout up.

The "descending triangle" is the plane reflection of ascending one and the most credible end is the price breakout down.

The "symmetric triangle" is characterized that its sides are inclined symmetric in relation to the time axis. Such triangle often appears both on upward and downward trends in periods of prices consolidation and specifies the continuation of market movement in former direction.

The "wedge" is also the continuation formation that strongly reminds an ordinary triangle. The wedge is formed by two converging lines, connecting few successive peaks and slumps of prices formed during the market fluctuations in the period of consolidation. However, in the wedge these lines are inclined in the same side. The falling wedge usually reflects a temporal pause in the development of upward trend, and the growing wedge is characteristic of corrections on downward trend.

When development of the new strong trend begins on the market and prices direct almost vertically upward or downward, after some time inevitably comes the short pause. At this time the market is consolidated on the threshold of the new strong rush in the direction of trend. Exactly in such pauses, prices form a figure, known under the "flag" name.

The "flag" has the parallelogram form, formed with the support and resistance lines that are almost parallel each other and inclined in direction, opposite to the basic one.

Some figures are dual – in different situations they can be either as breakout formations or as continuation formations of tendency.