Markets fluctuate constantly under various factors such as economic and political elements. These fluctuations, which continue over a certain period and follow a specific direction, form trends. Trends show the general inclination of the markets. Therefore, it is one of the fundamental indicators followed by market participants.
How Long Do Trends Last?
A trend describes the general direction of a market or an asset. For a movement to be considered a trend, the price must move in the same direction over a certain period. This duration can be a few days, weeks, months, or even years. The shortness of the period does not prevent the movement from being defined as a trend. Each trader considers trends of different lengths according to their trading strategy.
Trends are fundamentally divided into three categories according to their duration:
Primary Trend: The primary trend usually refers to price movements that continue in the same direction over a year or longer. These types of trends form the general economic cycle of the market and are associated with the market's fundamental variables.
Intermediate Trend: Intermediate trends last between a few weeks and a few months and occur opposite to the primary trend. These trends appear as corrections during the primary trend and do not indicate the end of the primary trend.
Short-Term Trend: Short-term trends typically last from a few days to weeks. These trends are formed by short-term rapid fluctuations due to data flows, news, or market speculations.
What Are the Types of Trends?
Trends are divided into three main categories:
Uptrend: An uptrend is characterized by the price forming higher highs and higher lows over a certain period. In an uptrend, optimism prevails in the market, and the risk appetite of market participants is high.
Downtrend: A downtrend is characterized by a continuously declining price, making lower lows and lower highs. This usually occurs during economic pessimism and when the risk appetite decreases.
Sideways Trend: A sideways trend is when the price does not make new highs or lows but fluctuates within a certain range. Sideways trends often occur before major developments that cause market participants to remain undecided and during periods of uncertainty.
Why Is the Trend Important?
Traders examine the trend before taking any position in the market because trends depict the direction that market participants believe the price will go. Therefore, trading in the direction of the trend reduces potential risk and increases the likelihood of making a profit. Martin Zweig meant this by saying, "Trend is your friend."
If most market participants believe that an asset's price will increase, the price will ultimately increase. Meanwhile, others believe that the price will decrease. Therefore, no asset's price increases or decreases in a straight line. Which side is in the majority determines the ultimate direction of the price, but until then, the price may fluctuate intermittently.
On the other hand, over time, the expectations of market participants can be influenced by many factors. Developments that lead to a reversal of expectations can result in a reversal of the trend. At this point, Edward Arthur Seykota's famous saying, "The trend is your friend until the end when it bends," comes to mind. Seykota reminds traders that no trend lasts forever. Therefore, every trader must monitor trends and remember that trends may reverse.
Conclusion
In conclusion, trends are one of the most fundamental elements of financial markets. Monitoring trends to understand market inclinations and accordingly strategize is of critical importance.