What is trend trading?

The Dow Theory’s Perspective on Trends

According to Dow Theory, the price trend can be divided into three types:

1. The long-term trend, also known as the primary trend, is used to describe the bull market and bear market. Long-term trends can generally last for several months or several years.

2. The medium-term trend, also known as the adjustment trend, refers to a major price rebound or adjustment. The medium-term trend generally lasts for several weeks or several months.

3. Short-term trends, also known as minor trends, are used to describe short-lived price fluctuations, and can usually last one to several days. The wave is typically less than 6 days, and can hardly go above 3 weeks.

What are long-term, medium-term, and short-term trends?

• Long-term trend

1. The Dow Theory divides long-term trends into bull and bear markets. The bull market, also known as the long market, refers to a market that trends upward in general; otherwise, a market that goes in a downward trend is a bear market, also known as a short market.

2. The evolution of a bull market can usually be divided into three phases:

   1. In its first stage, the market begins to pick up and traders start to increase positions. This stage is for farsighted trend traders (such as professional left-side traders) and farsighted value traders (investors) to enter the market and build their exposure. They can see beyond the bear trend that is currently going on and know recovery is about to come. Driven by such judgment, they invest heavily to buy assets abandoned by traders who are not as farsighted as them and are deeply discouraged by the sluggish market. As a result, the price gradually picks up, driving trading volume up. Note the bearish trend of the market is still lasting at the current stage, perhaps it is at its worst.

   2. The market is on a steady rise in the second stage. The trading volume keeps rising as the currency price continuously goes up, and a vigorous market begins to take shape. At this stage, crypto investment becomes a hot topic for its high returns, and those who profit the most are sophisticated trend traders and patient value traders.

   3. The third stage finally comes, when currency prices soar and hit a new high every day, whilst some investors become millionaires overnight. People are immersed in joy and can easily forget the fact that the bull market has lasted for two years or even longer, and it is time to short their positions.

• Mid-term trend

1. A mid-term trend is a critical downtrend in a bull market or an important uptrend in a bear market, usually lasting from three weeks to several months.

2. The mid-term trend can be easily misinterpreted. On one hand, the mid-term trend that takes a sharp turn from the original trend and endures for a long time, can be misunderstood as a change in the long-term trend.

3. On the other hand, the early stage of the long-term trends can be misinterpreted as an intermediate-term trend. For example, at the beginning of a bull market, the price increase can be misread as an intermediate rally in a bear market. Vice versa, as a bearish trend begins to form, the price decline can be easily misinterpreted as a mid-term adjustment in a bull market.

• Short term trend

1. The short-term trend generally refers to short-lived price fluctuations that happen in less than 6 days, and rarely exceed three weeks.

2. The short-term trends work to make up the medium-term trends and connect the long-term trend and the medium-term trend. Generally speaking, most medium-term price movements are comprised of a series of easily identifiable small waves.

3. According to Dow Theory, compared with long-term and medium-term trends, the short-term trend is the easiest to be manipulated and is therefore of low importance for professional traders.

Trends are the basis for conducting technical and value trading

• Value trading

Value traders make investment decisions based on fundamental analysis. Fundamental analysis, also known as basic analysis, refers to the strategy of evaluating the factors that can influence the intrinsic value and price of encrypted assets. These include macroeconomic environment, industry conditions, and company operating conditions. Based on these, investors evaluate the investment value and its reasonable value before making trades. The direction of the transaction is determined after comparing the asset’s values with current market prices.

• Technical trading

For technical traders, all market information is hidden and reflected in the trading trends. At the end of a bear market, all factors related to technical analysis, such as the market, trading behavior, and traders’ temperament, are at the bottom of the trend movement. The same is true for all factors related to fundamental analysis, such as industry, economy, and economic policy, which are also at the bottom of the trend movement. This means that all technical analysis factors and all fundamental analysis factors resonate with each other at the end of the bear market. Conversely, at the end of a bull market, the opposite applies.

Technical trading and value trading are mutually dependent and independent of each other

Both value trading and technical trading are part of the market behavior. The two are mutually dependent and independent of each other, and each takes the existence of the other as the basis for its own existence.

Below is an example of a complete and evolving process of bull-bear cycles in the crypto market. Let’s see how market sentiment, trading behavior, and traders’ mentality changes in this process:

1. The market tumbles and remains sluggish for a long time. Although the market is stuck in a depression, value traders see a silver lining in the darkness and start to open positions and buy assets. Technical traders who use left-side analysis also begin to invest and buy low in anticipation of an imminent bull market. Buying power starts to recover.

2. The peak of the rising trend has surpassed the highest rebound in the bear market, and even if there is an adjustment, the price will not go to a record low level. The market recovery is obvious, and right-side traders who become aware of the trend start to open positions.

3. As more buying orders flood in, the market starts booming, and the bullish trend becomes obvious. Investors flock to chase the positive trend, and right-side traders increase their positions. Currently, the market has completely evolved into a bull market where transactions are busy, and bullish news is everywhere, pushing currency prices and trading volume to rise steadily

4. The price continuously hits new highs. Value traders begin to question whether market bubbles would dilute asset values, so they start selling coins to close positions. Left-side traders also feel the pressure due to the market frenzy and have a hint of an imminent price peak. As a result, they also start to shut down their positions, getting ready to exit.

5. The market finally turns around, leading the panicked right-side traders to sell assets massively. The selling orders keep increasing in volume, and the coin price begins to fall.

6. The market experiences a robust rebound. Right-side traders continue to short positions; the bearish trend resumes after a short rebound.

7. The market continues to plummet, and the sluggish trend seems to last forever. Be it value traders, left-side traders, or right-side traders, they all maintain short positions, waiting for the end of the bearish wave.

8. The market continues its bearish trend. The volumes are thin, the market is like stagnant water - no waves can be seen, and crypto trade becomes the last topic people want to talk about. Most traders, who have been long stuck in the market and suffer major losses, have become numb and are at their lowest level of interest in trading. Value traders and left-side traders who have already commenced a new journey of profit hunting, are an exception. Trading volume is poor and the price change range and frequency maintain at a moderate level.

History repeats itself again and again, and the cycles go round and round. When investors go against the above trend, they will go with the cycle to lose money, because counter-trend trading also repeats itself. This is the evolving process for all trends and transactions. Although the three trends can be easily mixed up, there are still big differences between them, enabling traders to identify between the two.

Summary

In a broad sense, a trend is a law that describes situations in which all natural and social phenomena in the world, including those in material and spiritual forms, move regularly according to a certain period and amplitude. Moving in a trend is the fundamental way everything moves. The bull-bear cycle is also a moving trend, which refers to the market cycling between bullish and bearish trends in a wave-like, circuitous manner, rather than a straight-line, one-way pattern. Understanding the law of trends is very important for achieving success in trading

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Disclaimer

Please note that this article is for informational purposes only and does not offer investment advice. Gate.io cannot be held responsible for any investment decisions made. The information related to technical analysis, market judgment, trading skills, and traders’ sharing should not be relied upon for investment purposes. Investing carries potential risks and uncertainties, and this article does not guarantee returns on any investment.