Wave Patterns & Trend
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Swings are called waves when the swing legs are labelled by numbers or letters.
A wave pattern consists of minimum 3 waves : ABC. 5 wave patterns are 12345.
Knowing wave patterns helps to predict the next swing and trade it.
A Trend is when the price swings/waves move in one direction
A single swing is not a trend
A trend moves in two sorts of patterns
Bull trend (uptrend): a sequence of low (L), high (H), higher low (HL), higher high (HH)
Bear trend (downtrend): a sequence of H, L, Lower high (LH), Lower Low (LL)
Identifying the strength of Trend
The momentum of the Trend - shows the rate of change in price movement over a period
Good momentum can lead to fast moves so a big win.
The probability of the expected direction with the trend is high
A weak trend or weakening momentum can provide trading opportunities for the reversal of the trend.
Moving averages are used to analyze if a trend is going strong or weak.
Supertrend - Another trend following indicator more or less similar to Moving Averages called Supertrend. Green indicates bullish momentum and Red is for bearish momentum.
Trend Channel
Broad Channel and steep channel
Steep channel – higher momentum
Broad channel – slower momentum or a larger trend
A break of the channel indicates a slowing down of momentum and the price will usually target the larger channel
Non-trending movements
Price will be swinging up and down of the moving average usually a bigger one like 200 moving average.
After a range, the price can also reverse the previous trend instead of resuming it.
Pullbacks are a retracement of the trend.
When expecting a Trend, the pullbacks or correction of a trend will not retrace the corresponding impulsive wave by more than 100% whereas a correction can be a trending or non-trending pattern.
Support resistance, channels, moving averages and Fibonacci retracements are tools used for trading the pullback levels
