As far as I'm concerned as a trader at Forex , the problem of finding a proper trend is one of the keystones in understanding of the market. On the surface of it, it is quite simple. One has just to make use of the trend definition as the currency stably-forward movement, then to open a deal concerning the trend and to gain profit.
In the trend absence (a flat, lateral movement), one must not take risks and stay outside the market. Otherwise, as it is written in all the manuals of Forex , one should open deals on "sell" at maximums of uptrend and on "buy" at minimums of downtrends.
It is so logical and simple, isn't it?
However, the first thing that makes me wonder is the following. Authors of numerous books concerning Forex pass the problem of the trend detection clear criteria over in silence (respectively, they do not dwell on opening deals by a trader in this trend). Even B. Williams has omitted this principal problem (the author who has written about Elliott's waves, fractals, changes in the momentum direction, divergence, target zone, cushion pads, etc.).
So, what is the trend by definition? What are its criteria? In what a temporal chart is it detectable? I mean that one wants to open a deal not "just for fun" but in order to gain profit faultlessly and regularly. As I can see, this problem is not elucidated in the literature.
However, the problem of the trend detection is primary with respect to the problems of a fractal, "Alligator", "a wonderful indicator", etc.
Thus, who does teach whom and to what? How can one gain profit? For instance, in what cases the stochastic indicator is applicable? Let us suppose that this indicator fails to function in a trend. At the same time, we do not know how to detect these trends... One can clearly see the logical consequences of this situation.
So, the stochastic indicator exists by itself, indicating something every second (as well as many other "classical" indicators at Forex do). Forex market is operating separately. Traders are on their own as well - they either work or play. It is necessary to find out the keystone of the whole system in order to link all of its elements together. That is, we need a certain indicator to detect the trend. Respectively, we can distinguish a flat, the trend replacement, etc. Various indicators are applicable at different stages in the currency pair movement.
Dozens of various indicators and techniques are developed by "Classics" and "Masters" of Forex . Such "specialists" do not see the system as a whole. All the same, they try to prove the reliability of their mathematical techniques of detecting particularities, whereas the whole pattern remains unknown.
Therefore, it is worthwhile to dwell on this problem more in detail. The scheme of the examination is the same as in all chapters of this book. That is:
a) elucidation of the problem in the classical literature;
b) the unresolved contradictions that hamper a trader to gain profits regularly;
c) my approach to this problem and, respectively, the method of gaining profits.
CONCEPT DEFINITION of TREND in MANUALS of FOREX
Here I do not want to dwell on the basic definitions again. What a trend represents by itself, its classical figures of reversal and continuation, the movement channels, etc. - all these aspects are in detail elucidated in the corresponding literature. As a matter of fact, the beginners pay $150-500 to various Forex Brokers for this information.
Any fundamental course of Forex takes for granted the following definition of a trend, formulated by Ch. Dow in the 1930s. The trend is the tendency in the price movement when each of the next maximums is higher (lower) than the previous one (the same relates to the minimums).
There are the three types of trends:
· "bull" - the price is going upwards;
· "bear" - the price is going downwards;
· "lateral" - the price is moving within the trading range (channel), unable of breaking through the levels of resistance neither from upward nor from downward.
Is it so easy? On the face of it, "The Trend is Your Friend ". That is, one must open deals only in accordance with the trend direction. In this way, one can receive a profit automatically - the gaining will "just come to you"! At the same time, why do 90% of traders keep on losing their deposits at Forex ?
There are even verses dedicated to this problem. It can be translated approximately like this: "A trend should me whisper how to enter and when to exit. In vain, I'm visiting forum with friends. To quit it! We howl and wail". Here I'm not going to discuss this work of art (as well as the quality of the translation). However, the essence of the problem is depicted perfectly. That is, any trader-loser asks the same question: "What is the trend in its essence?"
The problem becomes obvious. Even the concept of "trend" is obscure. That is, nothing is clear and simple - notwithstanding the information submitted in every manual for the beginners.
And what is more, many traders in earnest consider that there are no long-term prospects for trends at Forex.
· Nobody understands the concept of trend;
· Some traders, rather experienced and successful, don't mind the problems of this kind - i.e., they don't care for the trend concept. They are not interested in detecting trends at Forex.
At Forex , the problem of the trend identification is important from the only point of view. That is, a trader wants to understand how to detect a trend and its criteria (not post factum !). An individual wants to clearly see the applicability of such criteria to any currency pair at any second. The goal is to open deals at the very beginning by making use of these criteria in order to regularly make money at Forex . As regards any trader, this problem is purely practical. To work in accordance with the trend, which is "my friend", it is necessary to calculate the point of beginning of the trend and its direction. In this way we get a section (segment), where a trader can gain profits faultlessly.
From this practical viewpoint we will examine classifications of trends given by various classics of Forex . We want to detect various trends (i.e., the price directed movement) according to their techniques. Our goal is to regularly gain profits when we work with these trends.
TREND CLASSIFICATION by CHARLES DOW
The classification submitted by Ch. Dow can shock and muddle up a contemporary trader. Really, towards what direction a deal must be opened? Must it be done either upwards, or downwards? Or, probably, it would be better just stay out of the market because of the flat. Ch. Dow's theory is still not disproved by anybody. According to this theory, there are the following types of trends.
1. A long-term trend lasts several years (according to Dow, it is the basic trend). Can you imagine what a currency pair it must be to make you to stay in this deal during such a period?
2. A medium-term trend lasts several months (the intermediate tendency). According to Dow, the direction of this trend is opposite to the long-term basic trend. In its essence, the intermediate trend is corrective (it depicts retracement ). Below one can see the charts of the two principal currency pairs movement. The medium-term trend of the duration of several months is depicted. However, the long-term (basic!) trend of the duration of several years is absent.
3. The short-term trend lasts not longer than three weeks. It consists of short-term oscillations in the framework of the intermediate tendency.
4. The comment . According to Dow, the intra-day trade is just "small ripples", and not much attention should be paid to it. Nevertheless, the fact of its existence must be mentioned.
There arise the questions:
a). How many traders do work in the long-term trend of the duration of several years? Personally I do not know anybody. How is it possible to keep the deal open during such a long time interval? Above all, towards what direction this deal must be carried on? - See the charts D1 that depict the movement of EURO/USD and GBP/USD pairs.
b). How many traders do work in the medium-term trend and hold up deals opened during several months and longer? And what is more, traders must risk! Really, according to Dow's theory, the medium-term trend, being corrective to the basic one, goes in the opposite direction. Personally I know a few of such traders.
c). How many traders do work in the short-term trend? According to Dow, such trends last not longer than three weeks, being just short-term oscillations in the framework of the intermediate tendency. A few of traders work with short-term trends as well.
d). Nowadays the majority of traders work with intra-day trends. 100 years ago such trends were regarded as absurdity and nonsense. Ch. Dow considered such trends to be just "small ripples, not worthwhile of one's attention.
Thus, there at least three types of trends (the "bull", "bear" and flat). This figure must be multiplied by their four varieties that differ in the duration. You can see how many variations are possible! In addition, in what direction and for what time interval must a trader open his deal?
You can imagine what an extended "front of operations" analysts of Forex have!
You can find the technical analysis given by JPMorgan Securities Ltd. London to USD/SWISSI movement on September 27. The medium-term trend is of the "bear" type; during the short-term trend the upward retracement occurs. The long-term trend is ascending (the uptrend).
Issuing from the recommendations given by JPMorgan Securities Ltd and FX EURO CLUB , who can tell me towards what direction a deal must be opened? (Is it the uptrend or downtrend?). In any case, post factum such "analysts" can explain anything. They had warned you.... Why were you guided by the medium-term trend under the condition of the short-term retracement ? Why did not you pay attention to the long-term trend? Are you an investor who disregards the short-term downtrend when the medium-term trend is directed towards the opposite direction, while the lateral trend lasts already for two years? These are the reasons for your losses. As it is evident, the number of such answers to traders is unlimited.
The FIRST CLASSIFICATION of TRENDS according to E. NAIMAN
Let us examine how another up-to-date classic of Forex presents the trend classification (see "The trader's small encyclopedia" by E. Naiman ):
- the long-term trend, the period of which makes two years or longer;
- the prevailing (dominant) trend; its period is one year;
- the primary cycle (or medium-term trend); its period is within 9 -26 weeks;
- the trade cycle of the duration of 4 weeks;
- the semi-prime cycle; its period is in the middle of the duration of the primary and trade cycles;
- the a / b cycle of the duration of 2 weeks.
Another important aspect of the formation of the cycles and giving analysis to them must be mentioned. It is the right- and left translations.
The right translation consists in the following. In the first phase of the cycle (the uptrend) the impulsive lines are tilted to the right with respect to the time like axis. The left translation occurs in the second phase of the cycle (the downtrend) when the impulsive lines are tilted to the left with respect to the time like axis.
As regards the application of the right and left translations, the following fact is the most interesting. In the "bull" trend the rise is slower than the decrease (the retracement ). In the "bear" trend the rise (the retracement ) is quicker than the decrease. If you notice such dynamics in prices, you can classify the trend type and predict the reversal more accurately.
The classical theory of cycles marks out the following 5 phases (stages) in the cycle development:
- the preliminary phase (the introduction);
- the rise (development);
- the maturity;
- saturation;
- decrease and recoil.
Can you understand this classification? Personally I cannot.
Besides, I think that the trend up-to-date classification by E. Naiman (2003) is even more perplexed than the classification by Ch. Dow (1930s).
In addition, in another part of his book E. Naiman submits one more classification of trends.
The SECOND CLASSIFICATION of TRENDS according to E. NAIMAN
The duration (life time) of the trend and its life cycle.
As regards their duration, trends can be the following:
a) the short-term trend;
b) the medium-term trend;
c) the long-term trend.
All trends differ in their life time. The analysis may be given to various intervals in the course of the trend life time.
On average, the long-term trend lasts 2-2.5 years. The medium-term trend lasts from 3-6 months and up to a year. The short-term trend can last from 1 day to 3 months. The trend life time can be determined by giving analysis to the trend life cycle (TLC). It is very important to correctly determine the cycle duration.
How to discern TLC
a). the beginning (the birth, childhood and youth);
b). the middle of the term (the maturity);
c). the end (the old age and death).
Even you may have no time to detect the trend beginning. However, it does not matter so much. More importantly is to get at least into the middle of the trend. The trend center is much more profitable than the first stage because of the speculative warming-up. You must be especially careful when the trend is dieing. You risk having no time to gain profit. Even worse, you can suffer heavy losses (take a bath) if you will be enable to react to the trend reversal.
The THIRD CLASSIFICATION of TRENDS according to E. NAIMAN
Bell curve model
This model of the price dynamics is applied by financial and technical analysts of Forex already the last 30 years. This cyclic model is based on the study of the three fundamental types of the market dynamics:
a) the long -term trend;
b) the medium-term trend;
c) the short -term trend.
According to this model, the long-term trend lasts 4-4.5 years. The cycle "bull" stage lasts 28±1 months. The "bear" stage lasts 15±1 months. To understand whether a given trend is a long-term one, it is recommended to make use of monthly charts. Long-term trends are mainly used by those investors who carry out real investments.
The medium-term trend duration (the second cyclic wave) is 20±1 weeks. The "bull" stage lasts 12±1 weeks. The "bear" stage lasts 8±1 weeks. Generally speaking, one can see the medium-term trend twice a year. Its "bull" stage coincides with the "bull" stage of the long-term trend 3-4 times during the total cycle. The "bear" stages of these trends coincide 1-3 times. The majority of traders prefer to make deals exactly in periods of the unidirectional dynamics of development of these trends. To detect medium-term trends, it is advisable to examine weekly charts. The results of giving analysis to medium-term cycles are valuable for those traders who possess substantial investment resources to hold on the positions open during rather long time intervals.
The short-term trend is the third wave of the cycle in question. The total short-term trend lasts 39±1 days (as it is considered, there are 240 trade (marketing) days in the calendar year (CY)). In one CY there can be 5-7 short-term trends. To detect them, it is advisable to examine daily charts. Both traders and short-term speculators analyze short-term trends for their work. The best positions for making the corresponding deals belong to interval where the price movement direction in the medium-term trend coincides with that of in the short-term one.
Thus, the long-term trend lasts 4 years and 1 month. The "bear" stage lasts 42 months, and the "bull" stage duration is 8 months. The long duration of the long-term trend first stage is conditioned by the protracted medium-term trend at the beginning of the complete cycle The latter makes 107 weeks, and consists of 87 "bear" weeks + 20 "bull" weeks. The medium-term trend duration varies within 7-37 weeks. In general, short-term trends rather precisely depict all principal oscillations of the price about the medium-term trends. There are 3 short-term trends, where the dynamics development direction coincides with that of the long-term trend. In the retracement (correction), one can single out two basic short-term trends, which is in the perfect agreement with the theory. It is difficult to distinguish short-term trends from medium-term ones because of the negligibility (minority) of the second stage in the complete cycle development.
So, should a trader remain in a deal during 1 day, 3 months or 3 years in order to gain the maximum profit?
The FOURTH CLASSIFICATION of TRENDS according to E. NAIMAN
The trend 4th classification by E. Naiman has confused even me. Let us try to understand what types of trends exist according to it. Below we issue from Naiman's recommendations for opening deals.
Possible strategies of the work. The choice of one of the three techniques available depends on the period under analysis and the trader's preferences.
The first strategy consists in keeping the positions open during a long time interval (from a few days and up to several months). This strategy is used by large-scale investors (investors-strategists) and semi-professional speculators. It is the most effective in the trend springing up. This approach is the least profitable when trends are lateral or stagnant (sluggish). A kind of security against losses (a cushion pad of a sort) and the corresponding work at the terminal market of options are necessary.
The second strategy consists in the work with medium-term trends of the duration up to several days. It is also popular mainly with semi-professional speculators. This approach combines advantages, inherent in various working strategies. On the one hand, this strategy can be long-term enough. On the other hand, it can be rather short-term. A suspension pillow of a kind (a security net) at the market of options is also desirable.
The third strategy implies opening of short-time positions (their duration varies from several minutes up to some hours). This strategy is applied by speculators-professionals, who know the market well enough and already "have developed a sense" of it. The positive aspect of this approach is the following. Unexpected messages and changes in the price that appear at the moment when you were out of the market do not affect your trading. At the same time, indirect expenses are rather heavy (the commission, spread, communication services, etc.). Besides, there are great risks of unfavorable short-term oscillations of the price. That is, a trader must be continuously concentrated. The whole day long such an individual works under the condition of self-control and stress.
CONCLUSIONS MADE by NAIMAN about HIS CLASSIFICATION of TRENDS
As it is mentioned above, Naiman writes that, as regards the trend types, there are no strict rules, established once and forever. Anybody's opinion about an object under analysis can be too subjective. Therefore, it cannot be taken for granted and must be thoroughly checked by a trader himself.
In the theory of cycles it is important now and then to look anew at the regularities discovered by you earlier. The so-called "the rule of mirror" is one of the best means of avoiding subjectivism. That is, logic of the development of any cycle must be confirmed not only directly. The inverse pattern, as if reflected in the mirror, must also prove the correctness of your model. For this purpose, you should reverse a sheet where the cycles are plotted. The cycles must be seen all the same (this can be done with the help of a mirror). The principal problem of all cyclic theories is the following. It is easy to see a certain pattern in the past, while at present it is rather dubious. As regards the future development, in practice, it is totally uncertain and unpredictable.
See continuation of this article under name "Where to look for trends at Forex, or the faultless gaining of profit by a trader. (Part II)"
