By Carl Paraskevas - Chief Economist
In my 20+ years’ experience trading and advising on financial markets, I’ve seen both beginners and seasoned traders make one big mistake; they fail to correctly assess the current market trend with sometimes catastrophic consequence to their P&L. It is safe to say that having the wrong premises about current market conditions invariably leads to poor predictions about the future.
Proper trend analysis can help you avoid some of the most common pitfalls involved in trading, giving you that extra edge no matter your trading style: be it technical, fundamental or algorithmic. It also opens the door to a deeper understanding of more advanced forms of analysis.
Better yet, learning is easy, and the tenants are universal across any market you trade. You just need to recognise whether the market for a given timeframe is either: 1) in an uptrend, 2) a downtrend, or 3) rangebound.
It sounds so simple; you might think you don’t need to keep reading and can just eyeball your charts. But, markets, whether trending or rangebound don’t move in a nice orderly linear fashion.
Impulsive & Corrective
To the contrary, when markets trend they typically move in consecutive waves composed of an impulse move in the direction of the larger trend followed by smaller corrective move in the opposite direction.
The #1 tip for traders is don’t confuse a corrective move for a change in trend. Markets, not only can, but most likely will, move in the opposite direction of their trend for a period.
Stay alert for the next article in our education series, where we will be discussing how to accurately determine whether a market is trending and in what direction.
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