Trend Analysis For Short Term Traders

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The Quick Guide To Forex Technical Analysis

By Tyson Clayton

Beside fundamental and sentiment analysis, technical analysis is one of the most popular types of analysis in any financial market. This is especially true for the foreign exchange market, where many traders rely exclusively on technical analysis to draw conclusions about future price movements of a currency pair.

What is Technical Analysis

Technical analysis is based on the assumption that historic price levels can be used to predict future price movement. It is a form of pattern recognition dependent on the idea that humans work in a relatively consistent manner.

One of the most important things required for the successful operation of technical analysis is a lot of historic data, which is why the forex market is a prime opportunity for those who would like to use technical analysis in their trading.

Since the forex market is open 24 hours a day, and has the highest daily turnover of any financial market, it’s perfect for traders who use technical analysis as their primary type of analysis.

Technical analysis helps traders look for trends rather than arbitrage opportunities. It’s not about what can be gained right now, but knowing where a currency is going to move in the future and reacting with prescience.

The flow of capital based on economic, political, and psychological factors is what will determine the future rate of a currency. Technical analysis assumes that all fundamental information is already discounted in the current exchange rate, which makes the chart the best friend of a trader.

While fundamental analysis tends to focus on whether a currency is overvalued or undervalued relative to its equilibrium value, technical analysis is interested on whether the currency moves upwards, downwards, or sideways. If a currency pair breaks above or below an important historic price level, technical-based models will issue a recommendation to go long or short on that pair, regardless of the fundamental “fair” value of a currency.

There are three major trends that can form in the forex market: upward trends, downward trends, or sideway trends.

The sideways range indicates that a currency is range-bound and is going to maintain said rate for a period of time. To identify these trends, traders often draw lines connected by the highs and lows of the price, which then form support and resistance levels. Other popular tools include drawing trendlines and channels to project the current trend into the future.

There is usually a lot of hidden information in this data, and a technical trader believes it can be used to conclude future price movement that will allow him to make some profit.

Upward and downward trends can be visualized as a series of primary and secondary waves, where the primary waves move the currency pair in the direction of the broader trend, and secondary waves act as corrective phases of the primary waves. The following chart shows a typical upward and downward trend in the forex market.

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As a general rule, the major currency pairs (anything including the USD, such as GBP/USD, EUR/USD, USD/JPY) tend to form trends, whereas currency crosses (pairs involving major currencies but excluding the USD) remain range-bound. This can be attributed to the way people classify these countries.

For a long time, some of the major currencies such as USD, JPY and CHF have been seen as safe-havens and when there is trouble in the world, money usually flows into these currencies, forming trends. The interesting part about this is that different currencies have their own personalities and patterns, which creates trading opportunities as traders analyze the movement of different currencies in different ways.

Technical Analysis in Short-Term and Long-Term Trading

When performed on shorter time-frames, technical analysis usually gives better results than any other type of analysis. Short-term trading is in the most part influenced by technical levels, and this is especially true if a currency trades around its long-term fair value.

The reason for this is that fundamental traders will most likely stand beside the market and will not open new positions if a currency is close to its equilibrium level, which gives place for technical traders to fully employ all tools of technical analysis. In the long run, however, currencies tend to move in the direction of their fundamental equilibrium level.

According to a survey of FX dealers published in “How Do UK-Based Foreign Exchange Dealers Think Their Market Operates?”, a whopping 97% of FX dealers believed that fundamental factors played no important role in short-term price movements, while 87% felt that fundamental factors are the main driving force on a long-run basis beyond 6 months.

According to the survey, technical factors are the crucial force behind price movements on an intraday and short-term basis.

This is the reason why technical analysis is so popular with shorter-term traders, such as day traders and swing traders. They use technical models in their daily trading which can be a combination of trend-following rules, counter-trend trading, breakout trading and swing trading.

Using Technical Indicators

Although trends are the most basic aspect of technical analysis; there are also many indicators that are employed for the purpose of predicting where a price is going to move in the future. These include moving averages, stochastics, MACD, RSI, Bollinger Bands and other.

Some of these indicators are used to identify potential oversold and overbought levels, such as stochastics and RSI, while others are used to measure price volatility, such as Bollinger Bands. Although technical indicators can be used in a variety of ways, they all have in common that they use data of previous price levels for their calculation.

Before You Trade

Overall, technical analysis is a way of examining the wisdom of the crowds and using it to your advantage. As a forex trading strategy, it is viable and has a lot of solid data to back it up. Technical analysis is especially popular in short-term trading, where it returns the best results. In the longer-run, fundamental analysis tends to have an edge over technical analysis.

Technical traders can use a variety of tools, such as trendlines, channels, support and resistance levels and technical indicators, to perform their analysis regardless of where the currency stands in relation to its “fair” value.

In the 6th issue of ForTrader.org magazine, we will consider a trading strategy that works with short-term trends. The strategy is based on the Moving Average indicator with a period of 200 and Stochastic with periods of 14.

Trading Strategy Algorithm

The strategy uses 2 charts with different time periods (15-minute and one-hour), as well as two technical indicators: moving average with a period of 200 and slow Stochastic with a period of 14.

Fig. 1. Workspace.

Search for a signal to enter the market:

1. Compare the moving averages on the 15-minute and hourly chart. The presence of a trend is a situation when the price on both charts was above or below the moving average (see Fig. 1.).

2. When we have identified the trend, we analyze the 15-minute chart for its compliance with two conditions (they must be observed at the same time):

  • The price should be no more than 20 points higher (for buying) or no more than 20 points lower (for selling) the moving average.
  • The fast stochastic line should cross the slow stochastic line below level 20 (for buying) or cross down the slow stochastic line above level 80 (for buying).

Fig. 2. Signal to buy.

Fig. 3. Signal to sell.

3. After entering, install StopLoss. At long position place a stop order 10 points below 200 MA on a 15-minute chart. In case of opening a short position, place StopLoss 10 points above the MA on a 15-minute chart. If the price goes in your direction, we raise or lower (depending on whether you hold a long or short position) a stop to protect profit. For simplicity, in the following examples we used a trailing stop with a move of 25 points from each new top or bottom (When testing, we set StopLoss from the purchase or sale price, and not from the 200 MA line).

Having tested the above rules, we got the following results:

Fig. 4. Testing on EURUSD, M15.

The results show that trading by standard strategy parameters is unprofitable. Let’s try to choose the most optimal parameters from 2007.01.11 to 2008.01.11 and then check them already in the future period up to the current moment.

Having tested various combinations of parameters for EURUSD M15, we settled on the following:

Fig. 5. Strategy optimization results for EURUSD, M15.

Let’s see what results will give optimized strategy.

Fig. 6. The result of the selected parameters during the period from 2007.01.11 to 2008.01.11.

As we can see, the result is positive, for this period the profit amounted to – $ 12020. Let us check now how these parameters work on the future period of January 08.01.11, XNUMX to the present.

Fig. 7. The operation of the system without selection of parameters on the site from 2008.01.11/XNUMX/XNUMX to the present.

Testing showed that the parameters turned out to be workable not only on historical data, where the initial study was conducted, but also on others. The result for two months amounted to just over $ 564.

System testing was carried out with a constant transaction volume of 0,1, without the use of lot management systems.

To summarize

In general, the system showed good results. But still causes controversial feelings, because There are many ambiguities in the description of the strategy. Firstly, exit from transactions is carried out only at StopLoss levels, it would be interesting to use TakeProfit. Secondly, when testing, we get a lot of “false” inputs due to multiple intersections of stochastic lines. The results of the strategy prove that it is worthy of attentionHowever, it still requires some modifications.

Trend Analysis

What is Trend Analysis?

Trend analysis is an analysis of the trend of the company by comparing its financial statements to analyze the trend of market or analysis of the future on the basis of results of past performance and it’s an attempt to make the best decisions on the basis of results of the analysis done.

Trend analysis involves collecting the information from multiple time periods and plotting the collected information on the horizontal line with the objective to find actionable patterns from the given information. In Finance, Trend Analysis is used for Technical analysis and Accounting analysis of stocks.

Types of Trend

#1 – Uptrend

An uptrend or bull market is when financial markets and assets – as with the broader economy level – move in the upward directions and keep increasing prices of the stock or the assets or even the size of the economy over the period of time. This is a time of booming where jobs get created, the economy moves into positive market and sentiments in the markets are favorable and the investment cycle has started.

#2 – Downtrend

A downtrend or bear market is when financial markets and assets prices – as with the broader economy level – move in the downward direction and prices of the stock or the assets or even the size of the economy keeps on decreasing over the period of time. This is the time when companies shut down the operation or shrink the production due to a slump in the sales. Jobs are lost and asset prices start declining, sentiment in the market is not favorable for further investment, investors run for the safe haven of the investment.

#3 – Sideways / horizontal Trend

A sideways/horizontal trend means assets prices or share prices – as with the broader economy level – are not moving in any direction, they are moving sideways, up for some time then down for some time. The direction of the trend cannot be decided this is the trend were investors are worrying about their investment and government is trying to push the economy in the uptrend. Generally sideways or horizontal trend is considered risky because when sentiments will be turned against cannot be predicted hence investors try to keep away in such a situation.

What is the Use of Trend Analysis?

It is used by both – Accounting analysis and technical analysis.

#1 – Use in Accounting

Sales and cost information of the organization’s profit and loss statement can be arranged on a horizontal line for multiple time periods and examined the trends and data inconsistencies. For instance, take the example of a sudden spike in the expenses in a particular quarter followed by a sharp decline in the next period, is an indicator of expenses was booked twice in the first quarter. Thus the trend analysis in accounting is important for examining the financial statements for inaccuracies, to see whether the adjustment of the certain heads should be done before the conclusion is drawn from the financial statements.

Trend Analysis in accounting compares the overall growth of key financial statement line item over the years from the base case.

For example, in the case of Colgate, we assume that 2007 is the base case and analyze the performance in Sales and Net profit over the years.

  • We note that Sales has increased by only 16.3% over a period of 8 years (2008-2020).
  • We also note that the overall net profit has decreased by 20.3% over the 8 year period.

For forecasting, estimated financial statements trend analysis is used for the head where no major changes have happened. For example, if employee expense is taken 18 % of the revenue and major changes have not done in the employees then for estimated financial statements employee expense can be taken as 18 %.

Internal use of the trend analysis in accounting (the revenue and cost analysis) is one of the most useful management tools for the forecasting.

#2 – Use in Technical Analysis

An investor can create his own trend line from the historical stock prices, and he can use this information to predict the future movement of the stock price. The trend can be associated with the given information. Cause and effect relationship must be studied before taking coming to the conclusion of the trend analysis.

  • Trend analysis also involves finding patterns which are occurring over the period of time, like a cup and handle pattern, head and shoulder pattern or reverse head and shoulder pattern.
  • In technical analysis, it can be used in the foreign exchange market, stock market or derivative market. With slight changes, the same analysis can be used in all markets.

Examples of Trend Analysis

  • Examining sales patterns to see if sales are declining because of certain customers or products or sales regions.
  • Examining expenses report claims for proof of fraudulent claims.
  • Examining expense line items to find out if there are any unusual expenditures in a reporting period that require further investigation.
  • Forecast revenue and expense line items into the future for budgeting, for estimating future results.

What is the Importance of Trend Analysis?

  • Trend analysis tries to find out a trend lie a bull market run, and make a profit from that trend unless and until data shows a trend reversal can happen, such as a bull to bear market. It is most helpful for the traders because moving with trends, and not going against them, will make a profit to an investor. The trend is the best friend of the traders is a well-known quote in the market.
  • A trend is nothing but the general direction the market is heading during a specific period of time. Trends can be both growing and decreasing, relating to bearish and bullish markets, respectively. There are no criteria to decide how much time required to find out the trend, generally longer the direction more is the reliable considered. Based on the experience and some empirical analysis some indicators are designed and standard time is kept for such indicators like 14 days moving average, 50 days moving average, 200 days moving average.
  • While there is no specified minimum amount of time required for a direction to be considered a trend, the longer the direction is maintained, the more notable the trend.

Conclusion

The trend is a friend, is a well-known quote in trader’s fraternity. The trader makes a good profit by following the trend. Trend analysis is a not an easy task it required eyes on details and understanding of the market dynamics.

The trend analysis in accounting can be used by management or the analyst to forecast the future financial statement. Following blindly trend can turn out to be dangerous if a proper analysis of the past event is not done.

This has been a guide to what is Trend Analysis and its meaning. Here we discuss how Trend analysis works in Accounting & Technical analysis along with practical examples. You can also learn more from the following resources –

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