Application #1 - Chapter 1: The Definition and Interaction of Trends

As mentioned in progress report #3, a clear downfall in my current study plan is there's not enough emphasis on application. As a result of this, you'll be seeing more posts beginning with "Application", to reflect the increased focus on putting study material into practice.

The aim is to cover a chapter every two days. This is likely to change as the book I'm studying (Technical Analysis Explained [Fifth Edition] by Martin J. Pring) covers many subtopics in each chapter. One point I'd like to make clear is that not all the material in the book will be covered in these application posts, just the topics I see as critical.

With that out of the way, I'll now focus on applying primary, intermediate and short term trends. A trend being defined as a period in which a price moves in an irregular but persistent direction.

Primary Trends

Time Span: 9 months to 2 years

On the monthly BTC/USD chart below, I've plotted roughly where I believe each primary trend starts from May 2014 to present day. Note how I've charted it on a logarithmic (proportionate) chart, which allows easy viewing of the years where price is low as opposed to an arithmetic (incremental) chart which would simply show a flat line. Note that the time span suggested isn't a hard and fast rule. Trends can occasionally fall outside their expected range.

We can see quite easily why there's nervous energy around price these days - low volume, potentially a lower high incoming and we're reaching the outer limits of primary trend.

Since writing this, Russia has invaded Ukraine so it's anyone's guess what happens now...

Intermediate Trends

Time Span: 6 weeks to 9 months

For this chart, I've reduced the time frame down to weekly, to better understand the trend.

Although we're in a pandemic, WWIII is round the corner and economic indicators look ridiculous, there's potential from a purely trend chartist point of view that we could go up further still. We need to close higher than we did on the 10th Jan (~43k) and remain above the close on the 17th Jan (~36.3k) to reverse the downtrend we've seen since November.

Something to note about intermediate trends, is they are prone to being deceptive in nature. As long as the primary trend indicates otherwise, we're still in a bull market. It's the intermediate trend that has us panicking, along with surrounding world events.

Short-Term Trends

Time Span: 3 to 6 weeks

Shorter time spans are harder to identify trends on than longer time spans. This was evident when I analysed the chart below as there are many more data points compared to the charts earlier in this post. Perhaps that's why short term trading is so hard?

Concluding Points

• Short-term traders should be aware of long-term trends and long-term investors should be aware of short-term trends.

• Trading against the primary trend is an easy way to lose money i.e. always trade in the direction of the primary trend.

• Trends are easier to identify on longer term charts and are also more reliable.

• BTC primary trend is still bullish, however intermediate trends have been bearish for some time which can lead us to thinking we are in a bear market.

When I began writing this post, I thought I would get a lot more done in just a couple of days. I think it's best for me to just make my way through chapters, picking out applications I believe to be useful and working through them in my own time. Doing so will mean a more thorough approach and I'll likely learn more to boot!

Addition: Peak and Troughs & Assessment Score

Continuing on with the same chapter, there is an element I should have taken into account while doing this applicant - this is peaks and troughs. The idea being similar to that of the ripple effect of waves against a shoreline, in that it is possible to identify the turning of a tide by watching for a reversal of receding wave action at low tide.

When a series of rising peaks and troughs is broken, this signals a reversal. In an uptrend, this will be when the next low is lower than the previous low and the next high is lower than the previous high.

This needs to be in conjunction with the weight of evidence. To me, this is how the situation looks for the pair being traded, as well as macro influences as well (currently inflation, war etc.).

Technically speaking, a reaction to the prevailing trend retrace a third to two-thirds of the previous move. Occasionally, there will be exceptions to this but this is a strong rule of thumb. This can also be applied to the length of time a correction takes i.e. the time taken for it to complete would be approximately a third-or more of the time taken to form the rally it relates to.

Thought I would add that as a quick recap of the material, rather than add this onto the charts above.

Assessment Score: 11/12 questions answered correctly from the study guide for Chapter 1.

/End