Highlights ①. Gate's "Basic Futures Courses" course introduces various methods of technical analysis that are commonly employed in futures trading. These courses aim to help traders establish a comprehensive framework for technical analysis. Covered topics include the basics of Candlestick charts, technical patterns, moving averages, trend lines, and the application of technical indicators. ②. This piece will delve into the principles of trend trading. Prior to exploring the associated trading strategies, it will start by acquainting readers with the three types of trends: short-term, medium-term, and long-term. Ultimately, the article will examine the connection between trading with the trend and trading based on value.
1. Dow Theory’s discussion of trends Dow Theory believes that price trends can be divided into three categories. They are: ①. The long-term trend, also known as the general trend, constitutes the well-known bull market and bear market. Long-term trends can last for a long time span, varying from a few months to a few years;
②. The mid-term trend often appears in the consolidation stage, reflecting a major adjustment of a long-term trend. It usually lasts from a few weeks to a few months;
③. Short-term trends, which are also called minor trends, pertain to transient price movements that occur over a short period. These minor fluctuations are short-lived, typically dissipating within 6 days, and even the more extended variations rarely persist beyond 3 weeks.
2. What are long, medium and short trends？ - Long-term trend ①. The Dow Theory divides long-term trends into bull markets and bear markets. During a bull market, prices are predominantly increasing, whereas in a bear market, the trend is largely downward. ②. It usually takes three stages to form a bull market: A. Recovery from depression At this stage, far-sighted trend traders (such as professional left-hand traders) and insightful value-based traders (investment) begin to enter the market to accumulate positions. Despite the prevailing market gloom, they anticipate a potential market recovery and begin purchasing assets from less bold and visionary traders. Consequently, prices begin to rise, which, in turn, prompts additional sell-offs. It's important to note that all this activity occurs in a lackluster market, potentially at what might be considered its bleakest point.
B. In the second stage, there is a consistent upward trend in prices along with a gradual rise in trading volume. The market is bustling and flourishing, and its profitability becomes a hot topic among participants. During this phase, adept trend traders and patient value-oriented investors stand to reap significant profits.
C. The market enters the emblematic third stage, characterized by the coin's value reaching unprecedented peaks each day, a period rife with stories of newfound millionaires. At this point, a commonly overlooked reality is that the bullish trend, potentially spanning two or three years, may be nearing its pivot point to decline. This signals the moment to divest from all positions.
- Medium-term trend ①. The medium-term trend signifies a significant downswing within a bull market or a notable upturn within a bear market, typically enduring from three weeks to a few months.
②. The medium-term trend is prone to misinterpretation. Often, when a medium-term trend exhibits a relatively broad scope of fluctuation and persists for an extended period, it is mistakenly believed to indicate a shift in the long-term trend.
③. On the other hand, the early phase of a long-term trend may be misidentified as a medium-term trend. For instance, the initial uptick at the start of a bull market could be misconstrued as a brief rally during an ongoing bear market. Similarly, when prices begin to fall at the onset of a bear market, this decline could be falsely characterized as a medium-term correction within an overall bullish trend.
- Short-term trend ①. Short-term trends refer to brief fluctuations which generally exist for less than 6 days and rarely can exist beyond three weeks. ②. Short-term trends come together to establish the medium-term trend, and act as a connecting phase between the long-term and medium-term trends. The majority of medium-term trends are typically formed from a sequence of distinct short-term waves. ③. Dow Theory posits that of the three aforementioned trends, the short-term trend is the only one susceptible to manipulation by individuals, so it holds minimal directional value for traders in their transaction decisions.
3. Trends analysis is the basis for value-based trading and technical trading - Value-based trading Basic analysis,also known as fundamental analysis, is primary methods used by value-based traders to detemine the timing of opening positions. To use methods, the first step is to assess the intrinsic value of assets, by looking into a series of factors that affect the value of crypto assets, including macroeconomic environment, industry conditions, company operating conditions, etc. Then by comparing the assessed value and the current price performance of the assets, one can decide the direction of positions.
- Technical trading For those who rely on technical analysis, the belief is that the price reflects and digests all available information. In a mature bear market, indicators that technical analysts consider—like market trends, trading patterns, and investor sentiment—typically hit rock bottom. Similarly, elements pertinent to fundamental analysis, such as sector health, economic conditions, and fiscal policies, are also at their lowest ebb. Thus, a bear market represents a convergence of various analytical indicators, all echoing lows in unison. Conversely, a bull market represents the reverse, where these factors collectively signal highs.
4. Technical trading and value-based trading are interdependent and independent of each other
Value-based trading and technical trading represent two distinct approaches to market analysis, each operating autonomously yet also interlinked. That is to say, while they function independently, value-based analysis is a crucial component of technical trading, and conversely, technical analysis is an essential aspect of value-based trading. Each informs and complements the other in the evaluation of market positions.
The following is an illustration of a full bull-bear cycle in the cryptocurrency market, which allows us to see the shifts in market sentiment, trading patterns, and the mindset of traders as the market transitions from a bullish phase to a bearish one:
①. Following a steep and prolonged downturn, the market continues to be gloomy. Despite the lingering malaise, astute value-based traders discern opportunities for a rebound and start initiating positions. Contrarian investors, often referred to as 'left-hand traders', detect the prospect of an upcoming bull market and begin to acquire assets at low prices. Gradually, the momentum of buying begins to gather strength.
②. As the market starts to fluctuate upwards, it sets new highs that surpass the previous peaks achieved during the rebound in the bear market. Even when there are dips, the market consistently recovers without reaching new lows. These are all indications that the market is gaining momentum. At this point, 'right-hand traders,' who typically wait for more confirmation before entering the market, now have sufficient signals to also begin establishing their positions.
③. As purchase orders steadily accumulate, the market grows more vibrant each day. With a clear uptrend established, right-hand investors start to increase their positions. At this point, the bull market is widely recognized. The flourishing market is accompanied by a stream of positive news, and both currency prices and trading volumes continue to climb.
④. Faced with a market that persistently reaches new heights, value-based investors recognize that the current boom is inflated into a bubble with diminishing intrinsic value of the assets, prompting them to start liquidating their holdings. Left-hand traders sense the mounting sell-side pressure and foresee that the exuberant market may be approaching its peak, leading them to also start unloading their positions.
⑤. Ultimately, the market takes a downward turn. This unfavorable shift raises alarm among right-hand traders, who then commence offloading their positions as well. The sell orders increase, triggering a drop in prices.
⑥. Before the market settles into a consistent downturn, there will be several vigorous rebounds. Right-hand traders take advantage of these rallies to divest any remaining positions they hold. During this stage, the rebounds are merely temporary, and after these brief upticks, the market will resume its downward trajectory.
⑦. The market eventually enters a stable bearish phase characterized by a prolonged descent, with the end of the downturn appearing distant. Value-based traders, left-hand traders, and right-hand traders all maintain short positions and wait patiently for signs of change.
⑧. The descent persists, with trading volume dwindling. The market remains in a state of gloom, and trading gradually fades from daily conversation, no longer a hot topic. The moment the market touches its lowest point also signals a time of awakening for value-based traders and left-hand traders. They begin a new cycle of activity, much like animals emerging from hibernation to forage anew. Aside from these proactive traders, the majority of market participants, whose capital is trapped due to the market's collapse, are numbed by the prolonged experience of significant losses. This low enthusiasm for trading results in subdued transaction data and infrequent price fluctuations within a narrow range.
The history of the market is essentially a repetition of the aforementioned bear-bull transition process, which outlines the shifting trends throughout the cyclical changes. Transactions that result in losses are typically those that go against the direction of the prevailing trend. This cycle perpetuates over time, serving as the foundation upon which trend traders develop their strategies. Although there are no clear-cut demarcations between the two phases, they are distinct from one another and can be readily identified by experienced traders.
5. Summary
In a broad sense, trend describe how things move forward by going through periodical changes. It exists in movements of all subjects, be it in the natural realm or human society, pertains to both the material and spiritual existence . Trends underlie the fundamental manner in which everything moves.
The movement trend in the crypto market illustrates the repetitive cycle of bull and bear shifts, highlighting that the market navigates through wave-like, cyclical motions while advancing in a fluctuating manner. Grasping the patterns of these trending movements is essential for making informed and prudent decisions.
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Disclaimer This article is for informational purposes only and does not constitute investment advice. Gate is not responsible for any investment decisions you make. Content related to technical analysis, market assessments, trading skills, and traders' insights should not be considered a basis for investment. Investing carries potential risks and uncertainties. This article offers no guarantees or assurances of returns on any type of investment.
