What are waves ?
Swings are called waves when the swing legs are labelled by numbers or letters.
A wave pattern consists of minimum 3 waves : ABC. 5 wave patterns are 12345.
Knowing wave patterns helps to predict the next swing and trade it.
Trend – Up trend and down trend
A Trend is when the price swings/waves move in one direction
A single swing is not a trend
A trend moves in two sorts of patterns
Bull trend (uptrend): a sequence of low (L), high (H), higher low (HL), higher high (HH)
Bear trend (downtrend): a sequence of H, L, Lower high (LH), Lower Low (LL)
Identifying the strength of Trend
The momentum of the Trend - shows the rate of change in price movement over a period
Good momentum can lead to fast moves so a big win.
The probability of the expected direction with the trend is high
A weak trend or weakening momentum can provide trading opportunities for the reversal of the trend.
How to know the momentum of a Trend?
Moving averages are used to analyze if a trend is going strong or weak.
Supertrend - Another trend following indicator more or less similar to Moving Averages called Supertrend. Green indicates bullish momentum and Red is for bearish momentum.
Broad Channel and steep channel
Steep channel – higher momentum
Broad channel – slower momentum or a larger trend
A break of the channel indicates a slowing down of momentum and the price will usually target the larger channel
Correction part of a trend
Price will be swinging up and down of the moving average usually a bigger one like 200 moving average.
After a range, the price can also reverse the previous trend instead of resuming it.
Pullbacks are a retracement of the trend.
When expecting a Trend, the pullbacks or correction of a trend will not retrace the corresponding impulsive wave by more than 100% whereas a correction can be a trending or non-trending pattern.
Support resistance, channels, moving averages and Fibonacci retracements are tools used for trading the pullback levels
