Trendiness

Now if you look at those three charts, for example, you will see why the Random Walk Theory is really disproved in practice, and why traders have no fear that their analytical basis is unsound. Quite often a daily chart will look somewhat random, as sometimes happens when there is no real driving force moving the share prices – it’s generally trading sideways. Remember that a price may only be trending about 40% of the time, so there will be periods where you see only apparently random fluctuations. But as soon as you open your eyes to the longer range charts, there can be no doubt that trends exist and therefore can be followed, if trend following is the trading method that you choose. No-one can doubt that the charts do not show a random walk, but exhibit a definite tendency in one direction or another, and this is usually evident when you look at the long-term.

Demonstrating Conflicting Indicators in Trading

These charts show clear directions that the prices are going in for periods of time. They are easy to see in this case, and you would not have a problem if someone told you to describe the direction of the trends. It is very unlikely that the price movements you see could happen by chance, and it is certain that you would not be able to observe the same effect on every different financial security, as you can over time, purely because of random action. You will see virtually every financial instrument going through periods when the price seemingly wanders aimlessly, but you will also be able to find periods of trending.

What you should remember is that you cannot force a price to trend, just because you want to use that method of trading. Observation of what the price is really doing is important if you are to succeed and make good trades, and you will sometimes need to exercise patience in order to find opportunities with a good chance of success. Price charts are not always easy to interpret, and you must learn to read and understand what the chart is telling you.

Trends are a topic that deserves a detailed discussion, and they are the subject of the next module. The module goes into how to find and recognize them, as well as what you can do with them. It is not for nothing that traders have the saying “Let the trend be your friend”, as trends will have a major influence on the effectiveness of your trading career.

After the trend module, we’ll be looking at patterns on charts and how to recognize them. This is another way of using charts to determine which way to trade. The 4th module will go into the ‘shapes’ that you can look for in the price curve, and what they mean. Patterns can be recognized on daily, weekly or monthly charts, as I keep emphasizing – technical analysis is scalable.

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