Read and Understanding Market Trend

Long-term investors are principally concerned with the direction of the primary trend.

It is apparent by now that the price level of any market is influenced simultaneously by several different trends, and it is important to understand which type is being monitored. For example, if a reversal in a short-term trend has just taken place, a much smaller price movement may be expected than if I the primary trend had reversed.

Long-term investors are principally concerned with the direction of the primary trend, and thus it is important for them to have some perspective on the maturity of the prevailing bull or bear market. However, long-term investors must also be aware of intermediate term and, to a lesser extent, short-term trends. This is because an important step in the analysis is an examination and understanding of the relationship between short and intermediate term trends, and how they affect the primary trend.

Also, if it is concluded that the long-term trend has just reversed to the upside, it may pay to wait before committing capital because the short-term trend is overextended on the upside. A lack of knowledge of the short-term trend's position by an investor could therefore prove costly at the margin.

Short-term traders are principally concerned with smaller movements in price, but they also need to know the direction of the intermediate and primary trends, This is because surprises occur on the upside in a bull market and on the downside in a bear market. In other words, rising short term trends within the confines of a bull market are likely to be much greater in magnitude than short-term downtrends and vice versa.

A trading loss usually happens because the trader is positioned in a countercyclical position against the main trend. In effect, all market participants need to have some kind of working knowledge of all three trends, although the emphasis will depend on whether their orientation comes from an investment or a short term trading perspective.