Technical Classroom: What is Trend & Higher Peaks - Higher Troughs?

Chandan Taparia

Motilal Oswal Securities

Technical Classroom - 4

Three premises on which Technical Analysis builds up

1. Price discounts everything

2. Price moves in a trend

3. History repeats itself

Technical Analysis works on below mention concepts

1. There is enough liquidity in the market

2. There are sufficient buyers and sellers at all prevalent price levels

3. All the known information are always built in the price at any given point of time in a fairly liquid stock or market

4. Any unforeseen event or news can change the basic trend of the underlying security or market

5. Understanding the underlying demand and supply is the basic theme of Technical analysis

6. If the demand pressure is high, prices will move up and if the supply is greater than prices will come down

7. It helps us in taking decision of trading, investment or disinvestment

Technical Analysts believe that trend is your friend, follow the trend till it doesn’t bend. So identifying trend is an important and top most part of a chart analysis. Trend may vary as per the time duration of chart as many times long term trend remains bullish, medium term trend also bullish while short term may be bearish.

Basic Bull trend: Higher top – higher bottom / higher peaks – higher troughs. The principle of Technical is to ride the rally till a particular chart continues its higher peaks and higher troughs formation.

Basic Bear trend: Lower top – lower bottom / lower peaks – lower troughs: The principle is to ride the downside till it doesn’t negate the formation, or one can take contra trade for a bounce back once the previous setup is violated.

Higher peaks and higher troughs suggests that demand and supply zones are shifting higher while in sideways market one may not get higher peaks and troughs which suggests that demand and supply is intact at particular zones.

One can use such kind of basic concept of Dow Theory, like formation of higher highs – higher lows or higher top – higher bottom. It helps to identify short term or long term trades by not going in to much complexity but it requires lots of practice and common sense to come at the conclusion for trade setup.