One of the most helpful tools to analyze market movements is trend analysis. Each trend consists of a number of distinctive elements, most prominently the main trend line. There are, however, many more trend lines. They show short lived trends that deviate from the main trend line, and can even run into the opposite direction.
This article will help you make sense of the many trend lines of a trend. You will learn what to expect and predict, and how to trade these predictions. If you have problems with any of the terminology, please see our article about trend terminology.
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Once you have discovered the main trend line for a trend, you will see many smaller trends following their own trend line. Some of these trend lines will only be valid for a very short period of time, some for a longer period of time, and some will even run in the opposite direction of the main trend line.
For each major trend there are an almost infinite number of smaller trends. Starting from a daily chart, a trader can work his way to a tick chart, and find each simple movement in the bigger time frame consisting of a number of trends in a smaller time frame. Even while staying in one time frame, a trader can make out a number of trends. Each movement from point 2 to 3 and vice versa consists of a trend, as you can see in the picture below. When two trend lines collide, the bigger trend will usually prevail over the smaller trend.
As a trader, it is important to recognize these smaller trends. Binary options are short-term investments. Therefore, when the general market is in an uptrend, but the reversal from point 2 to 3 has created a temporary downtrend, you should invest in the direction of the shorter trend, since it is more relevant to the time frame you are trading.
This applies to all investments you make with binary options:
You have to invest in the trend that is valid for the time frame you are trading. For example, 60 Seconds options and High/ Low options with an expiration time of one day need to be traded with different trends. The trend that is valid for 60 Seconds does not to concern a trader with an expiration time of one day.
Even the most persistent trend line will eventually lose its significance. Once the price crosses a trend line, one of three things can happen:
1: First of all, the trend can continue as it has in the past, but the trend line will flatten a little bit. This happens especially to young trends in daily charts. When a trend is created by big news hitting the market, the first reaction by traders is the strongest. After a while, this effect will fade away. The trend will therefore lose some of its momentum, and the trend line will flatten. The trend’s direction, however, can remain valid for a long period of time into the future.
2: As a second possibility, the price could enter a period of sideways movement, and create a continuation or a reverse pattern. After some time, the price will create a new trend with a new trend line, either in its original direction, or in the opposite direction.
3: The third possibility is an immediate reversal, and the creation of a new trend in the opposite direction.
Which possibility will happen in the end is hard to predict. Before making a prediction, you should wait until the price movement gives you a good indication of what it will do next.
In any case, the price of an assets crossing a trend line will result in many traders losing faith in the trend, and either selling their assets in trend direction or investing in the opposite direction of the trend. This will lead to a short but strong movement against the trend’s direction.
The more significant the trend line was, the bigger the resulting movement will be. Depending on the time frame of the trend, you can trade this movement with a High/Low option or a 30/60 Seconds option.