wave patterns & Trend

Wave patterns & Trends

• What are waves ?

• Wave patterns and its role in chart analysis

• Trend – Up trend and down trend

• Identifying strength of Trend

• Correction part of Trend

Swings are called waves when the swing legs are labeled 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.

What are waves ?

Wave patterns and its role in chart

analysis

A Trend is when the price swings/waves move in one direction

Trend – Up trend and Down trend

• 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)

UP

TREND

DOWN

TREND

Bear trend (down trend): a sequence of H,

L, Lower high (LH), Lower Low (LL)

L to H is Impulsive, H-HL is

Corrective, HL to HH is Impulsive

.

H to L is Impulsive, L to LH is

Corrective, LH to LL is Impulsive

.

Trend – Up trend and Down trend

Momentum of Trend - shows the rate of change in price movement over a period

• Good momentum can lead to fast moves so big win.

• Probability of expected direction with the trend is high

• Weak trend or weakening momentum can provide trading opportunities for the reversal

of the trend.

Identifying strength of Trend

How to know the momentum of Trend?

Moving averages are used to analyze if a trend is going strong or weak.

200 MA

21 MA

Identifying strength of Trend

Supertrend

Another trend following indicator more or less similar to Moving Averages called Supertrend. Green

indicates bullish momentum and Red is for bearish momentum

Identifying strength of Trend

Trend Channel

Broad channel and steep channel

Steep channel – higher momentum

Broad channel – slower momentum or

larger trend

Break of channel indicates slowing

down of momentum and price will

usually target the larger channel

Identifying strength of Trend

Trend Channel

Correction part of a trend

• Non-trending movements

• Price will be swinging up and down of the moving average

usually a bigger one like 200 moving average.

• After a range, price can also reverse the previous trend

instead of resuming it.

• Pullbacks are 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

Impulsive up

swing

Range/p

ull back

Range/p

ull back

Images