Trend and flat simple words for newbies traders

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We continue a series of articles in which we consider the basics of trading in the market. In this case, we consider one of the most simple and common concepts, namely, what is a trend.

A trend is a directional price movement. There are upward and downward trends in the markets.

An uptrend, where every next peak and price decline is higher than anticipating.

Here is a trend line, which is initially built on two points and, accordingly, goes further in the same direction. The market responds to this line, and in the area of ​​this zone is adjusted.

That is, each next minimum is higher than the previous one, each next maximum is greater than the previous one – this is the uptrend.

In this case, we see an example of the growth of gold, which is at a correctional level.

Downtrend. The figure shows a graph of oil. You can see that each next low is lower than the previous one, each next high is also lower than the previous one.

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In this case, we see a corridor, also a flat, price range. An example is the EUR / USD pair.

A corridor is a chart where each candle represents one week price fluctuation. This figure shows that the price is in a certain range and, accordingly, there are certain maximums that are formed in this channel, there are also false breakdowns. We can also note the minimums within the framework of which the correctional movement and market reversal take place.

In fact, there are three incarnations of the upward, downward and corridor trend that any trader needs to understand.

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Keep It Simple and Trade With the Trend

As a trader, you have probably heard the old adage that it is best to “trade with the trend.” The trend, say all the pundits, is your friend. This is sage advice as long as you know and can accept that the trend can end. And then the trend is not your friend.

So how can we determine the direction of the trend? We believe in the KISS rule, which says, “keep it simple, stupid!” Here is a method of determining the trend, and a simple method of anticipating the end of the trend.

Before we get started, we want to mention the importance of time frames in determining the trend. Usually, when we are analyzing long-term investments, the long-term time frame dominates the shorter time frames. However, for intraday purposes, the shorter time frame could be of greater value. Trades can be divided into three classes of trading styles or segments: the intra-day, the swing, and the position trade.

Large commercial traders, such as those companies setting up production in a foreign country, might be interested in the fate of the currency over a long period of such as months or years. But for speculators, a weekly chart can be accepted as the “long-term.”

Averages Moving in Pairs

With a weekly chart as the initial reference, we can then go about determining the long-term trend for a speculative trader. To do this we will resort to two very useful tools that will help us determine the trend. These two tools are the simple moving average and the exponential moving average.

Chart 1: May 2006-July 2008

In the weekly chart above, you can see that for the period of May 2006 until July 2008 the blue 20 interval period exponential moving average is above the red 55 simple moving average and both are sloping upward. This indicates the trend is showing a rise of the euro and therefore a weakening dollar.

In August 2008, the short-term moving average (blue) on the chart below turned down, indicating a potential change in trend although the long-term average (red) had not yet done so.

Finding the Change in Trend

In October, the 20-day moving average crossed over the 55-day moving average. Both were then sloping downward. At this point, the trend has changed to the downside and short positions against the euro would be successful.

Chart 2: October Short-Term Moving Average

Still looking at Chart 2, we notice that the short-term moving average goes relatively flat in December 2008 and starts to turn up, now indicating a potential change in trend to the upside. But a closer look at the 55-day moving average, as of December 2008, shows that the long-term moving average has remained downward sloping.

By checking Chart 2, we can see that the first arrow from the left indicates that the long-term moving average has turned down, indicating that the weekly or longer term trend for the EUR/USD has now gone down. The second arrow indicates where a new short position could have been successfully taken once the price had traded back to the down sloping moving average.

The goal here is to determine the trend direction, not when to enter or exit a trade. Of course, this is not to say that there were no trading opportunities in the shorter time frames such as the daily and hourly charts. But for those traders who want to trade with the trend, rather than trading the correction, one could wait for the trend to resume and again trade in the direction of the trend.

What Does Trading Flat Mean?

What Does Flat Mean?

Flat, in the securities market, is a price that is neither rising nor declining. Under fixed income terminology, a bond that is trading without accrued interest is said to be flat. In forex, flat refers to the condition of being neither long nor short in a particular currency, and is also referred to as ‘being square.’

Understanding Flat Stocks

When the stock market has made little to no movement over a period of time, it is said to be a flat market. This does not mean that all publicly traded securities in the market are making no significant movements. Instead, the increasing price movement of some sector or industry stocks may be offset by an equal declining movement in the prices of securities from other sectors. Investors and traders looking for profits in a flat market are better off trading individual stocks with upward momentum, rather than trading the market indices.

Individual stocks can also be flat. For example, if a stock over the last month has been trading around $30, it can be thought of as trading flat. Bombardier Inc. (TSX:BBD-B.TO) is considered a flat stock as it has averaged around $3 in the past five years (2020 to 2020). Writing covered calls is a good strategy to profit from a stock that stays flat or goes down modestly.

Understanding Flat Bonds

A bond is trading flat if the buyer of the bond is not responsible for paying the interest that has accrued since the last payment (accrued interest is usually part of the bond purchase price). In effect, a flat bond is a bond that is trading without the accrued interest. The price of a flat bond is referred to as the flat price or clean price. Typically, flat prices are quoted so as not to misrepresent the daily increase in the dirty price (bond price plus accrued interest) since accrued interest does not change the yield to maturity (YTM) of the bond.

A bond also trades flat if interest payment on the bond is due but the issuer is in default. Bonds that are in default are to be traded flat without calculation of accrued interest and with delivery of the coupons which have not been paid by the issuers. Also, if a bond settles on the same date as the interest is paid and, therefore, no additional interest has accrued beyond the amount already paid out, the bond is said to trade flat.

Flat Position in Forex Trading

Being flat is a position taken by a trader in forex trading when s/he is unsure about the direction of currencies trading in the market. If you had no positions in the U.S. dollar or your long and short positions canceled each other out, you would be flat or have a flat book. The flat position is considered a positive position given that although the trader is not making any profits by standing on the sidelines, s/he is also not making any losses.

A flat can also refer to a trade in which the currency pair has not moved significantly up or down and, therefore, has no large gain or loss attributed to the forex trading position. Since a flat price stays within the same range and hardly moves, a horizontal or sideways trend can negatively affect the trade position.

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