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In this column of Tech School, we shall look at some of the complexities associated with the trend.
Technical analysis on a security can be done in different time frames such as long-term, intermediate-term, medium-term, short-term and intraday. Trends occur across these time frames in a fractal manner.
In other words, price moves forming peaks and troughs in every time period. But the type of trend can vary between these time periods. For example, the trend could be down in the short-term, up in the medium-term, sideways in the long-term and so on.
To put this concept differently, every trend is a portion of its next bigger trend. In chart, (refer weekly chart of Marico), one would notice that the stock has been on a steady long-term (more then one year time-frame is said to be long-term) uptrend from its 2008 low around Rs 46.5.
The rising trend-line below the higher peaks and higher troughs highlights this up trend-line which is marked in blue colour.
In the same chart, the down trend-line marked in red colour represents corrective or counter medium-term downtrend, between July 2011 peak of Rs 172 and December 2011 low of Rs 134. This is a correction or counter trend for the long-term up trend-line. Within the medium-term down trend there are short-term up and downtrends.
A trader or an investor can select the time-frame that he wants to trade or invest in, depending upon his inclination and investment horizon.
If we go back to the example of Marico, a long-term investor would be holding the stock bought at lower levels since the long-term trend in the stock is up.
But a medium trader (swing trader) could have shorted the stock during July or August 2011 and booked profit around November or December 2011. Short-term and day traders would have executed numerous trades in the period, both buy and sell.
Multiple time frame analysis is about considering the trend across all the time frames in a particular stock to arrive at a decision at the kind of trade to execute. In this analysis, the trend in the larger time frame is said to prevail.
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