One of the main premises of technical analysis is that prices do trend. The concept of trend although very simple is of crucial importance to market analysis.

Most of us hear the terms “the trend is your friend” or “follow the trend”. These terms have one implicit meaning: Knowing the direction of the trend and participating in it is the only way to make money in the financial markets.

Simply stated the trend is the direction of the market and which way it is moving.

If you look at any price chart you will notice that it is made of a series of peaks and troughs, the direction, or trend, of these peaks and trough is either moving upward or downward or is flat.

An upward trend is a series of successive peaks that penetrate previous high points, interrupted by troughs or sell offs terminating above previous troughs or sell offs.

A downward trend is a series of successive declines that penetrate previous low points, interrupted by rallies that terminated below the preceding peaks.

A flat trend is a horizontal pattern referred to as a trading range.

Further more the trend has three classifications: Major, intermediate or secondary and short term.

The Dow theory can explain the distinction between major, intermediate and short term.

Dow compared each of the above three classifications to the sea; the tide would be the major or primary trend, lasting more than a year. The waves that make up the tide would be the secondary or intermediate trend lasting three weeks to three months.

The secondary correction usually retraces between one-third to two-thirds of the previous trend movement or 50 percent.

The minor or short-term trends would be the ripples on the waves, lasting less than three weeks.

By observing the highest point on the beach reached by the waves you can determine the direction of the tide, if the next wave reaches further in then its preceding wave the tide is flowing in. if the high point of each successive wave retreats the tide is ebbing.

A full understanding and distinction between each classification can make the difference in buying and selling decisions.

It is only be identifying the major trend correctly, and later being able to distinguish between a change in the major trend or a secondary interruption or correction, that you can accurately time your buys and sells to maximize profits and minimize losses.

The trader is always faced with three decisions: Whether to buy (go long), or sell (go short) or do nothing.

Going short is an approach that is not yet activated in the Saudi stock market, it is one of the most difficult concepts for the novice trader to understand, it is the idea of selling a stock first that you do not own, and then buying it later at a lower price, the difference between buying and selling is your profit.

The buying strategy works in a rising market, the short selling strategy works in a falling market, and standing aside would be the best approach to a sideway-trending market.

By the end of 2003 the Saudi stock market went into a major bull run, an average investor following a buy and hold strategy could have made a minimum of 200 percent by simply holding on to his/her investment and selling before the crash of February 2006.

A person with a full understanding of the trend concept could have made up to 500 percent or more by acting on intermediate or secondary trends.