July 19, 2014

How to identify a trend


We all keep hearing the "trend is your friend" or "follow the trend" etc but what is a trend?

A trend is the persistence of a stock to move in a particular direction (up or down) over extended periods of time. 

Since TA principles are independent of time, different trends can co-exist simultaneously over different time frames. For eg., it is common for weekly trend to up and daily trend to be down. Ditto for intraday charts.


A trend should always be treated as intact until there is a clear signal that the opposite trend has started.

Knowledge of a trend is important. This will help you trade on the winning side of the market and prevent you from taking decisions which run counter to the broader trend of the market.

Bullish trend

A bull trend is a series of higher highs and higher lows. The start of an up trend is signaled when price makes a higher low (trough), followed by a rally above the previous high (peak). The end is signaled formation of a lower high (peak), followed by a close below the previous low (trough). 

The peaks (HH) are also called as swing high and trough (HL) as swing low.

Bearish trend

A bear trend is a series of lower highs and lower lows. The start of a down trend is signaled when price makes a lower high (peak), followed by a break of the previous low (trough). The end is signaled formation of a higher low (trough), followed by a close above the previous high (peak). 

The LH is swing high and LL is swing low.

Example of trends

I have given examples using line charts... these are visually very easy to understand. For trading purposes, one should use a combination of line charts and candlesticks as the latter have the advantage of giving early signals.

The horizontal lines refer to applicable swing highs/ lows... these can be used as breakout levels or stoplosses.

Sample stock -5 min charts





Same stock - hourly charts



Same stock - daily charts



10 comments:

  1. a trader needs to have good understanding of 10 m 15 m , 30 m , 60 m , daily , weekly charts to identify trends , entry ,exit points ,

    ReplyDelete
    Replies
    1. Two time frames are more than enough. One is the current/ preferred trading timeframe and the other to get the bigger view.

      Delete
    2. is it as simple as that?

      Delete
    3. @sam - you can make it more complicated if you wish but it will be counter productive.

      In reality, once you learn how to manage the price and market behaviour, you need not learn anything else. All indicators are a waste of time... they apparently seek to make things easier or automate processes but eventually if you want to reduce the number of "fails" you have to dump indicators and go visual.

      So line chart followed by candlesticks give the clearest view of the market and can help you formulate your strategy. This calls for more mental work so in that sense it is not easy. But once you develop your own strategy, then the only work involved is following it.

      Delete
  2. kpl ji, if i invest for say 3 months to 2/3 years then what time frame will be good for me.

    ReplyDelete
    Replies
    1. For 3 months, use daily charts.
      For 3 years, use weekly charts.

      Delete
  3. For intra day trades what time frames would you recommend Sirji?

    ReplyDelete
    Replies
    1. 5 min... all my nifty charts posted in this blog show this timeframes

      Delete
  4. can u explain wolfe wave ?? and how to trade with it as a day trader?

    ReplyDelete
    Replies
    1. Visit http://www.wolfewave.com/what_is_the_wolfewave.htm

      I have no idea how to use this.

      Delete