The Trend Is Your Friend PDF Print E-mail
Written by Greg Matthews   
Saturday, 10 July 2010 13:17
One among the most important skill in trading is always to trade with -- moreover not against -- the trend. So what is a trend? A trend is usually defined as a share market grouping sustained over a unique timeframe. The trend might be either high, low otherwise sideways.
by GregMatthews


One among the most important skill in trading is always to trade with -- moreover not against -- the trend. So what is a trend? A trend is usually defined as a share market grouping sustained over a unique timeframe. The trend might be either high, low otherwise sideways.

An uptrend can be described as sequence of upper highs while a downtrend is simply the opposite: a series of lower lows.

That which explains the trend is the trendline. One of the most important skills in technical analysis is to have the ability to sketch accurate trendlines. There are 3 easy steps to mastering this skill:

1. Start with a cycle low. It is a clear base on the chart.

2. Find a second point that may permit you to draw a straight line. This subsequent point generally occurs as soon as a pullback over an first purchasing increase.

3. Locate a third point on the same line. Two points on a line allow you to draw a somewhat tentative and hypothetical trendline; as soon as 3 points have been touched, the trendline is confirmed.

If you have found this 3rd point, continue the line "into space."

As long as stock's value stays on top of that trendline, through description the stock is in an uptrend. You must have the stock as long as shares stay on top of the trendline or except you see certain initial caution indication given by indicators or candlesticks of the fact that trend may reverse.

The rules for drawing downtrend lines are exactly the reverse as those for drawing the uptrend line. However, rather than a cycle less, begin using a cycle up.

A broken trendline means certainly one of two things: either the stock will move into a period of sideways consolidation, or it is going to reverse route -- an uptrend will become a downtrend, or vice versa. In both cases, gain taking is appropriate.

The broken uptrend line may be a potent indication when confirmed via indicators such as MACD, Stochastics and RSI.

Trendlines shouldn't pass through the cost bars of stock. Occasionally it is definitely required to violate this guideline to get a straight line, but in about 95% of cases you should stick to this standard.

Trendlines of about forty five degrees in slope can grasp for long periods when placed on arithmetic charts (equal space is given to each dollar increment vary in cost).

In contrast, trendlines together with slopes much steeper than 45 degrees were apt to end quickly. This is important to concentrate on this standard so that you don't prematurely exit over cost-effective positions or disastrous trades counter to the trend.

Occasionally you can find several suitable trendline on a chart. Such as, a stock might have a fundamental uptrend and then sharply accelerate upwards.

The greater times a trendline have been touched, the most important it can be.

Trendlines are normally separated into three time frames:

Most important: a extended-time trend that lasts from almost 6 months to a year or more, and named as a primary trend.

Intermediate: a trend which remains from about 1 to 6 months. This trend can represent a correction in the main trend. It can also be called a secondary trend.

Less important: a trend which remains since a few days to a couple of months. It may possibly refer to a correction or consolidation that represents a short pause in bigger trend. It's also referred to as a short-term trend.

Commonly, the longer the trend has occurred, the most significant it is. A major three-year trend is much more significant than a 3-month or else 3-week trend.

To best generate trendlines, I recommend you toggle between daily along with weekly time frames on the chart. A two or 3-year weekly chart often reveals a superb picture of a significant trend. Daily charts usually are best for showing intermediate or else less important trends.

DISCLAIMER: This article is provided as information only and is not to be taken as financial advice.

Do you want to know what's ticking on Wall Street? Signup for the Free Weekly Wealth Letter and get the latest stock market updates and expert opinions about the current trends of the stock market. Click here to download your free copy now.