At some point in your investing career, you are most likely going to hear the cliche “the trend is your friend.” While this statement is true and seems simple enough, actually identifying a trend can be deceptively tricky–especially if you are new to technical analysis. And of course, the trend is only your friend if you can properly identify it.
[VIDEO] Identifying Trends
How Do You Identify a Trend?
Technical analysts have come up with many different ways to identify a trend. Some look at how moving averages are interacting with each other, some look at technical indicators that have been specifically created to identify trends and others–like me–prefer to look directly at the price action.
Stocks rarely move straight up or down. Rather, they move up and down in a stair-step fashion. In other words, they move up and down and up and down but ultimately move higher or lower.
Whenever a stock moves up and then starts to turn around and move back down, it creates a new high–or a peak.
Whenever a stock moves down and then starts to turn around and move back up, it creates a new low–or a valley.
You can use these highs and lows–or peaks and valleys–to help you determine the trend.
Identifying Up Trends
A stock is in an up trend when the price is making a series of higher highs and higher lows. For instance, if a stock moves up $1.00, then down $0.50, then up $1.00 and then down $0.50 again, it creates a series of higher highs and higher lows.
Identifying Down Trends
A stock is in a down trend when the price is making a series of lower highs and lower lows. For instance, if a stock moves down $1.00, then up $0.50, then down $1.00 and then up $0.50 again, it creates a series of lower highs and lower lows.
Identifying Sideways Trends
A stock is in a sideways trend when the price is making neither a series of higher or lower highs nor a series of higher or lower lows. For instance, if a stock moves down $1.00, then up $1.00, then down $1.00 and then up $1.00 again, it creates no distinguishable pattern of highs and lows.
Image courtesy miss-britt.