Technicals Stability Returns
| Trends Basics | Uptrend Basics | Downtrend Basics | Sideways Basics |
| Trend Strength By ADX | Trend Trading Strategies | Common Mistakes in Trend |
We have learnt that stocks moves in trend but they are in trends about 30-35 % of the time. Rest of the time they move in random direction. Therefore, it is essential to identify the right one and ignore not so clear ones. Here are some of the ways to find trend.
1. Trend-line
Most common form of identifying a trend is to draw a line of support or resistance. We recommend reading about support/resistance to fully understand this part.
Support trend line is a straight line drawn by joining any two lower points of rising stock. This line is extrapolated and acts as a support line, and trend is considered to be intact as long as this line is not breached. In an uptrend, it is must to have each subsequent support point to be higher than previous one and subsequent higher level is higher than previous highs. If not then it is not an uptrend. More explained in uptrend section.
Similar to support trend line, Resistance line is drawn when stock is continuously moves down ward.See downtrend
for more.
In case of sideways market, two trend-line one each of support and resistance is drawn. See sideways
section for more.
Trend line form basis of some of the very important reversal chart patterns like Triple Top
, Channel
, Head And Shoulder
and plays equally important role in continuation patterns like, Flag
etc.
Trend-line is most valuable tools in technical analysis as other studies heavily rely on them. Some traders feel comfortable by joining at least three points before entering a trade. Since any two points can form a trend line, it is important to select points depending upon your trade duration. For short term traders, points in last few trading interval can do the trick while for long term traders point spanning across months may work.
Trend lines as illustrated in the figure, can be a rising line or a falling line or a horizontal line.
TopstockResearch.com also provides screening of stock with trend-line support and resistance for multiple stock markets. Refer to the links below.
2. Moving average
Moving Averages
are yet again excellent tool to identify trend. Since moving average smoothen price movement they provide clearer picture to the direction of the stock movement. A rising moving average means a rising trend while a falling moving average means falling trend.
They also indicate start and end of the trend. When price line crosses moving average line then a trend is considered to be started and on reverse cross, trend is considered to be over and a counter trend is expected. Though any moving average cross over gives indication about the trend, short term traders should look for shorter duration MA and long term traders look for longer moving average like 200 Day MA.
Two Moving average crossovers also indicate start and end of the trend. When a shorter moving average say 3 days crosses above 13 days moving average then a short term bullish signal is generated. And when 50 day Moving average crosses above 200 DMA also known as bullish golden cross, long term bullish signal is generated.
Moving averages also provide dynamic support and resistance similar to trend line but owing to its dynamic nature they tend to provide better signals.
Similar to trend line, moving averages also form basis of lot of other technical indicators like MACD, ADX etc.
TopstockResearch.com also provides screening of stock by moving average for multiple stock markets. Refer to the links below.
3. Price breakout
A range bound market means that there is no decisiveness on the direction of the stock. Both bulls and bears are locked in battle and gradually a strong support and resistance zone is formed. This at times result in triangle formation, or a narrow channel or a very narrow price band like Bollinger Bands.
Upon breaching this zone, a new trend is started in the direction of the breakout/breach. It is important to note volume
participation during the breakout. If the volume is higher at breakout then trend strength is stronger and if the volume is not high at the breakout then it may be a false signal.
4. Measuring trend Strength
There are indicators to measure trend strength. Among important ones is ADX. They measure strength of the trend with a easy to understand numeric value. MACD another momentum indicator indicates trend and their reversals. Sustained Strong overbought/oversold level also indicates strong trend. Steep short term moving average also indicates strong trends. Trend tends to get slower near important support and resistance. They could be moving average, trend line or Fibonacci levels.
5. Divergence
Also it is important to note divergence of price with other indicators. They could be RSI, MACD, ADX etc. Divergence is a leading indicator indicates weakling or trend reversal.
6. Measuring market participation
Two important things to note in a trend are price and volume behavior. If either of them is not supportive, then trend may be weakening or a possible reversal is on the cards. There are quite a few volume based indicators like ADI, CMF, MFI.
| Trends Basics | Uptrend Basics | Downtrend Basics | Sideways Basics |
| Trend Strength By ADX | Trend Trading Strategies | Common Mistakes in Trend |
| Trend Up By Price | Trend Up By MA | Trend Up Daily | Trend Strength By ADX |
| Trend Down By Price | Trend Down By MA | Trend Down Daily | Sideways At Lower End |
| Sideways At Upper End | Daily Trending |
