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|Ok, today we are going to talk about trends. You know all the trading wisdom: The trend is your friend, etc. etc., but it's sometimes hard to know exactly what to do with that advise. Many people don't even really know what a trend is, so that will be the purpose of tonight's class: make sure you all understand trends. This is one of the first steps in becoming a trader. You have to understand how stocks trade: a b c d... They have four stages, all stocks in all time frames.
Ok, if you look at the first series of moves in the drawing on this page you will see the uptrend.
At some point, the stock will get tired. A large move for a stock is much like running a marathon... The stock needs to rest beofre it can move again. At this point, the trend will often go sideways which is the (b) move. A sideways trend move is composed of basically equal highs and equal lows as you can see on the graph
A long sideways trend can often give way to a move down. This down move is (c), the downtrend. A downtrend is a series of declines followed by rallies which fail to take out the high of the last rally. It is a series of lower lows and lower highs. In a downtrend the easiest direction to take a position is is short.
A downtrend also becomes tired after some time and will eventually go into a stage (d) which looks like stage (b) but it's at lows instead of highs. For our core purposes we only want to be long stocks in stage (a) or in stage (d) which is breaking into the early parts of (a) and we only want to be short in (c) or in (b), which is going to put us in on the early stages of (c).
I'm going to go ahead and take questions now because understanding this will be very important starting next week when we move into the actual setups. If you do not have a good understanding of the trends, then you will quickly find yourself lost.
<Foolonthe> What is the minimum time scale of each phase of trend?
<Foolonthe> I have another question brandon. The other day, we were looking at chart of some stock, and someone was explaining how a series of highs makes uptrend. Is it higher highs, or higher lows, or both?
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