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Introduction to Trends - Technical Analsysis Basics

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.

uptrend downtrend sideways trend

Ok, if you look at the first series of moves in the drawing on this page you will see the uptrend.  
An uptrend is simply a series of rallies which is followed by declines that stop at or before the last low.  The last low serves as support for the uptrend.  So, an uptrend (a) is a series of higher highs and lows. As long as this criteria stays in tact, higher highs and lows, you are dealing with an 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?  
<brandon> It depends on the chart you look at. You will see it on a tick chart. Y you will see it on a yearly chart, etc. It will occur in all time frames.  
<Foolonthe> But it can't be on ALL time frames. That leads to white noise.  
<brandon> ...only if you are not consistent in the frames you trade. For example, I look at a weekly and daily to decide what I will trade. Then I will use an intraday for entry, but I don't look at every time frame, otherwise there would always be a conflict some place.  
<Foolonthe> So an "uptrend" is normally based upon daily or weekly charts. With at least 3 data point, we are talking minimum time scale of about a week for uptrend.  
<brandon> It would usually take more than a week because it's a SERIES of higher highs and lows and you are not likely to get a series in under a week on a daily chart and if you did I wouldn't want to trade that stock because its pretty choppy.  
<Foolonthe> Put question another way: what is the maximum days I need to look back to determine the trend stock is in?  Seems like 60 days or so.  
<brandon> You can determine in a few weeks, or you can determine in a year. There is not one answer to this or anything else in trading.  
<Foolonthe> ok. that helps. Before I trade I need to look back at least a month.  
<brandon> I will say you should always look at more than 60 days of data though, just to see S and R (support and resistance.) You should try to look at close to 1 year. 

<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?  
<brandon> No one of those is more or less important than the next.  
<Foolonthe> What happens if chart is broken a bit? Sometimes it is not clear.  Case in point: FDRY. Did chart break uptrend on June 31?  
<brandon> That's where discretion comes in, but until you have experience, you should not trade that and just stay with the "pure" setups. That's not anything to worry about because the very best traders only have 3 or 4 patterns that they trade and just get very good at it. If the criteria isn't there, it's not there. It doesn't matter. There will be other setups, better setups. 
<Foolonthe> Is it a bigger deal if imperfection of uptrend causes a high that is below a previous low?  
<brandon> No, its equal.  
<Foolonthe> Ok. 

 

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