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Trend And Trading Range
A trend exists when the price of a stock keeps rising or falling over time. In an uptrend, there are higher highs and higher lows. In a downtrend, there are lower lows and lower highs.
An uptrend emerges because bulls are stronger than bears with their buying forces.
A downtrend happens because bears are stronger than bulls with their selling forces.
The author suggests that we should buy in an uptrend and sell during a downtrend.
A trading range occurs when a security trades between a constant high and low for long periods of time. Finding a good entry point is extremely important in trading ranges.
Rules for executing a trade in a trending market and in a trading range are different.
When you’re buying in an uptrend and selling in a downtrend, give that trade the benefit of the doubt and do not be shaken easily. When trading in a trading range, close out your positions at the slightest sign of a reversal.
Future prices of a stock are uncertain, nobody surely knows whether it is going to be an uptrend or a downtrend, and because of this reason, some of our trading decisions are based on probabilities.
How to identify a trend?
- Analyse the patterns of highs and lows when looking at a chart. If rising prices keep reaching new higher level and a decline in price stops at a higher level than the previous decline, it signifies an uptrend. The pattern of lower lows and lower highs signify a downtrend, and the pattern of irregular highs and lows signify a trading range.
- To identify a trend, draw an uptrend line connecting the recent lows and a downtrend line connecting the recent highs. The slope of that trend line signifies a trend.
- Plot a 13 – day exponential moving average. The direction of its slope can identify a trend. If the moving average does not reach a new high or low in a month, then it signifies a trading range.
- Market indicators, such as Moving Average Convergence and Divergence (MACD) help in identifying a trend. The Directional System is a good indicator for catching early trends.
