Trading with the trend is almost always easier than trading against it. But what exactly is the trend ?
The classical definition of an uptrend is higher highs followed by higher lows. A downtrend is lower lows followed by lower highs. [on the chosen timeframe] There’s that timeframe question again, because a stock can be in an uptrend on one timeframe and still be in a downtrend on another timeframe.
My way of determining trend is illustrated by the pictures above.
The uptrend is intact as long as the stock is making higher highs and not violating the low which precedes the higher high. When it violated the prior low at the magenta line, according to my definition, it was no longer in an uptrend. It was not yet in a downtrend, however, because it had not yet made a lower high. A lower high is a good expectation for the near future and might make a good short.
Similarly, the downtrend was intact as long as it was making lower lows followed by lower highs. When it made a higher high at the cyan line, it was no longer in a downtrend. Not an uptrend yet, but that would be expected to follow.
To me, it is important that the prior low (high) be taken out first. Then I will look for a lower high (higher low). The reason for that is there used to be buyers (sellers) at the prior low (high) and there is no proof that they are gone until that point is overcome.
Some other ways of determining trend include moving average(s), trendlines and linear regressions. Pick a method which suits your style and then try to be consistent about it.
[ disclaimer : there’s more than one way to skin a gopher. Your mileage may vary ;-) ]
The classical definition of an uptrend is higher highs followed by higher lows. A downtrend is lower lows followed by lower highs. [on the chosen timeframe] There’s that timeframe question again, because a stock can be in an uptrend on one timeframe and still be in a downtrend on another timeframe.
My way of determining trend is illustrated by the pictures above.
The uptrend is intact as long as the stock is making higher highs and not violating the low which precedes the higher high. When it violated the prior low at the magenta line, according to my definition, it was no longer in an uptrend. It was not yet in a downtrend, however, because it had not yet made a lower high. A lower high is a good expectation for the near future and might make a good short.
Similarly, the downtrend was intact as long as it was making lower lows followed by lower highs. When it made a higher high at the cyan line, it was no longer in a downtrend. Not an uptrend yet, but that would be expected to follow.
To me, it is important that the prior low (high) be taken out first. Then I will look for a lower high (higher low). The reason for that is there used to be buyers (sellers) at the prior low (high) and there is no proof that they are gone until that point is overcome.
Some other ways of determining trend include moving average(s), trendlines and linear regressions. Pick a method which suits your style and then try to be consistent about it.
[ disclaimer : there’s more than one way to skin a gopher. Your mileage may vary ;-) ]