RiskPicksWhat is a Trend?
A trend is the overall direction of a stock's price movement over a period of time. Prices do not move in straight lines. They zigzag, making a series of highs and lows. The trend is determined by the pattern of those highs and lows.
Three types of trends
- Uptrend: price makes higher highs and higher lows. Each peak is above the previous peak, and each dip stays above the previous dip. Buyers are in control
- Downtrend: price makes lower highs and lower lows. Each rally fails below the previous peak, and each drop goes below the previous low. Sellers are in control
- Sideways (range-bound): price bounces between a ceiling (resistance) and a floor (support) without making progress in either direction. Neither side is winning
Trendlines
A trendline is a straight line drawn on the chart connecting two or more price points:
- Uptrend line: drawn along the rising lows (support). As long as price stays above this line, the uptrend is intact
- Downtrend line: drawn along the falling highs (resistance). As long as price stays below this line, the downtrend is intact
- Break of trendline: when price breaks through a trendline, it may signal a trend change
Trading with the trend
- "The trend is your friend": trading in the direction of the prevailing trend has better odds than trading against it
- Uptrend = buy pullbacks: wait for dips within the uptrend and buy the bounce
- Downtrend = sell rallies: wait for bounces within the downtrend and short the rejection
- Sideways = trade the range or wait: buy at support, sell at resistance, or wait for a breakout
Before you look at indicators, patterns, or news, answer one question: what is the trend? If you are buying in a downtrend or shorting in an uptrend, you are fighting the market.