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The Importance of the Trend, and how to Spot It

One good rule is never to buy a share, an option, or take a position in a spread bet, unless you have a good reason to do so. One advantage that an amateur has over a professional is the lack of the requirement that the amateur should deal every day. Professionals are under a certain amount of pressure to be active, whereas you at home can decide to sit it out for as long as you like, if you see fit. As with most advantages in trading, however, it is not easy to acknowledge. It is even harder to find the self-discipline to practice this type of behavior.

One reason that you might have for taking a spread bet position might be that you have become aware of the trend of a stock or index that you have been watching. Trends that are established have a good capacity to continue. This is particularly true if they are observed to be moving in the trending direction on large volume.

Trending Market

A trend is the general direction an asset class is heading in. Most securities have an underlying trend that can take shape over days, weeks, months or years and depending on the traders/investors time horizon they will look to benefit from these price movements.

For example, in the chart above, General Electric (GE) does seem to be trending upwards, as the price movement is up and the volume seems to be good as well, taken over the total of the four days prior to when this chart was printed.

Higher Highs

The basic trend takes the form of “higher highs” and “higher lows” in an uptrend, and “lower lows” and “lower highs” in a downtrend.

However, be careful. The following shows the position at the same point in time, but with the three-month period of history selected instead of one.

Trend Peak

Notice that there is a very definite peak at around the price 31.5 level, back in June. This is a classic example of a resistance level. The very real likelihood is that if the price approaches that value, it will then start to fall again. It may approach the level again subsequently, when technical analysts would say it was re-testing its resistance level, and fall back again. Or it may not – it may break through and continue on an upward path. Breaking through a resistance like this is regarded as a very good sign and once the breakthrough has been verified (by staying over the resistance level for a number of days, it can be expected to move onwards and upwards even more.

When analysing charts it is important that the chart is constructed to reflect a time horizon for the trend being identified. For example, long-term trends would normally consider a time horizon that spans over at least a year with either weekly or daily price movements making up the composition of the chart. In contrast, an intraday trader may only look at charts that span over a week with the composition reflecting 30-minute price movements.

Whichever way you consider it; long-term trends are made up of medium term trends, just as medium term trends are made up of short-term trends.

To help identify trends, technicians draw trend lines to help find where support or resistance may be. This is a simple line drawn in the direction of the price movement through the lows of the trend. Technicians use trend lines to anticipate where support may be found in a security so that an investment/trade can be made in the hope of a move back to the upside and consequently, a profit.

Trends and Retracements

I would look for 5 day constant gainers and search for this type of thing. I have never come across the company below for instance so don’t know the fundamentals but the technical analysis shows clearly the long term trend the medium retracement trend and a moving average entry and exit when the price crosses above or below. So, the chart is good, I only need to check the fundamentals and news and it’s a buy – except I haven’t checked it out yet.

Once in the trade you have a high probability that it will continue the long term trend and go back up to the previous high or even higher. At that point you may decide you want to be defensive and bank half of the profits or you are going to be aggressive and add an additional stake at the new high breakout. Keeping it simple is to take profits at the previous high or just let it run until the price crosses back below the moving average:

Trend and Retracements

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