Trends, Trend-spotting,
Uptrends and more

Price charts summarise the opinions of the real market participants,
and the ongoing change of opinion is often summarised on the chart in a price trend.
But an uptrend, downtrend, no trend?

Trend-spotting! - How and why to identify
a price trend, and how to profit from it!

Why is the notion of a trend important?

One of the key tenets of Dow Theory basically says:

Once a trend is in place, then it is likely to remain in place; and
the trend continues to exist until it is confirmed to have ended.

This is very important, and it is a fundamental principle that underlines a lot of the success in the market.
 
Why is it so important or useful? Because if we can identify a share price rising trend for a stock, and buy some, we can ride the trend.
 
It applies to the uptrends, which the average investor / trader might ride, as well as to the downtrends which many investors and traders hope to avoid. See more details about this in the material below.
 
For more information about Dow Theory, see the More Information list at right, and also see more information here about Dow Theory.

Brainy's "3Ways Rule (in 3 Times)"

Any stock or index will always be trading
in one of 3 "ways":

• in an uptrend, or
• in a downtrend, or
• there will be no trend.

This is a simple re-statement of one tenet of Dow Theory; but it is a useful way to remember a simple fact about the price chart. That the chart will show an uptrend, or a downtrend, or no trend.
 
See more information about the 3Ways Rule.

Why avoid a downtrend?

It is important to avoid the downtrends, because they are likely to continue. When a share price is falling, many people are tempted to purchase it because it seems to be cheap. And many commentators and brokers might recommend to buy it because the share price offers great value. But how do we define great value? Well, this is very subjective (read more about this topic here).
 
Because a downtrend is likely to continue, many investors / traders will not buy the stock until the downtrend is confirmed to have ended, and a new uptrend has started. Exactly how to do this depends on a few things, including the time period of the charts that you study (ie. weekly, daily, hourly, etc.).

How to spot a trend

There are a number of ways to spot an up-trend:

1. The simplest eye-ball call
   On a price chart, if the price starts in the bottom left corner and finishes in the top right corner, it must be trending up (as in the sample at right - click on the image for a larger version).
   
   
2. Higher Peaks and Higher Troughs
   A rising trend is described in classical Dow Theory as a series of Higher Peaks and Higher Troughs, or as Higher Highs and Higher Lows. This is demonstrated in the sample chart at right, where each Higher High is denoted with "HH" and each Higher Low with "HL". The terms "higher peak" and "higher trough" are also in common use in reference to a rising trend. However, in the strict use of the terminology, there is a different between the "highs and lows" and the "peaks and troughs".
   
   
3. Trend Line
   As a price moves higher, it may be possible to place a rising straight line under the share price (as in the chart image above). This line appears to act as a "floor" to support rising prices. As long as the price stays above the trend line, then the up-trend is said to be in place. Once the price breaks below the trend line, then the trend is said to have failed.
   
   
4. Moving Average
   We can use a Moving Average chart indicator on the price chart to indicate whether a price is "trending" up or down (or not at all). In the sample Monthly price chart at right (click on the image for a larger version), a Moving Average (MA) is shown as a blue line. It can be inferred that where the MA is rising, the stock is also tending to rise (ie. uptrending). Conversely, a falling MA suggests the stock is trending down. Of course, the picture might be different on a weekly or daily chart, and the number of periods we use in the MA indicator can also make a difference. For a realistic example of using this idea to spot rising trends, see Brainy's Weekly Watch List strategy.

The health and strength of a trend - MMA

The health and strength of a trend can be quickly determined using a number of different technical analysis chart tools, including the Multiple Moving Average (MMA) indicator on the price chart. There are more than a couple of these in existence in good charting software packages including the Guppy MMA (or GMMA for short) and the Hull MMA.

The sample chart at right is the same chart as shown in the MA example above, except that this time a Guppy MMA indicator is included. At first glance, this indicator looks complex; but it is not. It is comprised of 12 MA lines - a group of 6 blue ones, and a group of 6 red ones. For the trained analyst, this is very helpful in telling us about the health and nature of a trend (the mood and sentiment).
 
See a sample use of the GMMA in Robert's Weekly Market Analysis.

Other tools for determining trend strength include: the simple trend line, a simple linear regression line, Alan Hull's ROAR indicator and the ADX indicator.
 
For more information, see the eBook Articles listed above right.

How to quickly find a trend with little effort

If you are using good charting software, with a good scan tool, then it is not hard to quickly scan through a long list of stocks and display a short list of the stocks that currently exhibit the characteristics of a trend.
 
One good software tool is BullCharts, where it is possible to easily create a scan to search for trending stocks. Brainy's eBook (PDF) Article BC-10-400, "Scans - Match (not) all criteria" (page 2), discusses this.

And a down-trend...

It is not only up-trends in which we are interested; but also down-trends. If we feel that a stock in a down-trend is over-sold and potentially a great bargain, we can monitor the price chart for a confirmed break of the down-trend. And those people who are happy to short-sell a stock, can look for confirmed down trends, and sell into the down-trend.
 
To visually spot a down-trend on a price chart, we look for the opposite of the signs of an uptrend - a series of Lower Highs and Lower Lows (or Lower Peaks and Lower Troughs).

Case Study - NAB 

A down trend is demonstrated in the weekly price chart of National Australia Bank (NAB) at right from late 2007 until mid-2009 (click on the chart for a larger image). NAB fell 61% from $43 to $16 over a 16 month period during the so-called infamous GFC (btw - imagine a blue chip stock falling 61%!). The comments on the chart at right explain the red down-trend line, and the observed break-out in March 2009.
 
In this chart of NAB we have placed a downward straight line above the price action, and it appears to act as a ceiling to prevent prices from rising. Once the price does break above the down-trend line, it can be said that the trend is over (as indicated toward the end of this sample chart).

Case Study - MYR

In the next chart at right, we can see two periods of uptrends (indicated with the green arrows) over the 8 years or so since the Myer IPO in 2009. But for the rest of the time, the share price was in a downtrend. We can easily see a sequence of Lower Peaks and Lower Troughs across most of this chart.

Trends in multiple time frames

More information?

More Information

• TA-2200 "Dow Theory" 

• ST-6120 "Trends are important and the 3Ways Rule" 

• TA-3200 "Trends and trendlines" 

• TA-3210 "Trends - primary and secondary" 

• TA-3220 "Trend strength" 

• TA-3230 "Trends in multiple time frames" 

• TA-6200 "Daryl Guppy - GMMA - introduction" 

• TA-6210 "Daryl Guppy - GMMA - interpretation" 

• BC-10-105 "BullScan - introduction"

• BC-10-120 "BullScan - key features"

• BC-10-200 "BullScan Manager"

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