Analyzing the trend of a security or sector can help your technical analysis.

Spotting the Trend Can Keep Your Trading on Track

The trend has long been considered a key building block on which much of technical analysis rests, but it’s one that many traders ignore. Instead, they’re quick to jump into a trade based on indicator readings or chart patterns without much regard to the bigger picture.

But context is everything, and looking at a security’s long-term position can provide a different perspective. For example, what might appear to be a constructive chart pattern based on very recent price action may actually be a pause or consolidation within a powerful longer-term down trend.

How to spot trends

  • Direction. Trend analysis begins with the question: Is the stock moving from the lower left corner of the chart to the upper right corner of the chart? If so, there is an obvious uptrend in force. If the stock is moving from the upper left corner of the chart to the lower right corner, it’s easy to see a downtrend as the dominant feature.  (See the chart below).  

  • Progression. Another basic technique is to look for a progression of peaks and troughs where, for example, a series of higher highs and higher lows will confirm a directional uptrend (the opposite is true for a downtrend). 

In reality, there are several trends in force at any one time: the long-term trend, the intermediate-term trend and the short-term trend. These different trends will not always be in agreement with each other, so traders must determine which trend will be the focus of their activity.

Traders should recognize that the short-term trend will often be influenced by day-to-day news, so focusing on the longer-term trends might be prudent.

Technical analysis tools for spotting trends

Other than just price alone, moving averages can be an effective technical tool for determining trend direction. 

Moving averages can also help identify the strength of a trend. Steeply sloping moving averages can mean that there is momentum in the price move. Flattening moving averages can suggest a move that is losing momentum or the formation of a trading range. 

Traders also can identify the simple trend line that connects points on the price chart to help determine a trend. For example, an uptrend line connects a series of higher lows on the charts, and the slope of that line becomes a point of reference for determining direction as well as providing a logical point of support.

To cover more ground, the Recognia® screening tools, which can be found on ScottradeELITE®, allow the user to select those stocks with a bullish pattern indicated by the price moving upward. This can be an effective way to begin to look for opportunities that would meet the basic requirement of trending market action

While these strategies can be effective, they’re not foolproof. Any trade involves risk.

Why is trading with the trend important?

If you are in sync with the current direction of the momentum, you might be able to make more informed decisions. By understanding the trend, you might be able to position yourself to take advantage of a pause or pullback in price movement, however doing so doesn’t guarantee a profit.

Trading with the trend can be much more forgiving than trading against it. For example, a poor entry will be less of a factor when a trend reasserts itself. Trading losses often occur when the trader is positioned against the main trend and is fighting market momentum.

Question: How to you use trend analysis in your trading?

Read Next:  Tools Can Help You Build Trade Ideas

The information and content provided is for informational and/or educational purposes only. The information presented or discussed is not, and should not be considered, a recommendation or an offer of, or solicitation of an offer by, Scottrade or its affiliates to buy, sell or hold any security or other financial product, or an endorsement or affirmation of any specific investment strategy. You are fully responsible for your investment decisions. Your choice to engage in a particular investment or investment strategy should be based solely on your own research and evaluation of the risks involved, your financial circumstances, and your investment objectives. Scottrade, Inc. and its affiliates are not offering or providing, and will not offer or provide, any advice, opinion or recommendation of the suitability, value or profitability of any particular investment or investment strategy.

Scottrade and Recognia are not affiliated. The information provided is for educational purposes only and Scottrade is not responsible for statements, offers, or products issued by Recognia. Scottrade assumes no responsibility for the accuracy, completeness, or timeliness of the data. No information presented constitutes a recommendation by Scottrade or its affiliates to buy, sell or hold any security, financial product or instrument discussed therein or to engage in any specific investment strategy. Please research any product or service carefully before investing.

More Articles & Insights

Understanding and Responding to Market Corrections

A key to weathering – and potentially profiting from – a market correction is planning and implementation.

Take the Emotion Out of Trading

A reasoned trading plan can help you overcome your emotions and add discipline to your buy and sell decisions.

What Is Extended Hours Trading? Get the Basics

Learn about extended hours trading at Scottrade and how trading differs outside normal market hours.