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How to Identify Trading Trends

Identifying a trading trend is relatively straightforward. Instinctively, you will know it when you see it. Visual techniques and calculated indicators both can be used to identify trading trend signals.

A steadily rising or falling stock is a trending stock. But if you watch stocks for any period of time, you know that they rarely go straight up or down. Instead, you see a stair-step effect in which a stock rises several steps and then falls back. Talking about a trend as a series of intermittent highs interrupted by intermittent lows makes good sense.

So an uptrend, then, is a series of higher intermittent highs and higher intermittent lows. Conversely, a downtrend is a series of lower intermittent highs followed by lower intermittent lows.

The price chart of Polycom, Inc., stock (PLCM) exhibits a series of higher intermittent highs and higher intermittent lows.

[Credit: Chart courtesy of StockCharts.com]
Credit: Chart courtesy of StockCharts.com

The PLCM example shows the type of trends that you hope follow the breakout patterns. As long as the pattern of higher highs and higher lows continues, you can participate in a profitable trade.

Here is a downtrending price chart of American International Group’s stock (AIG) that identifies its series of lower highs and lower lows. You may recall hearing about the government bailout of AIG during the credit crisis. You may also notice that the company’s stock performance signaled trouble long before the credit crisis began.

[Credit: Chart courtesy of StockCharts.com]
Credit: Chart courtesy of StockCharts.com
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