Introduction to Stock Trends for Investors
Identifying trends is a crucial part of technical analysis in stock investing. A trend is just the overall direction of a stock (or another security or a commodity); you can see trends in technical charts. Which way is the price headed?
Three basic trends exist:
An uptrend or bullish trend is when each successive high is higher than the previous high and each successive low is higher than the previous low.
A downtrend or bearish trend is when each successive high is lower than the previous high and each successive low is lower than the previous low.
A sideways trend or horizontal trend shows that the highs and the lows are both in a generally sideways pattern with no clear indication of trending up or down (at least not yet).
It’s easy to see which way the stock is headed below. Unless you’re a skier, that’s not a pretty picture. The bearish trend is obvious.
What do you do with a chart like the one below? Yup . . . looks like somebody’s heart monitor while he’s watching a horror movie. A sideways or horizontal trend just shows a consolidation pattern that means that the stock will break out into an up or down trend.
Regardless of whether a trend is up, down, or sideways, you’ll notice that it’s rarely (closer to never) in a straight line. The line is usually jagged and bumpy because it’s really a summary of all the buyers and sellers making their trades. Some days the buyers have more impact, and some days it’s the sellers’ turn. The chart below shows all three trends.
Technical analysts call the highs peaks and the lows troughs. In other words, if the peaks and troughs keep going up, that’s bullish. If the peaks and troughs keep going down, it’s bearish. And if the peaks and troughs are horizontal, you’re probably in California (just kidding).