The Trend is your Friend

Continuing with our "The Technician: From Beginner to Expert" series in this post we will
learn about trend analysis. So, many times you might have came across sayings like, "the
trend is your friend", "always trade in the direction of the trend", "never buck the trend"
etc. but what the word "trend" in these sayings mean? Here I go explaining it to you...

I would simply put it as the "overall direction of the price movement". Trend can be of
different horizons short term, medium term and long term depending upon the direction of
price movement during these time periods. Important thing to remember here is that there
is nothing like always rising or always falling in the stock market. So, we are using the word
"overall" in our definition. Let's see what are the different types of trend in the market.

Types of Trends:

1) Up trend - Up trend or bullish trend is the one in which the overall direction of the
price movement is upwards.

As we already know price moves in waves ups and downs it can't be up move all the time
but in a up trend there will be higher highs and higher lows each time with overall
movement towards the sky. When the market or any particular stock is in up trend that is
the best point to go long. Get into it and ride it till the trend reverses.
2) Down trend -

In case of down trend the overall price movement is downwards and the price makes
lower highs and lower lows as can be seen from the above diagram. Now, when we
know it from this point of time we should never get into any stock which is in down
trend.

3) Sideways Trend - Sideways trend or No trend is when the price is neither moving
sideways nor upwards but traing in range for several days. Its better to stay away from
the market when its showing no trend at all. Following are few examples of each:

The following figure will help you understand the trend easily:

In order to be profitable we should buy the stocks which are in uptrend and if after
being in uptrend for a considerable amount of time it starts moving sideways that's the
point where we should start booking our holdings partially and we should never hold
or buy any stock which is in strong downtrend:
Also, point worth mentioning here is that trend can be of short term or long term. We
should look at the charts of the periods we are planning to hold it to determine the
direction of the trend. I generally use 9 months or yearly charts to base my decision.
Following figure represents all three trends:

To summarize,
1) Look at charts before taking position in any stock, buy only if the stock is in uptrend.
2) Upternd is the situation when the overall direction of the price movement is
upwards, in downtrend the price moves downwards, in horizontal or sideways trend
the price movement remains more or less within a range.
3) Uptrend, downtrend or sideways can be of short term, medium term and long term
durations. Look at the charts for the period you are planning to hold your stock in
future. I generally recommend yearly or 9 months charts.