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IDENTIFYING UPTRENDS AND DOWNTRENDS

What is Trend?

A trend is defined in Technical Analysis as the direction of the market and can be of three types: uptrend, downtrend and sideways trend. If the direction of the market is upward, the market is said to be in an uptrend; if it is downward, it is in a downtrend and if you can classify it neither upward nor downward or rather fluctuating between two levels, then the market is said to be in a sideways trend.

It is important to identify and understand trends so that you can trade with rather than against them. Always remember “Trend is your Friend”. Trading in the direction of the Trend maximizes your chance of success.

Identifying Trends

A trend is a general direction that a certain financial market is taking. Trend analysis is a section of technical analysis that explains trends and helps traders define direction.

The most common way to identify trends is using trendlines, which connect a series of highs or lows.

Uptrend: If you can connect a series of chart low points sloping upward, you have an uptrend. An uptrend is always characterized by higher highs and higher lows.

Downtrend: If you can connect a series of chart high points sloping downward, you have a downtrend. A downtrend is always characterized by lower highs and lower lows.

How is Trend used?

A break of the trendline usually signals a trend reversal. Hence, we can say that when an uptrend line is broken (i.e. stock closes below the uptrend line), the prior uptrend has ended (can also be used as a Sell signal depending on the strength of the trendline) and vice versa when a downtrend is broken (i.e stock closes above the downtrend line), it means that the prior downtrend has ended (can also be used as a Buy signal depending on the strength of the trendline).

One popular trading strategy is waiting for the price to touch the trendline and trade it. So, let’s say we are in an uptrend. Once the price makes a higher low and touches the lower trendline, traders will be buying. The same happens in a downtrend. Once the price makes a lower high, traders will be trading the trend line and selling. Traders trading the range are buying when price touches support and selling when it touches resistance.

What Are Uptrends and Downtrends?

Uptrends and downtrends are pretty simple. Here’s the definition for each:

Uptrend: This describes when the price of a stock is moving upward or getting higher. An uptrend is characterized by the chart’s peaks and troughs reaching new highs as the trend progresses.

So, if you look at the chart over time, it may be zigzagging, but it’s generally going up.

Downtrend: As you probably already guessed, a downtrend is the opposite of an uptrend. It’s when a stock price is moving downward or getting lower.

The downtrend is characterized similarly to an uptrend — but in the opposite direction. The peaks and troughs in the chart continue to drop as the trend goes on.

Over time the chart may zigzag, just like the uptrend, but its general direction is down.

A market trend is used to describe the movement of the market over time. Generally, a trend can move toward either the upward or downward until something changes and alters the trajectory. Generally, a trend moves up and down, until something happens to change the trajectory. There are three ways the market can move, upward, downward and sideways. Let’s try to understand each of these keywords:  

 

Upward Trends: When the price of the stock is moving higher or in the upward trajectory, then it is called Upward Trends.  

Downward Trends: When the price of the stock is moving lower, then it is called Downward Trends.  

Sideway Trends: A sideways trend means little price movement or change and doesn’t require any explanation. 

Out of these upward and downward trends are most important, let’s look at the difference between upward and downward trend:  

In an uptrend, both the peaks and troughs of a stock chart keep increasing successively. Whereas in the case of downwards a stock keeps falling successively.  

An uptrend is characterized by prices, making higher highs and higher lows. Whereas, a downtrend is characterized by lower price highs and lower price lows.  

An uptrend shows that the market has a positive sentiment. The chance of stock appreciation is quite more in this case. But in a down trend, each little rise in the stock price is used by investors to sell their existing quotas of shares. 

 An upward trend will be profitable if an investor is taking longer but the investor will never be profitable if you are a long trend in a downward trend. 

Apart from these things, one should also be aware of certain things which may act as a catalyst in setting up the trend in the short term.  

Major news Event: A news related to any stock, government policy or management changes may cause a change in the persistent trend. A piece of good news can set the momentum in an upward trajectory, while a piece of bad news can set the momentum in a downward trajectory.  

Earning reports: Earning reports can also impact trends. Good earning can set the right momentum for the investor. A bad earning momentum can reverse the momentum trade.  

Change in Management: A change in management does effects on the trend. It can go in either direction whether upwards or downward. For example, a tech company has hired a high-ranking employee of a reputed organization, then it will set the movement in a positive direction.  

Trending market

A trending market is when the price is clearly moving in one particular direction. If the price is moving up, then it is said to be in an uptrend; if the price is moving down, then it is said to be in a downtrend.

Many traders trade in the direction of the trend because there is a higher probability of the trade being profitable. There is a distinct advantage for traders who identify a trend early on — entering the market when a trend is beginning to develop means it is more likely to return a profitable result.

A trending market is when the price is clearly moving in either an uptrend or a downtrend.

Many traders trade in the direction of the trend because there is a higher probability of the trade being profitable. There is a distinct advantage for traders who identify a trend early on — entering the market when a trend is beginning to develop means it is more likely to return a profitable result.

Uptrend

The chart below demonstrates an uptrend. You can clearly see the price is moving up and that the uptrend is made from a series of peaks and troughs — the price does not move straight up, it moves up in waves. The peaks make the swing highs and the troughs make the swing lows.

Higher lows

Higher highs

In an uptrend, the market direction can be identified by a series of higher highs and higher lows.

Downtrend

In a downtrend, the price behaves in the same way, moving down in waves, with a series of peaks and troughs that make the highs and lows respectively. A downtrend can be identified by a series of lower lows and lower highs.

Lower lows

Lower highs

It is important to note that in an uptrend, not every candle is bullish and in a downtrend, not every candle is bearish; in a trending market the price is moving in an overall direction.

Ranging market

The other type of market condition is a ranging market, sometimes referred to as a sideways market. You can see from the chart below that the price is moving within a range; there is no clear sustained uptrend or downtrend.

In a ranging market, the price moves within an upper boundary or resistance level, and a lower boundary or support level. The upper and lower levels may not always be exact or clear to observe, however what you will see is the price rising and falling within a maximum and minimum price zone.

 

Determining a correction from a reversal

There is a distinct difference between a correction and a reversal and it is important to differentiate between the two.

Corrections

A correction — sometimes referred to as a retracement — is when the market moves in the direction of the trend, pulls back for a short time and then continues on in the original trend direction.

A correction is when the market pulls back, but continues on in the trend direction. A reversal is when price completely reverses in the opposite direction of the trend.

 

The charts below show a correction in an uptrend and in a downtrend, respectively.

Confirmed uptrend

Correction to the downside

Confirmed downtrend

Correction to the upside

Reversals

A reversal is when the market direction changes completely and reverses the other way. The charts below illustrate a reversal to the downside and a reversal to the upside.

Confirmed uptrend

Reversal to the downside

Confirmed downtrend

Reversal to the upside

Summary

So far you have learned:

there are two types of market conditions: trending and ranging.

an uptrend can be identified as a series of higher highs and higher lows.

a downtrend can be identified as a series of lower highs and lower lows.

ranging is when the price is trading between an upper and lower boundary.

a correction – or retracement – is a temporary pull back when the price is trending.

a reversal is where the price direction changes completely and reverses in the opposite direction.

https://learn.tradimo.com/technical-analysis/understanding-market-conditions



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