Technical Analysis: Trends

Submitted by Stock Market News on 13 May, 2011 - 16:45

How to interpret trends

Technical analysis may intimidating. Most often newbies get turned off by this method because it takes a lot of work and patience. Imagine having to go over multicoloured charts for days on end, trying to determine where you should make your entry and exit in future trades. However, if your the type of person who prefers to have a visual interpretation of figures then technical analysis works for you. Interpreting charts may take time, but they plot price movements that are important for trading.

Analysing Trends

The spikes of the line graph are higher the previous one, this illustrates an uptrend. You both have higher high and lower lows for it to be considered as an uptrend. From a trader's perspective this current trend can promise a profitable trade. You can enter at the price you want and then exit to profit, depending on your stop loss.

Obviously downtrend is the opposite of the uptrend, where the spikes are lower than the previous one. You have lower highs and lower lows. Common sense dictates that you shouldn't purchase a stock during a down trend.

Unfortunately markets don't move as simple as going up as that. Participating traders can easily push or drag down a price, so you need to identify the trend reversal. This is when there's a breach in the uptrend and goes on a downtrend, or vice versa.

At the start of the chart we can clearly see an uptrend with subsequent highs. However, if you look at H3, its lower than the previous high. This is a signal for a trend reversal which leads to lower high highs and lower lows. The uptrend now turns into a downtrend.

Trend analysis can you give indicators on when to make an entry, what's the best stop loss to cut your losses, and when to make an exit. Traders set up their own general rules in how they will execute their trade based on trends.