How To Trade the Trend.
Apart from “Gap Trading,” (see previous article) I also use “Trend Trading.”
Here is an explanation of what this is:-
An easy way of seeing a “Trend” is firstly looking at a monthly chart and observing which way the stock price is going. (This is called using the “Old eyeball test”)
This is a cheap way of seeing what the stock is doing right now and does not involve any fancy, expensive computer software.
Just your own two eyes. It takes a couple of seconds to work it out as there are only three directions a stock can go and that is Upwards, downwards or sideways. Another way is to look at the peaks and troughs. Making sure that each peak or trough is higher than the one previously.
Now as an added help I use a ruler or any straight edge and place it on the chart/monitor screen or you can print it off. Whichever suits you best?
What I am looking for is called a “Support line.” This can be found where the “bottom” finishing prices of the end of day’s trading are progressively higher than the day before.
You are looking for at least three points that you can put that straight edge against to confirm what your eyes have already shown you. That the stock is going upwards and is bouncing upwards off this support line.
Now you have found the “Support line” you now want to find a “Resistance Line.” This is found by using that straight edge again on at least three points which are the “Highest” points that you can find. Again the stock is bouncing repeatedly downwards off this line.
Once you have found both lines it should show you a stock that is going “upwards” traveling between these two lines. Occasionally going past these lines, but on the average it stays between them.
To explain further, a “Support Line” is formed when “buying pressure” consistently overcomes “selling pressure” at a particular price level. In other words this stock has found “buyers” willing to buy consistently at this point.
A “resistance line” is created when “selling pressure” overwhelms “buying pressure.” again at a particular point. In this case “sellers” are very happy to sell at this point.
When a stock is going “sideways” usually there is a lack of either buying or selling pressure, so the stock just goes sideways, until there is interest shown again, usually this is caused by a company announcement or an unforeseen event. Hopefully it’s good news, particularly if you are currently holding a stock like this which is acting like a yo-yo.
If you haven’t had this type of stock yet, don’t worry because you will, as all stocks go through this stage at one time or other.
The only thing which varies is the time frame. Sometimes it can be days or for even a week or even a month or two.
I have had stocks which have sat there for 3-4 months just going nowhere. Just happily tracking sideways.
A point to remember here is once the “support line” has been broken by excessive selling it invariably becomes the “New Resistance” line.
And once the “Resistance Line” has been broken by excessive buying it invariably becomes the “New Support” line.
It all sounds complicated and confusing at first but it gets easier the more times you do it. (Like other things) And is well worth the effort, for it will enable you to find more profitable, performing stocks. And that is what it is all about.