Ticker&TapeWhat is a trend? Uptrends, downtrends, ranges
A trend is simply the direction prices are moving. Learning to recognize it, and to trade with it instead of against it, is the foundation of everything else in this school.
Uptrend: higher highs and higher lows
Prices never move in a straight line. They zigzag. In an uptrend, each rally climbs above the previous peak (a higher high), and each pullback stops above the previous low (a higher low). Buyers are stepping in at higher and higher prices.
In a healthy uptrend the stock usually stays above a rising 50-day moving average, and up days tend to come on bigger volume than down days.
Downtrend: lower highs and lower lows
A downtrend is the mirror image: each rally fails below the last peak (a lower high) and each drop breaks the last low (a lower low). Sellers are willing to accept less and less. Rallies in a downtrend often look tempting but tend to fade.
Growth traders do not buy stocks in downtrends, no matter how cheap they look. A stock that has fallen 50% can fall another 50%.
Sideways: a range
Sometimes neither side wins and price moves sideways between a ceiling and a floor. This is a trading range. Ranges that form after a strong advance are often bases, where the stock digests its gains before the next leg up. The breakout from a range tells you which side finally won. See support and resistance.
The trend is your friend
The old saying "the trend is your friend" exists for a reason. A trend in motion tends to continue more often than it reverses. Buying stocks that are already going up feels uncomfortable to beginners, who like bargains, but it puts the odds on your side.
Trends exist on every timeframe. A stock can be in a weekly uptrend while pulling back for a few days on the daily. Decide which trend you are trading and judge it on the matching chart.
A trend ends when its pattern breaks. An uptrend is in trouble when a pullback undercuts the previous higher low and the next rally fails to make a new high. One red day is not a change of trend.
Trade in the direction of the market
The most important trend is the one of the general market. Most stocks follow it, so buying breakouts in a falling market is like swimming against the current. Before every trade, check the market's direction on the breadth page and in the lesson on market direction.
Common mistakes
- Buying a stock in a downtrend because it looks cheap after a big drop.
- Calling a trend over after one down day instead of waiting for a lower low.
- Fighting the general market's trend with new buys during a correction.
Key points
- Uptrend = higher highs and higher lows; downtrend = lower highs and lower lows.
- Sideways ranges after an advance often become bases.
- Trade with the trend of the stock and of the market.
Check what you learned
Answer at least 2 of 3 correctly to complete the lesson.
1. Which pattern defines an uptrend?
An uptrend is a zigzag of higher highs and higher lows: buyers keep stepping in at higher prices.
2. A stock has fallen 50% and looks cheap. What does the lesson say?
Rallies in a downtrend tend to fade. A stock that has dropped 50% can drop another 50%, no matter how cheap it looks.
3. When is an uptrend really in trouble?
A trend ends when its pattern breaks. One down day is not a change of trend; a lower low plus a failed rally is.
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