Sandy Jadeja, chief market strategist continues in this technical analysis course series on how to read stock charts. In this second lesson, one of three, we'll learn how to recognize a trend and stay on the right side of the market.
Trading with the Trend
The most important thing is learn is to recognize the current trend and how to trade with the trend. In the first chart, we can see instantly that the market has been rising. Where is the most important part of this chart? It is on the extreme right-hand side of the chart. It is relative to what has happened in the past. In this example, we can see the market is higher than where it had been previously. In this market, we can say the current market is rising.
What about this second chart example? Instantly we can see: lower highs and lower lows. This market is trending downwards. So we can say this is a downtrend.
How about this third chart example? We're not sure. It depends on your timeframe. For a short term trader, the market is trending down, but for a intermediate to long term trader, the market has been trading sideways. The market has not been able to break above the highs and the market has not been able to break below the lows. The market is trading in a range.
Defining an Uptrend Market
On slide 5, the Recent High and the Recent low are marked, and everything in between is called the trading range.
What must the market do to trade higher?
Clearly, the market has to break above the Recent High and that would show the market is moving upwards.
Once we get a breakout above the recent high and get a new high, we can expect the market to continue trading higher until the momentum changes and there is a directional change. For trading strategies involving buy orders and sell orders, we will learn to move our stop-loss orders accordingly. We will learn about stop-losses in future episode lessons.
Simple Trading with the Trend
In slide 7, we can see the market broke above the first high, then it broke above the second high. As soon as this happens, we could place a buy order above the first high (written in green). As the market declines and then starts to rise, we would then place a buy order above the second high. In this manner we will continue to buy the break of each high, expecting the market to go higher. Of course, we will continue to raise our stop-losses.
At some point, the market will take out a recent low and that is where the stop-loss will be triggered and we will get stopped out. This is the classic way of trading with the trend: we will look to buy the breakouts above each successive high.
On the chart in slide 8, we can see the market continued to trade higher and at each particular point the market kept taking out its high. Until it starts to break below its lows, we can arguably say this is still in an uptrend. You can take a pen with a ruler (or line-drawing tools on most modern stock chart websites and stock charts software). Draw lines connecting the lows to the highs and the highs to the lows.
In this chart, we have higher highs, and higher lows, so to trade with the trend we would only buy the breakouts of the highs or possibly even the pullbacks.
Next Lesson: Learn to recognize and trade in a downtrend.
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