The price chart of a security may appear like a random distribution, but that’s not true. About 30% of the time, a security will be in a definite trend. The rest of the time, prices will trade more or less in a sideways range. Our job is to recognize trends early, as they emerge from non-trends, or as reversals of prior trends.
Finding the prevailing trend will help you become aware of the overall market direction and offer you better visibility – especially when short-term movements tend to clutter the picture.
Our goal is to buy or sell our security early in these new trends, exiting the trade profitably when the trend ends. This identification of trend, both its beginning and end, is the most important task we have as traders.
A simple definition of trend is basically the general direction of price movements. An uptrend is present when prices make a series of higher highs and higher lows. A downtrend is present when prices make a series of lower highs and lower lows.
When prices move without such a discernible series, prices are said to be trading sideways in a range, or trading trend-less. Once a trend is dis¬cernible, then trend lines can be drawn to define the lower limits of an uptrend or the upper limits of a downtrend.
In an uptrend, trend lines are drawn below the prices, while in a downtrend, trend lines are drawn above the prices. As a rule, trend lines can only become flatter, not steeper.
There are two key things to remember about trend lines:
1.)Never adjust a trend line so that it becomes steeper.
Don’t run a trend line through price bars. An uptrend line is always below the price bars, a downtrend always above.
2.)Keep a trend line close to the lower lows or higher highs and don’t move it too far away.
If there’s too much distance between your line and the lower lows/higher highs, you risk missing a change in the trend.
It is essential that trend lines be drawn correctly. It is the recognition of the trend line and the violation of this trend line that is your key to successful trading and fortune building.
The validity of a trend line is dependent on its duration and the number of times it’s been successfully tested.
The longer the trend line has been in effect and the more times it has been successfully tested, the more important the trend line becomes. Conse¬quently, when a trend line of long duration – which has been successfully tested many times – is violated, then an important reversal of trend is likely to have occurred.
