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Understand How To Find The Trend And Make Trading Easier
By plrprousers | May 15, 2009
An odd thing happens if you put up a stock price chart and ask a bunch of people what the trend is. Even when its completely obvious to someone like me, as in not any question at all, you will still get many different answers based on the exact same chart. This stems from many people not knowing the proper method to actually find the trend on a chart. It is actually quite simple, and is a key thing to know if you want to learn to trade.
The first thing to do is to size the chart properly. There is no point of putting up 5 years of data if you are looking for a daytrade to hold for 5 minutes - that is completely pointless. So here is a guide for what you need as far as time loaded on a chart:
Daytrade:
- 1 min chart: Have at least 2 hours of data (120 bars) on the screen but no more than 6 hours (1 full day).
- 2-5 min chart: Have at least 3 hours of data, but no more than 2 days up.
- 10-15 min chart: Have at least 3 days of data up, but no more than 1 week.
For swing trades, which are a longer term hold, you will want a 10 to 30 minute chart on your screen, and additionally about 10 days of data.
You will want to make sure you are using a "bar chart" style of chart, and not "candlestick" or other types. This is easier to see the trend.Start by looking for every V bottom area. Anytime there is a low with a V bounce, make note of it.Additionally, look for / top areas where the price spikes up and then sells off sharply.Focus in on the major ones where it moves significantly away from that area in a short period of time. Next, get your drawing tool and connect the V to each other V. Connect the / to each other /. Connect the low of the V, the highs of the /. Again, this is a key to learn how to trade.
Lines that slope from the lower left up to the right means the stock is in an uptrend. Lines that slope from the upper left down to the right means the stock is in a downtrend.Another easy method: Go to the first bar on the left, and then to the very last price on the right hand side. Draw a line between the two. If the line is sloping up - its an uptrend.if the line is sloping down to the right, then the trend is a downtrend. The other key thing to look at is the oscillations around this trendline. Does it go +/- 2pts, +/- 1pt, +/- .50 etc - remember, all that is needed is a rough average, not an exact number.This gives you a decent sense of the trend strength. The lower the oscillation, the stronger the trend.The thinking here is that the price hardly oscillates because the buyers in an uptrend chase is up and bid, and the sellers in a downtrend chase it down and offer so it does not really counter move much.
Another thing to keep in mind the more you practice, the faster it gets - the lines are no longer necessary.I can glance at a chart and know the trend and approximate strength within seconds. In addition, you will always want to know the trend on the next higher timeframe than you are trading. For example, on a 5 minute chart the trend might be up, but on a 15 minute chart it is still down. This needs to be paid attention to, because the longer term trend can push the shorter term trend back into a downtrend.Overall, you want your higher term chart to be a time multiple of about 3 from the chart you intend to trade.So the way it works is if on a 1 min chart, you also want to look at a 3 minute chart - if you are using a 5 minute chart, you want to look at a 15 min chart also. Once you can easily tell the trend of any chart, other aspects of learning to trade become much easier.
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