Stock prices are controlled by the market factors of demand and supply, which is the reason why they seem to be constantly fluctuating. If you are a new investor, you may find that this has you constantly biting your fingernails in anxiety, but experience shows that this is just a normal, everyday aspect of investing.
If you view the history of a particular stock of a the timeframe of a few weeks or months, you will find that these fluctuations are not quite as random as they seem. Rather, they move according to clear trends which can be easily identified.
A stock trend refers to a continued movement in a particular direction over a certain time period, with specific reasons behind it.
Identifying a Stock Trend
A stock trend may either be upward, in which case it's called an uptrend, or downward, a downtrend. An uptrend will typically show continuously higher highs as well as higher lows while a downtrend shows lower highs and lower lows. You can then use the changing values to show a trend line, from which you can make future predictions.
Your ability to identify stock trends will always give you an upper hand in your trading deals. Trend lines will generally give you two advantages; first is the opportunity for low-risk buys, and secondly it helps you to sell at the best possible situation and make maximum profit.
When it comes to making low-risk buys, an astute investor will often use the higher lows of an uptrend. Once the stock price gets to the upper trend line, it's typically time to sell for profit.
Precise Methods for Identifying Stock Trends
1. The 200-day moving average for the stock that you want to purchase is an important place to start from. Have a look at that first and make sure that it is currently trading above that average.
2. Have a specific timeframe on which you will be basing your research, for example, an hour, a day, week, and so on. In order to determine the stock trend, extend your timeframe to one level higher. So if you plan to make decisions based on the daily chart, use the weekly chart to determine trends.
3. Once you have determined what chart you will be using, draw a trend line over an extended period such as 3 weeks (for a daily chart) or 3 months (for a weekly chart). For an uptrend, identify the lowest low and lowest high over this time period and draw a connecting line.
For a downtrend, you would draw a connecting line between the highest low and the highest high. The line for an uptrend will be directed upwards from left to right while that of a downtrend will be directed downwards.