How To Define A Chart Trend

Posted on June 22, 2009 @ 8:35 am

A funny thing happens when you put up a price chart and ask people to define 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 that needs to be done is to size the chart in the right manner.  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. 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. 2 to 5 min chart: Make sure you have at least 3 hours of data up, but no more than 2 days.
  3. 10-15 min chart:  Have at least 3 days of data up, but no more than 1 week.

Swing Trades (longer term hold) you will want a 10 to 30 minute chart up and you will want at least 10 days of data up on the screen.

Once you have the data up on the screen, make sure you are looking at a "bar chart" and not a "candlestick chart".This makes it much easier to identify the trend.  Start by identifying every single  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 you will want to get your charting draw tool and connect the V to each other V you see.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 straight line going in between the two.if the line is pointing upward - this is 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 up and down 2pts, up and down 1pt, up and down .50 etc - on average, not exact.  This gives you a general sense of the strength of the trend.  The lower the oscillation, the stronger the trend.  The theory here is the buyers (in an uptrend) or the sellers (in a downtrend) are so strong that it hardly budges against the buying or selling.

Another thing to keep in mind the more you practice, the faster it gets – the lines are no longer necessary.  I can look at any chart and in a matter of seconds know the trend and the strength.Additionally, you really need to know the trend direction and strength on the next higher timeframe than you are trading on.One example would be on a 5 minute chart the stock is in an uptrend, while on a longer view (15,30 min) its actually in a downtrend.  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.

 

 

 

 







Leave a Reply